Italy Urgently Seeks EU Flexibility on Budget Rules Amid Rising Bond Spreads
Italy Lobbies EU for Flexible Budget Rules
Italy is stepping up its efforts to persuade its European Union partners to approve more flexible budget rules. The country is concerned about widening bond spreads and fears that any deviations from its 2024 spending targets will lead to disciplinary action from Brussels. Government sources have revealed that Italy is particularly worried about a potential accounting ruling by Eurostat, the EU’s statistics arm, which could increase next year’s fiscal deficit. The Bank of Italy has also warned about the risks associated with Eurostat’s upcoming decision.
Proposed Amendments to EU’s Fiscal Rules
The EU’s fiscal rules, which were suspended due to the COVID-19 pandemic, are set to return next year with amendments currently being negotiated by EU governments. Italy is proposing various measures to make the rules as lenient as possible. These include favorable treatment of investments, higher defense spending, and financial and military aid to Ukraine.
Concerns Over Eurostat’s Decision
Italy’s latest proposal aims to protect it from a review by Eurostat on how tax credits for green home improvements are accounted for. The inclusion of these credits in past budgets has increased Italy’s deficits over the last three years. However, Eurostat may decide to shift the impact of these tax credits to 2024 and beyond, thereby revising down deficits for the years when EU limits were suspended and increasing them when the updated fiscal rules come into effect.
Possible Stability Pact Reform
If Eurostat’s decision goes against Italy, it could face a Stability Pact reform proposed by the European Commission. This would further intensify the market pressure on Italy’s debt, which is the second-largest in the euro zone after Greece’s. Italy’s budget framework, approved by the cabinet, has already raised next year’s deficit goal and postponed its return below the EU’s 3% ceiling to 2026.
Market Reaction and Italy’s Response
Italy’s budget plan has been met with skepticism in the markets, leading to an increase in the yield spread between Italian 10-year BTP bonds and German Bunds. The wider spread reflects concerns about Italy’s debt sustainability. To address these concerns, the Italian Treasury has committed to keeping net primary spending growth well below the 1.3% ceiling requested by Brussels for 2024. However, an unfavorable ruling by Eurostat could make it impossible to meet this commitment.
Italy is urgently seeking flexibility from the EU on its budget rules to alleviate concerns about its fiscal deficit. The country’s proposal, aimed at protecting it from potential revisions by Eurostat, highlights the importance of finding a balance between fiscal responsibility and economic recovery. As negotiations continue, Italy’s fate hangs in the balance, with potential implications for the wider euro zone. The coming months will reveal whether Italy’s lobbying efforts have been successful in securing the flexibility it needs.