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Italy and E.U. Reach a Budget Deal Italy and E.U. Reach a Budget Deal, as Populist Plan Runs Into Reality
(about 5 hours later)
ROME — Italy’s populists blinked. ROME — This time, Italy’s populists blinked.
After months of defying and insulting officials in Brussels, the Italian government on Wednesday reached a deal with the European Commission to drastically reduce its debt and avoid being financially penalized by the European Union and punished by international markets. Since taking power in June, Italy’s populist government has outmaneuvered political opponents, out-screamed its loudest critics, used the press for target practice and waltzed away from scandals unscathed. Italian and European liberal forces that sought to stop their rise have seemed powerless to lay a glove on them.
Speaking in Brussels, Valdis Dombrovskis, the bloc’s vice president for financial stability, and Pierre Moscovici, its point man on economic affairs, said the agreement would allow Italy to avoid an excessive deficit procedure as long as it followed through on the deal and that the Italians, despite their earlier histrionics, had made a lot of progress. But on Wednesday, the populist juggernaut slammed into reality, the only force that seems capable of slowing it down.
The deal, Mr. Moscovici said, would “make the euro stronger” and demonstrated that Italy remained “in the heart of Europe.” After months of torturous negotiations, acrid insults, internal tensions and enough social media airtime to fill a Netflix series, Italy’s populist leaders bowed to the demands of the European Union to roll back its expensive, rules-flouting budget. It did so in the face of costly penalties and potentially debilitating economic punishment inflicted by the international markets, real world forces that threaten to inflict genuine pain on their electoral base.
He added that the agreement showed that the European Union was “not a machine made up of insensitive bureaucrats imposing austerity and denying democracy.”
“I hope that after today we can move beyond these caricatures, both ways,” Mr. Moscovici said. “And I hope that today we can also put to rest any doubts over Italy’s place in the European Union.”
Italy, saddled with an enormous public debt, had provoked a head-on confrontation with the European Union by flouting the bloc’s financial laws with an expensive budget laden with government programs and tax cuts promised by populists during the election campaign this year.
The combined effect ballooned Italy’s budget and failed to lower its deficit within the union’s rules. After four months of defiance and internal conflicts, the government capitulated to a debt figure Europe found acceptable.
The Italian government shaved billions off its budget, but Prime Minister Giuseppe Conte insisted in a statement to the Italian Senate that the cuts would not affect the introduction of a universal income plan. The plan, essentially an enormous unemployment program, would benefit the base of the anti-establishment Five Star Movement in the chronically underemployed southern part of the country.
He also said the deal would not affect the priorities of the movement’s coalition partners, the League.
“We never backed down on content,” Mr. Conte, who was singled out for thanks by the Brussels officials, told the Senate.
His critics found the claim risible, and he was heckled during his remarks.
The government also agreed to lower its growth forecast to around 1 percent from a less-realistic 1.5 percent.
Markets reacted warmly to early reports that a deal had been reached. The Milan-based stock market rallied and borrowing costs fell. The Italian Parliament hopes to vote to approve the budget by the end of the year.
“The U-turn from the Italian government,” financial analysts at Barclays wrote in a note to clients, indicated that the populists had realized “the potential perils involved with Italy holding unreasonable fiscal policies and an anti-E.U. stance.”“The U-turn from the Italian government,” financial analysts at Barclays wrote in a note to clients, indicated that the populists had realized “the potential perils involved with Italy holding unreasonable fiscal policies and an anti-E.U. stance.”
The note added that “the experience of the past six months suggests the Italian government may be more mindful of the effects that anti-E.U. rhetoric can have, which is also a positive development in our view, albeit unlikely that a populist coalition such as this will fully abandon such a stance.” Investors, on edge over the possibility of Italy, the eurozone’s third-largest economy, causing an economic disaster that could infect all of Europe, breathed a sigh of relief. Markets reacted warmly to the deal, and the Milan-based stock market rallied and borrowing costs fell.
Nevertheless, Barclays added, “we remain of the view that 2019 will be a challenging year for Italy.” Italy, saddled with a debt equal to 131 percent of its gross domestic product, more than double the eurozone limit, had provoked a head-on confrontation with the European Union by disregarding the bloc’s financial rules. It proposed an expensive budget with big-ticket items to deliver on campaign promises.
The initial budget spent billions on a universal income plan, essentially an enormous unemployment program, that would benefit the base of the anti-establishment Five Star Movement in the chronically underemployed south. Five Star’s coalition partner, the League, demanded tax breaks and a lowering of the retirement age. Critics considered the promise a hand out for the League’s base of workers in the north.
