On Tuesday, the European Union did something it had never done before: It rejected the proposed budget of one of its members.
The European Commission said Italy’s proposal, which would swell the country’s deficit to 2.4 percent of gross domestic product to fund tax cuts and stronger welfare programs, posed “unacceptable risks” to Italy and the euro zone. “We see no alternatives,” European Commission Vice President Valdis Dombrovskis said Tuesday. “The ball is now in the court of the Italian government.”
The Italian government now has three weeks to make a choice: It can draw up a more austere budget, or stick to its guns and pay a heavy fine to the E.U. next year.
So far, Italian leaders have remained defiant. And why not? This is a fight that Italy’s populist government, which took power in June, has been waiting for.
That government — a coalition between the anti-establishment Five Star Movement and the far-right League party — has an ambitious but contradictory agenda. The vaguely left-leaning Five Star Movement won Italy’s impoverished south by promising a generous guaranteed income and pledging to ditch a pension measure that raised the retirement age. The League took the richer, more industrial north with pledges of big tax cuts and stricter immigration policies.
Boosting benefits while slashing taxes is an obvious contradiction, especially since Italy’s economy isn’t growing. But rather than attempting to solve that problem, the coalition chose to write a 2019 budget that included both tax cuts and better welfare benefits, daring the E.U. to reject it and take the blame.
“The commission is playing right into their hand,” said Federiga Bindi, a political science professor at the University of Rome Tor Vergata, calling the Italian government’s strategy a win-win. “If the commission says okay, then [the government] can say, ‘See, we did it,’” she said. “If the commission rejects it, then they can use that to blame the commission.”
Unsurprisingly, the Italian government has framed the E.U.'s decision as an attack on Italy’s autonomy. “They aren’t attacking a government, but a people,” Matteo Salvini, the interior minister and leader of the League, told reporters Tuesday. “These things make Italians grow even more irritated.”
The government is playing up discontent with the E.U.'s leadership, which it blames for economic hardship and the influx of migrants. The E.U., Italian leaders argue, is looking out only for big countries such as Germany and France while ignoring the Southern European nations that feel they are bearing the brunt of migration and the strictures of the euro zone.
Still, there is little support in Italy for a Brexit-style withdrawal from the bloc, so Italy’s government has tried to praise the idea of an integrated Europe while calling for change. Bindi described the government’s message as: “We don’t want this Europe. We want a better Europe, a more supportive Europe.”
Ultimately, Italy might have no choice but to play ball. Although the government’s proposed budget deficit is relatively small, the country’s cumulative debt is gigantic — 131.8 percent of its GDP last year. Interest rates on Italian bonds are at a four-year high, the New York Times reports, and European officials say this new budget could lead to even more significant increases in borrowing costs.
That’s bad news for Italy’s banks, which own much of the country’s debt. As my colleague Matt O’Brien put it, raising rates could force banks to “cut back on their own lending; in the worst case, it might make some of them need a bailout. But, in any case, it would make the Italian banking system as a whole more dependent on, you guessed it, aid from the [European Central Bank].”
That’s an outcome that both Italy and the E.U. want to avoid. We’ll see whether it’s enough to get them both back to the bargaining table.
Stefano Pitrelli in Rome and Quentin Ariès in Brussels contributed to this report.