21st November: the expected event
As widely expected, after the re-assessment of the 2019 Draft Budgetary Plan presented on 13 November by the Italian Government (where no significant changes were made on the economic projections front or on the deficit targets), the European Commission confirmed the existence of “particularly serious non-compliance” with the recommendations of the ECOFIN Council. Key to this assessment was the 1.4% of GDP gulf between the structural budget deterioration (0.8%) programmed by the Italian Government from the correction (-0.6%) recommended by the Council back in July 2018.
This large and unprecedented deliberate breach of the so-called "preventive arm" measures therefore calls for moving Italy into the "corrective arm" of the Stability and Growth Pact. Accordingly, the EU Commission took the first step towards open a debt-based excessive deficit procedure, a process that nonetheless remains relatively long.
The EDP procedure:
According to the procedure, after a few crucial steps (referring to Art. 126.4-5-6-7 of the TFEU), there will be a Council recommendation to Italy detailing annual targets both in nominal and in structural terms, in particular for deficit, based on the Commission’s economic projections. Attached to this recommendation, a monitoring process will be defined along with a timeline in order to assess progress towards restoring compliance with deficit and debt rules (which will then allow the EDP to be closed).
- The most likely scenario is that the Council’s decision on opening the EDP will be issued between mid-January and mid-February at the latest, according to the steps implied in the procedure.
- As this is an EDP for excessive debt, monitoring of progress will be likely less frequent (every six-event twelve months perhaps). As it would be the first time it is applied, there may be some “adapting” to the new issue.
- Given the current macroeconomic scenario and assuming cooperation, it will likely take at least three years to restore compliance with deficit and debt rules.
- Will there be a non-interest bearing deposit of 0.2% of GDP? Opposing pressures between applying rules vs avoiding stepping up of tensions with the Italian government make this still uncertain. Once EDP is open, the Commission will anyway have 20 days to decide if applying it or not.
The last minutes developments: Italy’s Prime Minister Conte and Minister Tria met European Commission President Juncker in Brussels on Saturday 24th of November. Albeit there was no breakthrough and a compromised was not reached between the parties, the post- meeting statements showed more constructive attitude.
As we write, few media report that Italian Vice prime Ministers both made some openings about changing the 2019 Budget by few decimal points. This is at the margin a positive development in the discussions.
But, unless a significant change is made in terms of
a) Nature of the expenditures in the budget (towards more structural and potential-growth boosting measures) and/or
b) Size and direction of change in structural balance (a meaningful correction would mean almost a change in direction of the government fiscal policy)
We do not expect a correction of few decimal points to become a game changer.