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Italy's 2015 budget, passed last week, puts the government on a collision course with the European Union how strictly the three-year-old terms of the Stability and Growth Pact will be interpreted.
When Italy took over the rotating presidency of the European Council in July, Prime Minister Matteo Renzi said he wanted to austerity rules -- most notably the Stability and Growth Pact rule that caps a country's budget deficit at 3 percent of its gross domestic product -- to be more flexible. Renzi has so far failed to broker any change in the rules, but the budget passed this week may do it for him.
The budget includes 18 billion euros (about 23 billion U.S. dollars) in tax reductions in 2015 for companies and individuals, in the prime minister's boldest attempt yet to jump start economic growth. Renzi called it the "largest single tax reduction (Italy) ever attempted."
A large chunk of the tax reductions will be funded by spending cuts and other offsets, but more than half -- an estimated 11 billion euros -- will come from increased borrowing. Early prognostications are that it will push Italy's 2015 budget deficit from the range of 1.8 percent to 2.2 percent of GDP to at least 2. 9 percent, perilously close to the 3-percent cap. If there is any significant miscalculation in projections, or if growth is weaker than expected, Italy could surpass the threshold.
"It's an astonishing situation," said Sonja Puntscher Riekmann, a political theory and European policy expert at Austria's University of Salzburg, currently a visiting professor at LUISS University in Rome. "This is heating up a conflict between the European countries calling for austerity, like Germany, the Netherlands, Finland, and Austria, and those who want more flexibility and economic growth, like France, Italy."
Puntscher Riekmann predicted the situation would end somewhere between the two extremes, with some delays on deadlines and a little more flexibility, but stopping short of a complete overhaul of the rules.
The outcome will be clearer within a couple of weeks: the European Commission will either allow Italy's budget 2015 and its tax relief plan or it will tell Italy to start over. The decision is expected by the end of the month. A rejection would be a huge setback for Italy and Renzi, but a thumbs-up would have the opposite effect.
Approval would be good news for Italy's Renzi, who will earn more time for his tax reduction polices to start sparking growth and while bolstering his reform credentials and proving he can stand up to more established European leaders like Germany's Angela Merkel and earn a victory.
"The right result would be positive for Italy, but it would especially strengthen Renzi," Puntscher Riekmann told Xinhua.
According to Carlo Filippini, an expert in political economy at Bocconi University in Milan, whatever the outcome, it will not close the book on the friction between the EU countries calling for austerity and those focused on growth. The future is likely to involve further clashes.
But he said it's also a battle based on a premise with limited value: the 3-percent deficit target, Filippini said in an interview, is best a kind of estimate.
"There are so many factors involved in calculating the figure correctly, including accurately measuring the size of a country's economy," Filippini said. "The chances that the figures being used are really accurate is pretty thin. In the end, there's a possibility that all this debate is really about a math problem that could be wrong." Enditem
