The European Commission could impose a 3 billion euro fine on Italy for breaking EU rules due to its rising debt and structural deficit levels, the country’s Deputy Prime Minister Matteo Salvini said on Tuesday.
An intensifying dispute between Italy and the European Union hit financial markets on Tuesday, with investors bracing for another budget showdown between Rome and Brussels.
European stocks and the euro were both trading lower during afternoon deals, following reports the euro zone’s third-largest economy could soon face disciplinary steps from the EU’s guardian of healthy public finances.
Italy’s Deputy Prime Minister Matteo Salvini said Tuesday that Rome could be hit with a fine of 3 billion euros () for accumulating debt and deficits that break EU rules.
The Italian government vowed to stand firm on its 2019 budget
Why does Italy’s government want to increase spending? The country’s coalition government, formed through an alliance between the populist 5-Star Movement and the far-right League, believes increased spending is the only way to jump-start the country’s economic growth. The government’s plan to increase spending is aimed at implementing a series of electoral promises, including lower taxes, a lowering of the retirement age, and a universal income.
Italy’s industry minister, Dario Galli, said last week the bulk of the spending cuts needed to meet the lower deficit target would be most likely to hit universal basic income, intended to give €780 (£700) a month to the unemployed, and the proposal to cut the retirement age. The other main proposal is the introduction of a flat tax.
Italy launched a citizens’ income scheme, designed to alleviate poverty and address unemployment.
It was one of the key election promises from the anti-establishment Five Star movement, which has governed the country along with The League since the 2018 election.
The government says those who take part will be signing an employment pact or a social inclusion pact, with recipients expected to retrain and get back into the work force.
Filippo Taddei, Associate Professor of International Economics at the School of Advanced International Studies (SAIS), Johns Hopkins University, told Euronews one problem is the lack of infrastructure to deliver the retraining element of the scheme.
Overall the citizens’ income scheme is set to cost the government around €7-8 billion per year.
Why has Italy introduced the scheme?
The government says it wants to address poverty and unemployment, and to better match job demand and supply.
Italy has one of the highest unemployment rates in the EU, at 10.5% as of January 2019, according to Eurostat.
The government has vowed to tackle poverty, which had risen to the highest levels seen for more than 10 years at the time of the 2018 election.
Who is eligible and how much will they receive?
To qualify, you must be an Italian or EU citizen, or have lived in the country for at least 10 years.
You must also have a household income of under €9,360 per year, savings under €6,000, and no second property costing more than €30,000.
A single person with no income or minimal savings can receive a maximum of €9,360 per year, or €780 euros per month, with €280 to be used for rent. This is adjusted up for families with children.
Anyone earning less than €780 euros per month are eligible to have this topped up.
Have similar schemes worked elsewhere?
Another European country which tried a citizens’ income is Finland – but the Scandinavian nation scrapped it after two years, with the final payments being made in January 2019.
The trial saw 2,000 unemployed Finns, chosen at random, receive €560 a month regardless of whether they found work in that time or not.
Initial results suggested a rise in well-being, but no major increase in the unemployed looking for work.
How can the EU fine a ‘sovereign country’ 3 billion euros for spending their own budget?
The EU Austerity fiscal policy
The EU government debt and deficit statistical bulletin is published quarterly in January, April, July and October each year, to coincide with when the UK and other EU member states are required to report on their deficit (or net borrowing) and debt to the European Commission.
The European Union (EU) is an economic and political union of 28 countries. It operates an internal (or single) market, which allows free movement of goods, capital, services and people between member states.
The EU countries are:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
Article 126 of the Treaty on the Functioning of the EU obliges member states to avoid excessive budgetary deficits. The Protocol on the Excessive Deficit Procedure, annexed to the Maastricht Treaty, defines two criteria and reference values with which member states’ governments should comply. These are:
- a deficit (or net borrowing) to gross domestic product (GDP) ratio of 3%
- a debt to GDP ratio of 60%
For the UK, financial year (April to March) figures are used by the European Commission when assessing against the Protocol on the Excessive Deficit Procedure.
