Policy Briefs

C. Bastasin: Will the European deficit procedure determine the future of Italy’s political equilibrium?

On June 5, 2019, the EU Commission assessed, in its Report from the Commission - COM(2019) 532 final “Italy, Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union” - that Italy did not satisfy the debt criterion of the Treaty in 2018, and concluded that a debt-based excessive deficit procedure (EDP) was warranted for Italy. The Italian government later added a number of significant tax increases and expenditure cuts that made it possible to suspend the procedure. A verification of Italy’s debt position will now be made in the autumn with special regard for the 2020 fiscal perspectives. Next October might thus become another critical juncture for the Italian government, called to adjust its plans via a major fiscal correction. This paper assesses the situation and argues that the size of the fiscal correction might become a powerful factor in undermining the current coalition.

Although excessive deficit procedures have been frequent in the euro area, since the first enactment of fiscal surveillance, the Commission report of June was the first initiative subjecting a large country to a “debt-based” excessive deficit procedure1. This peculiar procedure has a distinct technical complexity and a special political character: on one hand, it requires backward-looking as well as forward-looking assessments by the European Commission and by the Economic and Financial Committee (Ecofin) about the direction of the public debt in one country; on the other hand, given the need to correct the trajectory of very large public debts, it may require multi-annual commitments from the affected country, whose governments may find themselves restrained within narrow margins of political discretion for several years and even across different legislatures.

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