Rome alone

Germany’s finance minister slams Italian budget

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110% Wolfgang Schäuble, his predecessor. Source: Imago

Germany has joined the chorus of criticism of Italy’s upcoming budget as the heavily indebted euro-zone member plans to massively increase spending and allow its public deficit to grow in coming years.

Excessive debt “absolutely remains the responsibility of individual governments and parliaments,” German Finance Minister Olaf Scholz told Handelsblatt. “The Italian government has to deal with a high level of public debt; nobody can take that responsibility away.”

He added that despite growing integration in the 19-country currency bloc, Rome shouldn’t expect to shift responsibility for its own debt to its European partners.

Mr. Scholz’s warning came after two weeks of feuding between Italy’s populist government and the European Union over Rome’s proposed budget for 2019.

The Italian government, a coalition of the left-wing Five-Star movement and the far-right Lega, inherited a budget forecast limiting Italy’s budget deficit to 0.8 percent of the country’s GDP next year. But both parties swept into power last spring thanks to expensive anti-austerity election promises, and want to make good on them.

Higher and deeper

In order to deliver more spending on infrastructure and social welfare, and tax cuts for lower-income Italians, as pledged, the government last month agreed to set Italy’s budget deficit at 2.4 percent for 2019 and the following years.

Though this is well within the 3 percent limit permitted to euro-zone members, this budget is highly problematic for Brussels as Rome is already heavily indebted.

At 130 percent of GDP, Italy’s public debt pile is second only to Greece’s in percentage terms. But Italy isn’t Greece: It’s the euro-zone’s third-largest economy and its financial problems are a much bigger headache for the currency bloc and for the EU. Its banks are saddled with billions in non-performing loans, which means they may not be able to weather another economic downturn. So for the European Commission, it is crucial that Italy reduce its level of debt. The sooner the better.

Rome and Brussels have locked horns ever since the EU’s executive body criticized Italy for breaking EU budget discipline rules. The Commission warned last week that the budget increase in borrowing could be unsustainable given Italy’s huge debt pile. It labeled Rome’s “a significant deviation from the fiscal path recommended by the Council.”

On Tuesday, the International Monetary Fund weighed in and warned Rome that it was undermining investor confidence by not respecting the euro-zone rulebook. The development could trigger a debt default.

But the Italian government is defiant in the face of criticism from all sides. “We will not take a step back. We’ll invest in jobs and economic growth,” said Matteo Salvini, Italian deputy prime minister, in an interview on Thursday.

Another tricky issue between Rome and Berlin

Mr. Scholz’s latest remarks in Handelsblatt are unlikely to go down well in Italy. And to complicate matters further, Berlin and Rome are embroiled in another controversial topic.

Mr. Salvini and his German counterpart, Interior Minister Horst Seehofer, have been trying since July to hash out a bilateral asylum deal as part of Mr. Seehofer’s pet project to crack down on immigration. Germany wants to deport asylum seekers to Italy if that is their first point of entry to Europe and if they then traveled to Germany afterwards. So far, Mr. Salvini has refused to bow to Berlin’s demands. Quite the opposite — on Sunday, he said Italy would close its airports to planes carrying failed asylum seekers from Germany.

Sven Afhüppe is the editor in chief of Handelsblatt. Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Jean-Michel Hauteville is an editor with Handelsblatt Global in Berlin. To contact the authors: hildebrand@handelsblatt.com, greive@handelsblatt.com, afhueppe@handelsblatt.com,   hauteville@handelsblatt.com

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