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E.U., in a First, Rejects Italy’s Proposed Budget Italy’s Populists Dig in After E.U. Rejects Their Budget as a Danger
(about 5 hours later)
BRUSSELS — In a stinging and rare rebuke to a core member, the European Union sent Italy’s proposed budget back to its populist government on Tuesday, saying that it posed unacceptable risks to Italy and the eurozone. ROME — In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge on Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks.
The European Commission, the bloc’s administrative body, told Rome that it would have to rewrite its draft 2019 budget and reduce its deficits, or face heavy fines early next year. The European Commission, the bloc’s administrative body, had repeatedly warned Italy to reduce the deficits in its 2019 draft budget to avoid heavy fines early next year. But Italy’s populist government, which has bristled against Europe’s austerity measures, went ahead and submitted a budget with a proposed deficit equal to 2.4 percent of gross domestic product. That figure was considered much too high for a country whose total government debt equals 131 percent of G.D.P., more than double the eurozone limit.
It was the first time that the European Union had rejected the proposed budget of a member nation that uses the euro, setting up a confrontation between Brussels and the euroskeptic government that took power in Rome this year. As expected, the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse.
Italy has three weeks to negotiate with the commission and come up with a revised draft budget that meets the bloc’s guidelines, commission members said after a meeting in Strasbourg, France. But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt that helped America emerge from the Great Depression.
“The Italian government is openly and consciously going against commitments made,” said Valdis Dombrovskis, the commission vice president in charge of the euro and financial stability. Italy is guilty of “a particularly serious noncompliance” with eurozone rules, he said, and so “today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan.” “The only thing that we have to fear is fear itself,” Luigi Di Maio, Italy’s vice premier and the leader of the anti-establishment Five Star Movement told reporters as it became clear that the European Commission would reject the plan.
“The dialogue will continue,” said Pierre Moscovici, the commissioner in charge of economic and fiscal affairs. “Our door is open to dialogue.” After the official rejection, Mr. Di Maio wrote on Facebook, “We know that we are on the right path, and therefore we won’t stop.”
The Italian economy minister, Giovanni Tria, on Monday appeared to reject the commission’s demands, arguing that his government, an uneasy coalition of the populist Five Star and League parties, sees its budget as vital to rejuvenating the Italian economy, addressing social problems and keeping its promises to the voters, including tax cuts and increased welfare spending. His coalition partner and fellow vice premier, Matteo Salvini, the leader of the far-right League party, was equally scathing. “This doesn’t change anything. Let the speculators be reassured, we’re not going back,’’ he told reporters during a trip to Romania. ‘‘They’re not attacking a government but a people. These are things that will anger Italians even more.”
In reply to a warning letter from the European Commission last week, Rome said it would not back down from its plans to run a budget deficit of 2.4 percent of gross domestic product — triple the level that Italy’s previous government had agreed to. Italy has three weeks to revise its budget under the bloc’s rules, but the European Union’s unprecedented response may just be the instigation to a fight that Mr. Di Maio and his coalition partners have been itching for.
It was thought to be the first time since the eurozone crisis exploded over Greece that a country using the euro has rejected a demand from Brussels to adjust its budget. Both the Five Star and the League ran for election this year in direct opposition to Brussels. With European Parliament elections on the horizon in May, it doesn’t hurt their cause to reintroduce the specter of a bureaucratic boogeyman preventing them from stimulating the Italian economy and delivering on their campaign promises.
The European Union faces a greater number of serious challenges from member nations than at any time in its history. Britain plans to exit the bloc by the end of March, and the commission is exploring possible violations of the rule of law by Hungary and by Poland, where governments sharply critical of Brussels have curtailed judicial independence and press freedom. All of which make for strong political arguments that resonate with angry Italian voters who have yet to recover from the last debt crisis. Still, the markets are less moved by the talking points.
But the financial markets are expected to be more of a force on Italian budgetary discipline than the European Commission. Interest rates on Italian bonds are already close to four-year highs, and European officials say Rome’s economic plans could raise its borrowing costs significantly, forcing the government to modify its proposals. Mr. Salvini and Mr. Di Maio have at times spoken with disgust or derision about the yield spread between Italian and German 10-year benchmark bonds as if it were just another political enemy to be demonized or ridiculed. (The “spread,” Mr. Salvini has joked, is what he put on his breakfast bread.)
Italy is not Greece, however. Even the latest draft budget is within the eurozone guidelines of a budget deficit under 3 percent of G.D.P. But Italy’s cumulative debt is enormous — more than 131 percent of G.D.P. last year, far exceeding the guidelines of 60 percent. And the proposed budget would make that debt mountain worse, especially since Italy is not expected by Brussels to achieve the economic growth rates needed to reduce the debt. But the spread is no joke. Detested as it might be among Italy’s populist politicians, it has become perhaps the international markets’ most powerful judgment of the health of eurozone economies.
