The Italian Economy Is Set to Lose out in the Budget Dispute

The European Commission rejected Italy’s draft 2019 budget on the grounds that it violates European stability rules. This decision marks the first time in the history of the European Union that a budgetary plan of a Member State is rejected by the EU. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, explains:

“There will not be an easy fix in the budget dispute between Italy and the EU Commission. The processes of the European Stability and Growth Pact takes time, and ultimately, there are no credible sanctions. It is, however, already clear who is set to lose out in this conflict, namely the Italian economy.

The loss of trust in the future sustainability of Italy’s economy will reduce consumer and investor confidence. The growth projections made so far have become obsolete. There will most likely be a surge in the capital flight flowing from Italy to Member States in the north. Despite these developments, the Italian government enjoys strong backing from its voters. Basically, we are witnessing a case of collective irrationality.

With the support of the majority of its citizens, the Italian government is pursuing a dangerous course that considers the risk of an economic disaster as an acceptable price to pay. Europe can only take on the role of the observer. The EU Commission is right to take a hard line against Rome. The signal the EU is sending is that Italy cannot count on EU solidarity for the damage it has inflicted on itself.”

For further information please contact

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