BRUSSELS (Reuters) - The European Commission sent a letter on Friday to Italy’s finance minister urging clarifications over the country’s planned budget for 2018, adding to Rome’s headaches ahead of elections due by next May.
The move could force Rome to cut expenditures or raise taxes to comply with EU fiscal rules. Both are unpalatable measures before elections planned by May and amid deepening political divisions within the ruling Partito Democratico (PD).
The EU executive, which has the power to reject a euro zone country’s budget if it deems it in serious breach of EU fiscal rules, said Italy’s draft budgetary plans created risks of “a significant deviation from the required effort in 2017 and 2018 together”.
A source from Italy’s Finance Ministry said Rome will soon reply to the commission’s letter and expressed confidence that the clarifications that will be provided will be sufficient to resolve the matter.
The unexpected rift with Brussels adds to the woes of Italy’s Prime Minister Paolo Gentiloni who has recently faced strong criticism from PD leader, Matteo Renzi, on his confirmation of Bank of Italy’s Governor Ignazio Visco.
The Italian parliament, which has to approve the budget, is deeply divided and many lawmakers have already showed little enthusiasm for the low-key budget presented by the outgoing executive.
Under EU fiscal rules, Italy was required to have a structural adjustment, which excludes the economic cycle and one-off measures, of 0.6 percent of its gross domestic product in 2018.
The government pledged to reach an adjustment of only 0.3 percent when it presented its budget in mid October, a move meant to please political forces which oppose new austerity measures and weaken the appeal of growing populist parties.
The commission had let Rome understand that it would have approved this smaller effort. However, it has now estimated that the actual structural effort would only be 0.2 percent, it said in a letter sent to Italy’s Finance Minister Pier Carlo Padoan.
Structural corrections are meant to reduce a country’s public debts, an objective that is particularly important for Italy which has a debt above 130 percent of GDP, which is the second highest in the EU after bailed-out Greece.
The commission said its preliminary assessment indicated that Italy would breach the EU targets for the gradual reduction of its huge debt.
The letter, dated October 27, was sent one week after Italy submitted an updated version of its draft budget. Italy has to provide clarifications by October 31 and could even risk the rejection by the commission of the budget.
Brussels also estimated a lower-than-required reduction of the country’s primary expenditure, which excludes interests on the debt.
Euro zone countries’ primary expenditures are set to be scrutinized more closely by markets as the European Central Bank reduces its monthly purchases of government bonds, a move that is expected to gradually increase interest payments for states with less solid public finances, like Italy.
The commission also asked Rome to clarify its forecast expenditures for migrants, whose arrivals from Africa have substantially dropped in recent weeks.
To sweeten the pill, the commission said its assessment of Italy’s budget “will take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Italy’s public finances.”
The commission also required further information on the next year’s budgets from France, Portugal, Spain and Belgium.
Editing by Robert-Jan Bartunek and Matthew Mpoke Bigg