The governing coalition in Italy came to power in June promising to confront Brussels over those eurozone guidelines, which are intended to preserve the economic stability of the region and its currency and to avoid a crisis of the kind that hit the euro when it became clear that Greece was hopelessly deep in debt. In the 2011 European bond crises, it laid waste to the bloc’s governments — including, notably, that of former Prime Minister Silvio Berlusconi, who was forced to resign because of a lack of confidence from the international markets.
The European Commission fears that allowing Italy, which has a relatively large economy, to egregiously break the rules will only encourage other countries to do so. At the same time, European officials are mindful that the Italian government came to office on an anti-Brussels platform and remains popular. Giuseppe Conte, the prime minister of Italy, has suggested that leaders in Brussels have sought to raise fears about the Italian economy in order to spike the spread and force his government to bow to European rules. Mr. Di Maio has said “enemies of the people” were working to increase the spread.
With European parliamentary elections next May, Brussels is trying not to galvanize populist parties across the Continent that portray the European Union as a threat to their nations’ sovereignty. The question for Italy, and all of Europe, is how far Italy’s government is willing to go. Will it be forced into submission by the gravity of economic reality? Or will Italian leaders convince their voters that the country’s financial health is worth risking in order to blow up a political and economic establishment that they say is stripping Italians of their sovereignty?
On Tuesday in Luxembourg, Klaus Regling, the managing director of the European Stability Mechanism set up to help avoid another Greek crisis, emphasized that the risks of contagion so far were small. And Brussels must decide how strict it will be. Loath to let a member state slide for fear that it would loosen the ties that bind the union, its leaders must ask themselves if that is worse than an open revolt.
“There is a risk with Italy, we are worried about Italy, because the fiscal plans are not compatible with the E.U. framework,” he said in a briefing to reporters. “But Italy is not Greece, it does not have the problems that Greece had 10 years ago.” “Breaking rules can appear tempting at a first look,” said Valdis Dombrovskis, the European Commission’s vice president in charge of the euro and financial stability.
Italy has a much larger economy; leaving aside debt payments, the budget has a surplus; and much of the debt is financed by Italians, not by foreign banks, Mr. Regling noted. And it would largely be Italian banks that would suffer, he said. “It can provide the illusion of breaking free,’’ he added. ‘‘It is tempting to try to cure debt with more debt. But at some point, the debt weighs too heavy, and at the end of the day you end up having no freedom at all.”
Mr. Tria, the Italian economy minister, told the commission that if growth faltered, the government could adjust its spending plans, but that was not considered a firm promise. Mr. Dombrovskis called Italy’s budget “consciously going against commitments made” and said “the ball is now in the court of Italy’s government.”
Despite the confrontation, Italian leaders have made it clear that they have no intention of pulling Italy out of the common currency. That ball has already wrought havoc inside the Italian government.
At the end of September, Italy’s populists agreed on a budget that delivered on the priorities of both the Five Star, which sought a broad unemployment benefit, and the League, which wanted a flat tax for small business owners. It also included more generous pension benefits, allowing people to retire at 62 if they had contributed for 38 years, which both parties campaigned on.
“In a decisive manner, with this measure, with this budget, we will have abolished poverty,” Mr. Di Maio said at the time.
Italy’s leaders have complained they are being unfairly singled out by the European Union, and Mr. Di Maio has threatened new elections if the bloc doesn’t approve the 2.4 percent deficit.
The previous, center-left government had proposed a budget with a 0.8 percent deficit, which would have allowed Italy to continue chipping away at its total debt.
Establishment forces inside the government, including Economics Minister Giovanni Tria, sought to shrink the proposed deficit level but were outmaneuvered by the populists. At one point, a member of the League shut off Mr. Tria’s microphone to keep him from talking about the budget.
But the major pressure on Italy’s budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody’s dropped its rating for Italian bonds to one level above “junk” last week.
As the spreads rose, Pierre Moscovici, the European commissioner in charge of economic and fiscal affairs, provoked the government’s rage when he said Italians had chosen a xenophobic government.
As Mr. Moscovici left the press conference on Tuesday, a member of the European Parliament with the League party, Angelo Ciocca, snatched the commissioner’s papers and pounded them with his shoe, which he later wrote on Twitter, was “made in Italy.”
Italy’s leaders have responded less than diplomatically in other ways, too. After the European Commission President Jean-Claude Juncker compared Italy’s situation to the Greek crisis, Mr. Salvini portrayed him as a drunk, saying he only talked with “sober people.’’
Top members of Five Star echoed that critique, calling the European leaders “slaves of alcohol” and Mr. Grillo wrote on his blog last week that he suspected Mr. Junker of having neurological problems, and featured a picture of him looking unwell.
Mr. Conte, Italy’s prime minister, sought to bring down the temperature as investor fears of a confrontation rose.
On Monday, he assured reporters at the foreign press club that Italy’s budget dispute with Brussels could be settled through negotiation, with a nod to President George H.W. Bush’s famous “read my lips: no new taxes” pledge at the 1988 Republican National Convention.
“Read my lips,” Mr. Conte said, switching to English for emphasis, “for Italy there is no chance, no way to get ‘Italexit.’ There is no way to get out of Europe, of the eurozone.”
Mr. Bush agreed to raise taxes.