The formation of a new government in Italy last Thursday has reduced the potential for another clash between Rome and Brussels over fiscal policy when Italy sends its 2020 draft budget for review to the European Commission, by October 15th.
Italy’s new finance minister, the socialist Roberto Gualtieri, unlike his predecessor Giovanni Tria, knows EU budget rules well and understands how to navigate through the complex processes and key people in Brussels. Not only was he a member of the European Parliament for a decade, for the last five year he also chaired the parliament’s influential economic committee.
** Gualtieri is also likely to have more autonomy in shaping fiscal policy than did Tria, who was brazenly used by Matteo Salvini of the Northern League as a political tool in his confrontations with the EU to gain popular support for his party. EU officials say Prime Minister Giuseppe Conte has also been sending conciliatory signals on fiscal policy in his personal contacts with the Commission, even if until recently he was obliged to toe the confrontational line set mainly by Salvini.
** While EU officials do not expect Italy to suddenly turn into a model of fiscal rectitude, they do expect Rome will submit a draft budget for next year that will be borderline acceptable from the point of view of EU rules and markets, so as to avoid a potentially market-upsetting showdown with the EU executive arm and an effective penalty in the form of higher market yields.
** This could mean Gualtieri could offer some marginal reductions, perhaps by 0.1-0.2% of GDP, in the structural deficit — the calculated measure that excludes cyclical swings in revenue and expenditure as well as one-off income and spending – as well as some attempts to reduce Italy’s public debt.
** We expect the Commission, which on October 15th will have two weeks left to the end of its mandate and will not want to tie the next Commission’s hands with any openly hostile action against Rome, is likely to find a way to accept the draft, even if it classifies it as “at risk of non-compliance” – which is the last level at which the draft could pass without the EU having to take some action.