Italy’s Deficit Target Constitutes a Severe Violation of European Fiscal Rules

Italy’s coalition government has just agreed on some initial details of the national budget for the year 2019. Based on these plans, the country’s deficit is set to rise to 2.4 per cent of national GDP in the coming year. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), offers his view on Italy’s budget plans.

“Italy’s new deficit target of 2.4 per cent for the year 2019 amounts to a severe violation of the rules contained within the European Stability and Growth Pact. The previous Italian government made an agreement with Brussels to cut the national deficit down to 0.8 per cent in 2019, with the aim of having a fully balanced budget in 2020.  

As a country facing a very high level of debt, Italy is required to comply with the European rules regarding balanced budgets. These rules also apply to the current government. Italy’s relapse into a high deficit outside of an economic crisis is all the more concerning given the government’s plan to simultaneously roll back the labour market reforms that had previously served as a justification for the country’s large deficit. In addition, the newly proposed social benefits in terms of pensions and basic income are set to drive up the deficit in the long term.

The European Commission’s only acceptable response now is to swiftly initiate the excessive deficit procedure, which, if necessary, could go as far as imposing fines on Italy for non-compliance. Ultimately, though, the reaction from the markets will be far more costly than any sanctions from Brussels. Italy will have to pay the price for the irresponsible actions of its government through high interest rate spreads on new government bonds. Germany, together with the other Eurozone countries, must make it perfectly clear to Italy that financial assistance from the European Stability Mechanism is not an available option in this case.”

For further information please contact   

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-Mail friedrich.heinemann@zew.de