The moment is approaching when the countries of the euro zone will have to present their 2017 budgets. Not a day seems to go by without some sort of skirmish between Rome and Brussels. Is it much ado about nothing?
Partly yes. In this period in the run up to Italy’s delicate December 4 constitutional referendum, the European Commission would not want to create too much disruption in Rome, also because the referendum is starting to be viewed as a vote on the future of Europe.
Italy has committed itself to reducing its public deficit to 1.8% of gross domestic product (GDP) in 2017, compared to the 2.4% estimated for this year. From a structural point of view, the country must adopt budget reduction measures of at least 0.6% of GDP.
The Italian government's Economic and Financial Document (DEF), or budget blueprint, points to a reduction of the nominal deficit to 2.0% of GDP. The government has then prepared for budget flexibility that could take the deficit up to 2.4%.
“Italy will be able to enjoy some leniency on our part,” said an EU source. “We still have to understand how much though. A full analysis will only be possible after the budget plan is presented.”
According to EU rules, the European Commission has two weeks to send back the text if it is too distant from EU expectations. Otherwise, an opinion is expected within a month. Governments have until mid-October to present their budgets.
Italy already enjoyed maximum budget flexibility in 2016: 0.75% of GDP. At this point, new margins can only come from other fronts: spending to deal with the immigration crisis, the reconstruction in northern Lazio after the earthquake in August, the terrorism emergency (as decided by the Commission in April). In Brussels some people are talking of the need to “imagine some form of financial engineering”.
The Commission is not only eyeing Italy's deficit, but also its debt. According to European rules, the debt should fall by one-twentieth of a point a year on average over three years.
Commission President Jean Claude Juncker is holding the reins of the negotiations, and he is concerned about Italy's December 4 referendum. The vote is no longer just a consultation on a constitutional reform or a vote of confidence in the current national government. The referendum will also be a chance to measure Italian sentiment towards Europe.
The anti-immigrant Northern League and the anti-establishment 5-Star Movement have presented the referendum as an opportunity to vote against Europe, of which the Italian government is viewed as an executive arm.
As Italy could tip the balance between integration and disintegration, the Commission is proceeding cautiously. When it evaluates the 2017 budget it wants to avoid excessive disruption before the referendum.
Striking a balance between respect for budget rules and a desire to reach an agreement with the government is not easy. Beyond disputes over figures, it is likely that Brussels will choose to delay its judgement until after the referendum. After examining the 2016 budget last year it noted “the risk of not respecting the (Stabilty) Pact” but delayed a detailed analysis of the government's requests for flexibility until spring this year.
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