Italy backs budget deficit cuts to placate EU

But Prime Minister Paolo Gentiloni’s coalition will likely face bigger battles in the autumn.

ROME — Italy has approved plans to cut its budget deficit by an extra €3.4 billion in an effort to placate its EU partners and the European Commission.

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Prime Minister Paolo Gentiloni’s center-left cabinet agreed the measures only after heated debate — offering a foretaste of bigger difficulties to come in the autumn, when it will have to craft a new budget with very little room for growth-boosting policies. That battle will take place in the lead-up to a general election, due in early 2018.

“We are delivering a message of strong reassurance that our accounts are in order, and not because of higher taxes,” Gentiloni said at a press conference on Tuesday evening, following a two-hour cabinet meeting to approve the measures. “We are continuing to follow the path of reforms and growth.”

According to government figures also released on Tuesday, Italy’s budget deficit target for this year was lowered to 2.1 percent of GDP from a previous 2.3 percent, while it is projected to fall to 1.2 percent next year.

Economy Minister Pier Carlo Padoan said the lower deficit would be funded through measures aimed at fighting tax evasion, greater efficiency in tax collection and only limited spending cuts. Padoan also said Italy would move forward with other reforms, including a new competition law and a planned overhaul of the civil justice system.

The lower deficit requested by Brussels has been a tough nut to crack for Gentiloni, who took over as premier last December after his predecessor Matteo Renzi was defeated in a referendum on proposed constitutional reforms.

The European Commission has threatened to open an excessive deficit procedure against Rome if it doesn’t move quickly to bring its deficit targets closer to EU requirements. The Commission can impose fines of up to 0.2 percent of gross domestic product on eurozone countries that repeatedly ignore recommendations to fix their budget problems.

The Italian economy is projected to expand by 1.1 percent this year, slowing down to 1 percent growth in 2018 and 2019. Padoan said the limited growth rates predicted for the next two years were due to “stringent fiscal policies,” which were part of the government’s EU commitments. However, he hinted that there could still be some room for negotiations with Italy’s European partners to find new ways of balancing fiscal rigor with investment-boosting policies.

‘Right direction’

Italy, which is burdened by the highest public debt in the eurozone after Greece, has often clashed with the Commission over its expansive budget policies. A new disagreement with the EU would have been an additional headache for the Gentiloni government.

“Certainly the commitment of the Italian government is going in the right direction,” European Commission President Jean-Claude Juncker said in an interview with Italian daily La Repubblica published on Wednesday, adding that he had yet to see the details of the new measures.

Juncker also said that Italy must “decisively” overhaul its public finances and cut debt in the medium to long term, but he ruled out Rome’s exit from the eurozone.

Gentiloni’s coalition faces the hard task of keeping Italy’s accounts in order while addressing urgent calls for social policy measures to fight widening poverty and record-high youth unemployment.

Despite adopting a more accommodating stance with the EU than its predecessor, the government could still end up making expensive vote-winning promises in the autumn as it prepares to do electoral battle with a strong Euroskeptic opposition. Leading the charge is the anti-establishment 5Star Movement, which has pledged to call a referendum on leaving the euro and currently enjoys a strong poll lead over the governing Democratic Party.

“This is a fragile government, which doesn’t have much negotiating power either with the markets or with the EU,” said Pierpaolo Benigno, economics professor at Rome’s LUISS university.

“These budget moves are pretty mild and they are not solving Italy’s main problem, which is the country’s heavy public debt and its sustainability. This government, due to its brief time horizon and its internal weakness, can’t do much to address that key issue,” Benigno added.

Italy’s debt, which reached a record high of 132.6 percent of GDP in 2016, will remain stable at 132.5 percent this year, while easing to 131 percent in 2018, according to government figures.