Italy: Sanctions overdue, what should happen now?

The EU Commission assessed the case for opening an Excessive Deficit Procedure (EDP) against Italy today, due to the continuous increase in public debt. Cep-expert Alessandro Gasparotti comments on it.

The college of Commissioners issued today a report over the country's failure to reduce public debt as required by the Stability and growth pact, assessing the case for launching an EDP.

The final decision over whether to officially trigger an EDP regarding the Italian fiscal management will have to be taken by the Council of EU finance ministers, first at a technical level, and then at a political one (possibly already on the 9th July), when the finance ministers will convene for the Ecofin Council.

Last December, after an unprecedented confrontation with the newly formed Italian government over the 2019 budget, the Commission decided to refrain from opening an EDP against Italy, on the condition that Italian debt would ease this year and the structural deficit would remain stable at 2018 levels.

Italy's debt has however been rising: it went up to 132,2 % of GDP in 2018 from 131,4 % in 2017 and is expected to rise to 133,7 % this year and to 135,2% in 2020, according to Commission forecasts.

To date, the EU Commission has never initiated an excessive deficit procedure because the debt level of a member state has not fallen fast enough. For member states with a public debt above 60% of GDP, the Stability and growth pact requires public debt to decrease by a yearly average of 1/20th of the difference between actual debt to GDP and the 60% threshold. It mandates debt reduction on a path with clear targets and deadlines. Disciplinary steps in the case of non-compliance could culminate in a fine of 0,2 % of Italian GDP, i.e. around 3,5 billion euro. Regional subsidies from the EU's "cohesion fund" may also be withheld.

Sanctions for Italy are nevertheless very unlikely. The Commission has so far opposed sanctions, because it perceives sanctions as a failure of the existing economic policy coordination mechanisms.

Political instability inside the Italian government and weak economic performance are already taking their toll as capital markets are reacting: Italian 5 years bonds last week were traded at a higher yield than their Greek equivalents.

Given the difficult enforceability of the stability and growth pact in the Eurozone because of the Commission's unwillingness to trigger financial sanctions, effective pressure on Italy to reconsider its policies can only come from capital markets, which can use the excessive deficit procedure as a catalyst for requiring higher price for lending to Italy, pushing for fiscal adjustments.