The initial budget had a spending deficit equal to 2.40 percent of gross domestic product, a figure considered onerous for a country with such a burdensome debt.
For months, Italy refused to budge. But on Wednesday, it yielded by shaving billions of euros off the budget.
Speaking in Brussels, Valdis Dombrovskis, the European Commission vice-president responsible for the euro, announced that the agreement would leave Italy with a budget deficit next year of 2.04 percent of gross domestic product.
A substantial part of the savings, he said, “stems from the delayed entry into force of the two main expansionary measures — the citizens’ income and the rolling back of pension reforms.”
Pierre Moscovici, the bloc’s commissioner for economic and financial affairs, who for months fought with Italy’s populists, said “the agreement of today shows unambiguously that the Commission is not the enemy of the Italian people, as some people would like to describe us.”
He added that “I hope that after today we can move beyond these caricatures, both ways, and I hope that today we can also put to rest any doubts over Italy’s place in the European Union.”
To bring Italy back into the fold, Brussels, which originally wanted the budget spending to be no more than 1.6 percent, chose vinegar over honey. Eager to instill structural changes in Italy, it took a hard line and made it clear that it would begin a process that could punish Italy with costly fines for breaking its agreements.
In addition to trimming its spending plans, the Italian government responded by promising to sell off public buildings and to impose stiffer fines and higher interest rates on tax dodgers.
It revised its growth forecast from 1.5 percent, which Europe and the markets found deeply unrealistic, to less than 1 percent, which Europe and the markets find only mildly unrealistic.
Officials in Europe, who are eager to prevent more chaos in what many consider the soft southern underbelly of the European Union, characterized the deal as Italy’s recommitment to the bloc and to the euro.
The Italians tried, with some difficulty, to claim they had gotten what they wanted.
In an address to the Italian Parliament, which will have to approve the budget by the end of the year to avoid another round of negotiations with Brussels, Italy’s prime minister, Giuseppe Conte, said that the “determined” negotiations had paid off. He said the government never did anything to “betray the trust” of its voters.
Instead, speaking over heckles from opposition senators, Mr. Conte, who once said there was no “Plan B” to the original budget proposal, said that the technicians in Brussels had shown how the government actually needed less money “than initially foreseen.”
Contrary to the official statement in Brussels, he said, plans for a universal income and lowering the retirement age would not be delayed, a claim helped by the fact that no official start date for the programs had ever been offered.
“We never backed down on content,” he insisted, adding, that the government “never retreated.”
It sure seemed like they had.
Matteo Salvini, Italy’s powerful deputy prime minister and leader of the League party, had earlier said that he would not budge from the 2.4 percent spending figure, “not even if baby Jesus arrives.” He insisted that he would not allow even “one comma” of the budget to be changed. “Italians come first,” he said at another point. “Italy no longer wants to be a servant to silly rules.”
On Wednesday, he sounded like he suddenly took those rules more seriously. “To have avoided the infringement procedure is the victory of common sense for the good of Italian citizens,” he said.
Mr. Salvini’s governing partner, Luigi Di Maio, the political leader of the Five Star Movement and the minister of both economic development and labor, had in September called the proposed budget “historic.”
“In a decisive manner, with this measure, with this budget, we will have abolished poverty,” he said on Italian television.
Throughout the negotiations, Italy’s populists tried to rally popular support against Brussels with their usual mix of aggressive language, social media attacks and public outrage. Mr. Salvini insinuated that the Commission president, Jean-Claude Juncker, was a drunk, while the Five Star co-founder, Beppe Grillo, mused about his potential mental illness.
But none of it seemed to work.
On Wednesday, critics of the government hoped to exploit the government’s vulnerability. The previous government argued that the negative reactions of the financial markets to the government’s provocations had cost Italians real money.
“For the first time, Italy’s budget was launched in Brussels,” Paolo Gentiloni, the prime minister with the previous center-left government, who had proposed a budget with a 0.8 percent deficit, wrote on Twitter. “Sovereigntists without sovereignty. The economic effort of the last six years liquidated in six months.”
Barclay’s, the financial analysis firm, added in its note that “the experience of the past six months suggests the Italian government may be more mindful of the effects that anti-E.U. rhetoric can have, which is also a positive development in our view, albeit unlikely that a populist coalition such as this will fully abandon such a stance.”