How does the UK stack up?
- General government gross debt was £1,837.5 billion at the end of 2018, equivalent to 86.7% of gross domestic product (GDP) and 26.7 percentage points above the reference value of 60% set out in the Protocol on the Excessive Deficit Procedure.
- General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.
- General government deficit (or net borrowing) was £32.3 billion in 2018, equivalent to 1.5% of GDP and 1.5 percentage points below the reference value of 3.0% set out in the Protocol on the Excessive Deficit Procedure.
- This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.
The Maastricht Treaty signed in 1992 foresaw the creation of the Euro. It organised the way that multilateral fiscal surveillance would be conducted within the European Union. The provisions regarding the EDP are currently defined in the 2012 consolidated version of the Treaty on the Functioning of the European Union (TFEU).
The surveillance is based on the EDP which sets out schedules and deadlines for the Council, following reports from and on the basis of opinions by the Commission and the Economic and Financial Committee, on how to judge whether an excessive deficit exists in an EU Member State.
The TFEU obliges EU Member States to comply with budgetary discipline by respecting two criteria: a deficit to GDP ratio and a debt to GDP ratio not exceeding reference values of 3% and 60% respectively, as defined in the Protocol on the EDP annexed to the TFEU.
This includes the UK LINK
Article 126
(ex Article 104 TEC)
1. Member States shall avoid excessive government deficits.
2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria:
(a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless:
– either the ratio has declined substantially and continuously and reached a level that comes close to the reference value,
– or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;
(b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.
The reference values are specified in the Protocol on the excessive deficit procedure annexed to the Treaties.
3. If a Member State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State.
The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State.
4. The Economic and Financial Committee shall formulate an opinion on the report of the Commission.
5. If the Commission considers that an excessive deficit in a Member State exists or may occur, it shall address an opinion to the Member State concerned and shall inform the Council accordingly.
6. The Council shall, on a proposal from the Commission, and having considered any observations which the Member State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists.
7. Where the Council decides, in accordance with paragraph 6, that an excessive deficit exists, it shall adopt, without undue delay, on a recommendation from the Commission, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period. Subject to the provisions of paragraph 8, these recommendations shall not be made public.
8. Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council may make its recommendations public.
9. If a Member State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the Member State to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation.
In such a case, the Council may request the Member State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that Member State.
10. The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.
11. As long as a Member State fails to comply with a decision taken in accordance with paragraph 9, the Council may decide to apply or, as the case may be, intensify one or more of the following measures:
– to require the Member State concerned to publish additional information, to be specified by the Council, before issuing bonds and securities,
– to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned,
– to require the Member State concerned to make a non-interest-bearing deposit of an appropriate size with the Union until the excessive deficit has, in the view of the Council, been corrected,
– to impose fines of an appropriate size.
The President of the Council shall inform the European Parliament of the decisions taken.
12. The Council shall abrogate some or all of its decisions or recommendations referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the Member State concerned has, in the view of the Council, been corrected. If the Council has previously made public recommendations, it shall, as soon as the decision under paragraph 8 has been abrogated, make a public statement that an excessive deficit in the Member State concerned no longer exists.
13. When taking the decisions or recommendations referred to in paragraphs 8, 9, 11 and 12, the Council shall act on a recommendation from the Commission.
When the Council adopts the measures referred to in paragraphs 6 to 9, 11 and 12, it shall act without taking into account the vote of the member of the Council representing the Member State concerned.
A qualified majority of the other members of the Council shall be defined in accordance with Article 238(3)(a).
14. Further provisions relating to the implementation of the procedure described in this Article are set out in the Protocol on the excessive deficit procedure annexed to the Treaties.
The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the European Central Bank, adopt the appropriate provisions which shall then replace the said Protocol.
Subject to the other provisions of this paragraph, the Council shall, on a proposal from the Commission and after consulting the European Parliament, lay down detailed rules and definitions for the application of the provisions of the said Protocol.
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