Montesquieu Institute: from science to society

Battle of the Budget

Monday, November 26 2018, 13:00, mw Hoai-Thu Nguyen

Welke stappen kan de Europese Commissie nemen na de weigering van de Italiaanse regering om haar begroting aan te passen?


On 23 October 2018 the European Commission published an Opinion, requesting the Italian government to revise its draft budgetary plan (DBP) for 2019, which sets out a planned budget deficit of 2.4% of GDP. In accordance with Regulation 473/2013 of the Two-Pack the Commission gave Rome a period of three weeks to resubmit a revised DBP. Shortly before the deadline, on 13 November 2018, the Italian government under Prime Minister Giuseppe Conte and Finance Minister Giovanni Tria announced that it would not revise its budgetary plan for 2019.

Budgetary plans

Under the European Semester, all Member States are required to submit their Stability or Convergence Progammes (SCPs) and National Reform Programmes (NRPs) before the end of April and before the start of their national budgetary procedures, on the basis of which the European Commission will issue so-called Country-Specific Recommendations (CSRs). All EU Member States then implement these CSRs during their national budgetary processes. The Two-Pack sets out further obligations exclusively for the Eurozone Member States. Under Regulation 473/2013, Eurozone Member States are required to submit their draft budgetary plans (DBPs) to the European Commission and the Eurogroup before mid-October, so as to allow the Commission time to assess their compliance with the requirements of the Stability and Growth Pact (SGP). The Commission then adopts an opinion on these draft budgetary plans and, where necessary, it may ask for a revised plan to be submitted. All Eurozone Member States must adopt their final budget before 31 December of each year (art. 4(3) of Regulation 473/2013).

Deficit

In its Stability Programme of April 2018 the previous Italian government had set out a target deficit of 0.8% of GDP in 2019 – thus making the deficit set out in the DBP of October by the current government three times as high as what has been submitted as a target budget deficit six months prior. At the same time, the government debt in Italy is as high as 131% of GDP and therefore way beyond the 60% debt limit required under EU fiscal rules. Under the rules of the SGP, Member States are required to keep their budget deficit below 3% of GDP and their government debt below 60% of GDP – or at least must diminish the debt at a satisfactory pace where it is higher than 60%. According to art. 2 of Regulation 1177/2011 this means that the ratio of the government debt to GDP should decline at an average rate of 1/20th of the differential to the required 60% per year over three years (in the case of Italy: 3.55% of GDP per year). The target deficit of 2019 set out by the Italian government, however, would, according to the Commission Opinion, endanger such a reduction of Italy’s government debt.

Excessive Deficit Procedure

In light of these developments, it is expected that the European Commission will announce the launching of an Excessive Deficit Procedure (EDP) against Italy before the end of the month for having an excessive debt of more than 130% of GDP and not reducing it at a sufficient pace towards the reference value of 60%. The launch of the EDP for breaching the debt requirement is now possible under the Six-Pack, even where the government deficit remains below 3% of GDP. Ultimately, the EDP can lead to the imposition of financial sanctions on Italy.

Where Member States do not comply with the requirements of the SGP, the Council can decide, upon the Commission’s proposal, on the existence of an excessive deficit or a breach of the 60% debt limit. It makes recommendations to the Member State(s) concerned with a view to correct excessive deficit within a certain time limit (arts. 126(6) and (7) TFEU), but in any case no longer than six months (art. 3(4) of Regulation 1177/2011).

In cases of serious non-compliance with the SGP the Commission can recommend, within 20 days, to the Council to require the Member State concerned to lodge a non-interest-bearing deposit of 0.2% of its GDP (art. 5(1) of Regulation 1173/2011). The recommendation is deemed adopted unless it is rejected by the Council with qualified majority within ten days (art. 5(1) of Regulation 1173/2011). If the Member State does not take action to remedy the situation, the Council takes a decision to that effect under art. 126(8) TFEU and makes its recommendation public. The Commission, again within 20 days, can then make a recommendation to the Council to impose a fine of 0.2% of GDP on the Member State concerned, which is deemed adopted unless the Council rejects it with qualified majority (arts. 6(1) and (2) of Reg. 1173/2011).

Where a Member State persists in failing to implement the Council recommendations, the Council may ask the Member State to take measures to reduce its deficits within a specified time limit (art. 126(9) TFEU), consistent with a minimum annual improvement of at least 0.5 % of GDP as a benchmark (art. 5(1) of Regulation 1177/2011). Where the Member State fails to comply with taking such measures, the Council may impose for that time period sanctions on the Member State under art. 126(11) TFEU. Such sanctions can, for non-Eurozone Member States at least, range from requiring the Member State to publish addition information before issuing bonds and securities, to inviting the European Investment Bank (EIB) to reconsider its lending policy towards the Member State, to requiring the Member State to lodge a non-interest-bearing deposit with the EU to the imposition of fines.

For Eurozone Member States, on the other hand and despite the possibility of less stringent sanctions under the Treaties, arts. 11 and 12 of Regulation 1177/2011 require that a fine of 0.2% of GDP be imposed, which may be supplemented by the other sanctions listed under art. 126(11) TFEU. The decision to impose such fines on Eurozone Member States is again taken by the Council by reverse qualified majority voting (art. 7 TSCG).

'Exceptional events'

In its letter of 13 November 2018, the Italian government asked the Commission for the “application of budgetary flexibility for exceptional events”, citing expenditures on extraordinary hydrogeological interventions and transportation network maintenance, and recited its optimism that its policy plan of increasing the budget deficit through, inter alia, higher public investment and lower tax burden on small businesses will ultimately lead to a higher GDP growth rate (and the higher the GDP, the lower the debt-to-GDP-rate).

The European Commission, however, does not seem to share Rome’s confidence. Thus, Commission Vice-President Valdis Dombrovskis declared Italy’s assumption that an initial increase of budget deficit would lead to an eventual reduction of the same ‘overly optimistic’.

Whether this divergence in assessment will lead to Italy ultimately being fined still remains to be seen – thus far the EU has yet to financially sanction a Member State for the breach of SGP rules. The latest example is the cancellation in August 2016 of the fines that were to be imposed on Spain and Portugal for their failure to correct their excessive deficits, not lastly because of the general elections that took place in Spain in 2016. With the elections of the European Parliament coming up in May 2019, it is possible that the European Commission will be reluctant to take a politically sensitive decision that could potentially play in the hands of Eurosceptic parties during an election period.

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