ECONOMY

EU requests clarification on Italy’s ‘breach’ of budget goals

The European Commission has asked Italy to explain why its draft budget for next year will breach European Union debt-reduction goals, a step that may lead to demands from Brussels for changes to the spending package.

Italy’s 2015 budget proposal showed a “significant deviation” from its previous plan for achieving a balanced budget in structural terms, or adjusted for the effects of the business cycle, according to a letter from incoming Jobs and Growth Commissioner Jyrki Katainen released on Thursday.

Italian Prime Minister Matteo Renzi (photo) took a risk with Brussels last week when he set out 18 billion euros in tax cuts in next year’s draft budget and pushed back a target date for achieving a structural balanced budget by a year to 2017.

In the letter to Economy Minister Pier Carlo Padoan and published on the ministry’s web site, Katainen also said he wanted «to know how Italy could ensure full compliance with its budgetary policy obligations» in next year’s budget.

Renzi is campaigning, with the support of France and other struggling states, to shift the focus of European budget policy away from austerity, as he seeks to rekindle Italian growth with tax cuts after three years of stagnation.

France has also submitted a draft budget that breaks its pledge to bring its deficit within EU limits in 2015. The problematic budget is the second time in two years France has failed to keep a budgetary promise.

The issue of Europe’s economic policy mix will come up when the 18-nation euro zone leaders meet over lunch on Friday in Brussels, but Germany, the region’s biggest economy, has so far held fast against deficit spending as an expedient to growth.

Italy, the eurozone’s third-largest economy, teetered near default in 2011 as Greece, the only country in the region with a bigger debt as a percentage of output than Italy’s, received an international bailout.

The debt crisis prompted the EU to adopt more stringent budget rules, some of which are being applied for the first time this year. If the commission is not satisfied with Italy’s response, it can demand budget changes by the end of the month.

In recent days, a number of EU sources have said that Italy’s budget plans risked rejection, although the issue has been complicated by the impending handover to a new European Commission on Nov. 1.

In the letter, Katainen, who is a member of the new commission, said he is seeking «a constructive dialogue with Italy with the view to come to a final assessment» and requested a response to his queries as soon as Friday.

On Wednesday, Renzi played down the significance of the «letter from the EU», saying it was only a «natural» part of dialogue over the common budget rules. But he also said Italy was a «protagonist» in Europe and would accept «no diktat». [Reuters]