BRUSSELS – In a stinging and rare rebuke to a core member, the European Union on Tuesday returned the budget proposed by Italy to its populist government, stating that it poses unacceptable risks to Italy and the Eurozone.
The Union government told Rome that it needed to rewrite the draft 2019 budget and reduce its deficits, or face heavy fines early next year.
It was the first time that the European Union rejected a member's proposed budget for a nation that uses the euro and created a confrontation between Brussels and the Eurosceptic government that seized power in Rome this year.
"The Italian government is open and aware of its commitments," said Valdis Dombrovskis, Commission Vice-President responsible for the euro and financial stability. Italy was guilty of "a particularly grave non-compliance" with Eurozone rules and said, "today, for the first time, the Commission is required to ask a euro area country to revise its draft budget."
Dialogue will continue, "said Pierre Moscovici, Commissioner responsible for Economic and Fiscal Affairs," Our door is open to dialogue. "
Italian Economy Minister Giovanni Tria seemed to reject the Commission's demands on Monday arguing that his government, a troubled coalition of populist five-star and league parties, saw their budget as crucial to rejuvenating the Italian economy, tackling social issues and adhering to voter-to-people commitments, including tax cuts and higher taxes Social spending.
In response to a warning issued by the European Commission last week, Rome said it would not resign Its plans to reach a budget deficit of 2.4 percent of GDP tripled the level to which the Italian government previously indicated had consented
It was considered for the first time since the outbreak of the Eurozone crisis over Greece as the euro-using country rejected a demand from Brussels to adjust its budget.
The European Union faces a greater number of serious challenges from Member States than ever before in its history. The UK plans to leave the bloc by the end of March, and the Commission is investigating possible violations of the rule of law (Hungary) and Poland, where governments that sharply criticize Brussels have curtailed the independence of the judiciary and press freedom
. However, financial markets are expected to have more influence on Italian budgetary discipline than the European Commission. Interest rates on Italian bonds are already near four-year highs, and European officials say Rome's economic plans could significantly increase its borrowing costs and force the government to change its proposals.
Italy, however, is not Greece. Even the most recent draft budget falls within the eurozone's budget deficit guidelines below 3 percent of G.D.P. But Italy's cumulative debt is enormous – more than 131 percent of G.D.P. in the past year far exceeded the guidelines of 60 percent. And the proposed budget would make this debt mountain even worse, especially since Italy is not expected by Brussels to achieve the necessary economic growth rates for debt reduction.
In June, the governing coalition in Italy came to power and pledged to confront Brussels with euro area directives aimed at preserving the economic stability of the region and its currency and avoiding a crisis that hit the euro when it became clear that Greece was in deep hopeless debt.
The European Commission fears this will allow Italy, which has a relatively large economy breaking the rules outrageously, will only encourage other countries to do so. At the same time, European leaders are aware that the Italian government has come to power on an anti-Brussels platform and continues to be popular.
In the parliamentary elections next May Brussels will try not to mobilize populist parties across the continent that represent the country European Union as a threat to the sovereignty of their countries
On Tuesday in Luxembourg, Klaus Regling, managing director, emphasized the European Stability Mechanism in order to avoid another crisis in Greece, that the risk of contagion has been low so far.
"There is a risk with Italy, we are worried about Italy because the fiscal plans are incompatible with the EU framework," he said in a briefing to the reporters. "But Italy is not Greece, it does not have the problems that Greece had 10 years ago."
Italy has a much larger economy; Apart from debt payments, the budget has a surplus; and a large part of the debt is being financed by Italians and not foreign banks, Mr. Regling noted. And it would especially affect Italian banks, he said. Italian Economy Minister Tria told the Commission that the government could adjust its spending plans if growth stagnated, but that was not considered a firm commitment.
Despite the confrontation, Italian leaders have made it clear that they have no intention of pulling Italy out of the common currency.