EU triggers disciplinary action against Italy over its big-spending budget plans

EU triggers disciplinary action against Italy over its big-spending budget plans

Brussels has triggered a penalty procedure that could lead to Italy being fined billions of euros for failing to stick to EU spending rules.

The populist government in Rome wants to splurge billions of euros in its 2020 budget by lowering income tax, reforming the pension system and introducing a minimum guaranteed wage for struggling families.

The spending plans have been spear-headed by Matteo Salvini, the combative deputy prime minister, who says that Italy has been damaged by years of austerity and now needs a “fiscal shock” to jolt it out of its economic lethargy.

Brussels says Italy cannot afford such extravagance, insisting that the ambitious spending plans will only add to Italy’s already colossal debt, which amounts to 131% of GDP.

The populist government’s failure to make structural reforms and to lower spending projections “may negatively affect Italy’s growth potential," the European Commission said.

The Commission recommended that legal action, known as an Excessive Deficit Procedure, should be taken against Italy – a move that will be subject to approval by EU member states.

If approved, Italy could be hit with a fine of up to €3.5 billion within weeks.

The move by Brussels sets the stage for another bruising confrontation with Mr Salvini, who has emerged as by far the most powerful figure in the Italian government.

He has insisted that Rome should have greater economic sovereignty and wants EU spending rules to be flouted.

Lowering taxes will put more money in Italians’ pockets, increase their spending power and haul the country of its economic stasis, he claims.

“Each year we contribute six billion euros more than we receive (from the EU),” he wrote on Twitter on Wednesday. “We are asking to be able to use our money as we see fit.”

He later added: “Cuts and austerity led to an increase in debt, poverty and unemployment. We are not asking money from others, we just want to invest in work, growth, research and infrastructure. I’m sure that in Brussels they will respect these intentions.”

Mr Salvini has been emboldened by the strong performance of his party, the League, in the European elections last month.

The party won 34% of votes, far eclipsing its coalition partner, the Five Star Movement, which won just 17%.

The League insisted on Wednesday that it would not back down in its clash with the EU.

"Our economy is already flat, if we cut spending or raise taxes we will definitely go into recession, is that what the Commission wants?," Claudio Borghi, the party’s point-man on economics, told Reuters. The coalition would "stop at nothing" to prevent new belt-tightening measures. "We are very determined on this," he said.

Matteo Salvini, leader of The League party, might be tempted to pull the plug on the Italian coalition Credit: Alessandro Garofalo/Reuters

The battle with Brussels could spark the downfall of the Italian coalition, analysts warned.

If Mr Salvini’s spending plans are thwarted, he might blame his coalition partners, the Five Star Movement, which has been more conciliatory towards Brussels.

He could then engineer a crisis and demand fresh elections, positioning himself at the helm of a centre-Right coalition that would include Silvio Berlusconi’s Forza Italia party and the far-Right Brothers of Italy party. He could be prime minister within months.

“Support for the League and the other Right-wing parties is now close to 50% of the vote -well above the implicit threshold of about 40% needed to win a majority in both houses of parliament under the current electoral law,” said Agnese Ortolani, an analyst at the Economist Intelligence Unit.

“We believe that Mr Salvini will probably be tempted to pull the plug sooner rather than later. The most likely scenario is some form of government crisis around the 2020 budget negotiations late this year, followed by an early election in the first half of 2020.”

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