image

European Union

Italy and the European Union need a better understanding

The country will increase public spending under a proposed budget, raising fears among EU leaders that they will have to rescue Rome from debt

PUBLISHED : Monday, 08 October, 2018, 9:49pm
UPDATED : Monday, 08 October, 2018, 11:10pm

Of all the pressures on the European Union and its financial institutions, none is as worrying as those posed by Italy. The nation’s debt burden is the second biggest among its 28 members, yet its populist government has put forward a budget that will substantially increase public spending. Criticism and calls for a rethink by the European Commission have been rejected as threats to Rome’s authority. But if investors lose faith, the knock-on effects are such that Italian leaders would do well to see logic and reason.

The ruling coalition of the anti-establishment Five Star Movement and right-wing League formed a government in June pledging to uphold election promises that included cutting taxes and boosting welfare spending. It is making good with many of those promises in the budget for 2019, increasing spending threefold to 2.4 per cent of gross domestic product. But Italy’s debt burden is already about 130 per cent of GDP and although EU rules stipulate the deficit can be as high as 3 per cent, the spending violates requirements that highly indebted nations make efforts to reduce the amounts they owe. Leaders counter by arguing that lifting Italians’ spending power will spur economic growth.

Never mind Brexit, political chaos in Italy could be the fatal blow for EU unity

But markets have responded negatively. Five Star and the EU have always been ideologically at loggerheads and tensions have been raised over who should take care of refugees arriving in Italy from Africa, but the latest dispute has wider implications. EU Commission President Jean-Claude Juncker has drawn comparisons between the budget and the group’s most indebted economy, Greece, and said rules have to be strictly enforced. League leader and Deputy Prime Minister Matteo Salvini called the remarks a threat and, with Italian bonds and banking shares falling, said compensation may be sought from the EU to cover rising borrowing costs.

But EU leaders are right to be worried; they could find themselves trying to rescue Italy by overseeing a huge debt restructuring or even allowing the group’s third-biggest economy to exit. All would endanger the euro and European unity. Italian leaders have to show understanding and the EU should be more open to the concerns of Italians.