EU warns that Italian budget risks ‘sleepwalking into instability’

Italy’s 2019 budget will hurt growth and risks economic instability the European Commission warned during a recent press conference.

Italian flag
Source: Bloomberg

The Italian government risks ‘sleepwalking into instability’ if it chooses to go ahead with its proposed budget for 2019, warned EU Commission Vice-President Valdis Dombrovskis on Wednesday.

‘The impact of this budget on growth is likely to be negative in our view. It does not contain significant measures to boost potential growth, possibly the opposite,’ Dombrovskis said.

‘With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability,’ he added.

EU threatens to fine Italy over budget plans

The EU Commission said that if the Italian goes ahead with its budget and fails to reduce the size of its public debt, which stands at nearly €2.5 trillion, then it would consider taking disciplinary action that could see the country face fines of 0.2% of GDP for Italy.

In July, the EU Commission recommended the Italian government to take steps to reduce its structural deficit by 0.6% of GDP in 2019.

But after analysing Italy’s draft budget, the EU Commission found that it would increase the country’s debt to GDP by 1%, with the government’s plan likely to hinder growth and increase the cost of borrowing for its citizens, Dombrovskis said.

Italy remains a concern

Italian instability is a major concern for EU and the other 27 member states, with the country’s government determined to make additional borrowing instead of the necessary fiscal prudence that the EU Commission has recommended it take.

Italy’s debt to DGP is expected to remain at around 131% over the next two years, representing an average debt burden of €37,000 for every Italian citizen.

‘Let me also say that the impact of this budget on growth is likely to be negative in our view,’ Dombrovskis continued. ‘It does not contain significant measures to boost potential growth. And, the uncertainty and the rising interest rates are taking their toll on Italian economy.’

The draft budget plan also hinders the ability of Italian banks to lend to national companies and households at affordable costs, he added.

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