The European Commission has told Italy to revise its budget, an unprecedented move towards a EU member state.
Italy’s ruling populist parties have vowed to push ahead with campaign promises including a minimum income for the jobless. But it has the second-highest national debt in the eurozone.
The Commission said that was a “particularly serious non-compliance” with their recommendations.
Italy now has three weeks to submit a new, draft budget to Brussels.
Commission Vice-President for the Euro Valdis Dombrovskis said Italy’s response to the commission’s concerns was “not sufficient” to assuage fears and that the euro’s rules were the same for everybody.
“For the first time the Commission is obliged to request a euro area country to revise its draft budgetary plan. But we see no alternative than to request the Italian authorities to do so.”
A defiant prime minister, Giuseppe Conte, insisted earlier that the budget deficit would go no higher than 2.4% of the country’s GDP, although it is three times the deficit target of the previous government.
The government argues that servicing its debt of 131% of national output – second only to bailed-out Greece – would hurt Italians, who have still not recovered from the decade-old financial crisis.
Italy’s economy is still smaller than it was in 2008, and the ruling League and Five Star parties argue an increase in spending will kick-start growth.
How did the drama unfold?
The government hammered out its first budget in late September, vowing to “end poverty” with a minimum income for the unemployed.
Other measures included tax cuts and scrapping extensions to the retirement age – fulfilling several key campaign promises from the election in March.
Italy’s neutral finance minister, Giovanni Tria, and international observers had hoped Italy would keep its deficit under 2% – perhaps as low as 1.6%.
But the country’s new political leaders decided to raise it to 2.4% to fund their plans.
That would not normally be a problem as it falls well short of the 3% deficit limit under eurozone rules – except that Italy has a great deal of debt.
At 131% of the country’s economic output, that is the second-highest figure in the entire eurozone, behind Greece, which has extensive financial difficulties in the past decade.
And as the eurozone’s third-largest economy, Italy’s debt problems are of concern to Commission officials.
In late September when the budget was announced, EU Economics Commissioner Pierre Moscovici said that every euro spent on servicing such a large debt was “one euro less on roads, one euro less on education and one euro less on social justice”.
“Spending your way out of economic trouble ends up working against those who do it,” he said. “And it’s always the people who pay the price in the end.”
After Italy announced its draft budget, weeks of market turmoil followed.
Before the Commission announced its rejection of the Italian budget on Tuesday, European shares fell to their lower levels in nearly two years.
Following the announcement, the Italy-Germany 10-year bond yield gap, widely used as a relative yardstick of Italy’s position on the markets, widened to a new high of 314 points.