By Silvia Marchetti
ROME (MaceNews) – Italy’s newly appointed rightist government will seek to negotiate softer fiscal rules at the European level to take into account ‘country-specifics’ for more lenient and longer adjustment paths, according to ruling coalition sources.
Officials are worried that the new rules concerning the reform of the Stability and Growth pact proposed last week by the European Commission, meant to be softer in a post-COVID economy hit by inflation and recession, will not be so and will further penalize Italy with additional monitoring and higher risk of sanctions if the country misses fiscal targets.
“We were hoping for more leniency from Brussels — despite a few improvements, the tough framework remains but supervision of our budgets becomes more constraining and perpetual. It will all come down to negotiating a better deal with the country that is still anchored to austerity and refuses to back down: hawkish Germany,” said an official.
“Upcoming months will be key to find a compromise on a new pact that now stands as excessively prescriptive towards debt-ridden countries like southern member states, while northern peers deem it still too lax”.
After the SGP pact was suspended at the outbreak of the pandemic, EU leaders are now focused on approving the new fiscal rules this year with the goal of introducing an updated framework in 2024. The first EU Council summit is scheduled for February.
Rome will push to take into greater account in terms of budget evaluation by the EC reform progress and the implementation of the pro-growth pandemic aid recovery fund.
“We can no longer have fiscal rules based on one-size fits all, each European state has different economic foundations, economic structure and inflation levels, and growth potentials. Above all, there is no way the EC can turn into an all-present watch dog of our finances for the next four years or so,” added another official.
Rome’s cabinet is disappointed that the Stability and Growth treaty hasn’t been overturned in its entirety.
According to the EC’s proposed reform, the deficit-to-GDP ratio will remain at 3 percent, as the debt-to GDP ratio (60 percent), both already unrealistic targets for Italy which deficit is set to spike to 6 percent next year while debt will rise to nearly 157 percent. Sources argue Rome will attempt to raise both thresholds.
Officials say the improvements to the treaty do not outweigh the cons.
“Even though there is no longer the obligation of annual cuts of one-twentieth of public debt above 60 percent of GDP, governments must define an extremely binding four-to-seven years debt reduction path with Brussels which must then also be approved by the EU Council”, argued a source.
“There would be a constant monitoring of these plans by the EC, a stronger enforcement of rules and quicker sanctions if we deviate from agreed targets.”
Rome will lobby for a longer fiscal adjustment path based on ‘quality’ rather than ‘timing’, so to take into account the GDP-multiplier effect of key strategic investments and reforms that may take years to bear fruit and are not immediately ‘accountable’.
Officials are confident Italy will rally support among other debt-hit European southern peers to soften the new framework, mainly Greece.
“Brussels’s control over member states’ spendings will become binding, especially if they have higher than average debt like Italy does. In future, if these rules aren’t watered down, every government must agree with the EC on how to reduce excessive exposure, which goes against the principle of sovereignty”, noted an official.
A key improvement sources did welcome in the proposed fiscal reform however was the focus on net primary spending, meaning Brussels would consider only government expenditure that excludes debt interest. In 2022, Italy spent 3.5% of GDP, amounting to E66 billion to finance issuances, more than France and Spain.
“It is paramount that the new SGP is flexible and adapts to the conditions of each state, and it cannot in any way introduce new mechanisms which make it easier for the EC to intervene to penalise members who are totally out of those rules. That would be a paradox”, said an official.