Italy’s finances are under intense scrutiny from Brussels. here’s how

ROME, ITALY – JULY 24: Economy Minister Giovanni Tria attends a press conference.

Simona Granati | Corbis News | Getty Images

Italy is about to come under closer scrutiny from European authorities, given its massive debt load.

The European Commission, the EU’s executive, said last week that Rome had not reduced the level of its public debt in 2018. The commission said current spending by the Italian government shows that the level of the debt could reach 135% by 2020, in breach of EU fiscal rules. .

As a result, European finance ministers must decide whether the European Commission should step up its surveillance of Italy in a process that could ultimately lead to fines.

CNBC is examining how the process works and whether the risk of sanctions is likely to materialize soon.

Why is Italy increasingly under surveillance?

The countries of the euro zone should maintain their level of deficit below 3% of their growth and a threshold of public debt above 60% of GDP, according to the European treaties.

However, the rules are flexible. If a country has failed to comply with the EU treaty for “exceptional and temporary” reasons, the European Commission takes no action against the member state.

If the derogation from the budgetary rules seems to be an ongoing matter – as the European Commission has deemed it to be the case for Italy – then Brussels opens an excessive deficit procedure (EDP).

What is an excessive deficit procedure?

It is essentially a step-by-step process to determine whether a country is taking action to reduce its deficit and/or public debt level. The process becomes official when European finance ministers give the green light.

During the step-by-step process, the European Commission assists the Member State by suggesting ways to change its budgetary position.

If there is no desire on the part of this country to modify its finances, this procedure then provides for the suspension of the European funds granted to this capital as well as a fine of up to 0.2% of the country’s growth.

The latter has never taken place since the rules were established in 1993.

“They (Italy) must demonstrate that in 2019 and 2020 they are going to pursue a sound fiscal policy that is compatible (and) in line with our rules,” Pierre Moscovici, European Commissioner for the Economy, told CNBC on Sunday. in Japan.

“I think (Giovanni Tria, the Italian finance minister) is aware. Now he has to move from awareness to action.”

What is the probability that Italy will be fined?

“An ongoing standoff with Brussels could pay off politically in Italy, particularly for Matteo Salvini’s Lega. sanctions and fines,” Wolfango Piccoli, co-chairman of research firm Teneo Intelligence said in a note last week.

The work of the European Commission is particularly limited this year, as a new group of policymakers is due to take power in November.

Matteo Salvini, the country’s deputy prime minister and a vocal opponent of EU fiscal rules, said last week that the only way to reduce debt from previous administrations was to cut taxes. He also made earlier remarks noting that the current executive in Brussels would soon change.

“The fines are at the end of a very long process…It can take several months…the fines are not the point,” Moscovici told CNBC’s Nancy Hungerford.

He added that Italy “must be aware that its future is not to fight the eurozone with far-right ideas”.

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