EU Commissioner: EU May Sanction Italy Over Budget if Deal Not Reached

Irving Hamilton
November 7, 2018

On October 23, the EU Commission sent Rome a letter rejecting the budget - a historic first, even if Italy is far from the first country to break the rules of the eurozone.

The coalition has indeed built its 2019 budget on a very optimistic growth forecast of 1.5%, when the International Monetary Fund (IMF) expects only 1% and the European Commission - which must present new forecasts Jeudi - on 1.1%.

The European Commission could impose sanctions on Italy as a last resort if they cannot reach an agreement over Rome's rule-breaking budget, but Brussels wants to avoid that option, the EU's economics commissioner said on Tuesday.

"Italy's behavior puts our plans at risk", Slovak Finance Minister Peter Kazimir tweeted.

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The situation is reminiscent of the Greek debt crisis, except with Italy's much bigger and more central eurozone economy at the heart of the storm, making a bailout hard.

Moscovici added that Italy was in isolation on the issue, as all Eurozone ministers at the meeting supported the Commission's approach.

European Commissioner for Economy and Finance Pierre Moscovici that the cost of servicing Italian public debt is already equal to the country's entire spending on education - €65 billion a year, before adding that the Commission and the Italian government are not now involved in negotiations on a compromise regarding a revised budget.

Mr Stehn's analysis comes after Commissioner Moscovici reiterated Rome must understand European Union fiscal rules can not be broken with the bumper spending plan. The European Commission will rule on that plan, as well as the others in Europe, on november 21. Tria also noted that there have been other countries which deviated from the rules in the past, according to the same official.

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Asked whether some deal or compromise could be found between Brussels and Rome, Moscovici said: "No". We're not in a negotiation. "The rules are the rules".

Many officials say that, should Rome's borrowing costs on the market - already elevated on concern over the 2019 budget - rise to unsustainable levels, there would be no political will in the euro zone now to bail the country out.

The finance ministers released their statement on Italy, saying: "We agree with the commission assessment", and that "the focus on sufficient debt reduction and the path to the medium-term budgetary objective are an integral part of the stability and growth pact".

Dutch Finance Minister Wopke Hoekstra backed the budget supervision process but he would not speculate about what Italy might do or what response might be needed if it refuses to submit a new plan.

The Goldman Sachs economist suggested market pressure will play a "key role" on whether the Italian Government carries out its plans despite having signalled no intention to give up the proposed budget.

"We are looking to a constructive discussion with Italy", he said.

"On Nov. 19 we'll hold an extraordinary Eurogroup here in Brussels and this meeting will be mostly dedicated to euro-area reform", Eurogroup President Mario Centeno tells reporters after the meeting. "I really hope that the Italian government will seize the hand offered,"said French Finance Minister Bruno Le Maire".

Italian Finance Minister Giovanni Tria sits during a meeting of Eurogroup Finance Ministers at the European Council headquarters in Brussels, Monday, Nov. 5, 2018.

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