Friday , August 23 2019

The only way to fix Italy’s mess

There’s one worrying aspect about the decision by Brussels to trigger a disciplinary process against Italy – and, no, it’s not the prospect of financial sanctions. It’s that the European Commission report, which states that Italy hasn’t made enough progress in cutting its debt, lands at a time of utter political chaos in Rome.
The ruling League and Five Star parties cannot make up their mind on whether their coalition government should survive, let alone what economic policy it should pursue. Prime minister Giuseppe Conte and the technocrat finance minister Giovanni Tria appear completely powerless. The country’s populist leaders must decide what they want to do before the situation drifts out of control.
The surprising thing about Commission’s report is that it didn’t come sooner. At the end of last year, Brussels chose to climb down from the previous standoff with Italy, after Rome made some last-minute concessions over its deficit targets. Those new deficit and debt objectives were always difficult to believe, since they were based on wildly optimistic growth forecasts and a privatisation plan that’s devoid of substance. Still, Brussels gave Italy the benefit of the doubt and decided it was best to avoid a clash ahead of elections to the
European Parliament.
It’s now impossible for the Commission to avert its gaze. Italy’s ratio of debt to GDP continued to climb last year. While it’s true that growth slowed across the EU, Italy’s recession was at least partly self-inflicted.
Moreover, there’s no sign that Italy is serious about shrinking its debt in the future. The government says it wants to find more than 20 billion euros of savings next year – or else raise VAT – but the politicians have vowed repeatedly that taxes will not increase. It’s telling that Tria’s ministry couldn’t specify any area where it intends to cut public spending in its response to the Commission, no doubt because the coalition’s leaders wouldn’t allow it. If the EU’s fiscal rules have any credibility left, a disciplinary process was unavoidable.
A stronger government would do one of two things. The first option would be to take a conciliatory approach and find common ground with the Commission. The disciplinary process is still at an early stage, and the EU’s finance ministers would be able to say whether they agreed with any new Italian proposal by next month. Without this, Italy risks a financial sanction of up to 0.2% of GDP (about 3.5 billion euros), an unprecedented punishment.
The country has to decide what to do about the disciplinary process and, most important, what to include in the 2020 budget, due at the end of the year.
Salvini and Di Maio have vowed repeatedly that their government would last for four more years. But if they can’t work together any longer, it would be best to hold a general election. That way, they would have to tell Italians what their economic plans really are. More duplicity and ambiguity serves no one.

—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion

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