The European Union is sounding the alarm on Italy’s massive debt pile and warning that the country must take action soon or risk being declared in breach of EU rules.
The European Commission released its annual economic and social analysis of EU Member States on Wednesday and Italy was singled out for special treatment, with the Commission threatening the eurozone’s third largest economy with a potential fine.
Italy risks being declared in official breach of EU budget rules, opening the path to a potential fine. As it stands, government debt in the country is set to hit 133.3% of its GDP by the end of the year, up from 132.8% last year. That’s more than twice the 60% ceiling mandated by the European Union.
In recent months — thanks to the looming elections in France, the Netherlands, and Germany, and the imminent start of Brexit negotiations — Italy’s problems have flown largely under the radar.
But the European Commission demands in Wednesday’s report that the Italian government “credibly enacts” budget measures worth 0.2% of GDP by April of this year to bring down the debt.
Last summer, in the months following Britain’s vote to leave the EU, Italy began to rear its head as a big problem for the EU. A massive surfeit of bad loans in the country’s banking sector threatened financial stability, with the world’s oldest bank Monte dei Paschi a particular flashpoint. Italy also faced down a potentially destabilising referendum on political reforms that was widely seen as a vote on Prime Minister Matteo Renzi.
That referendum came and went, with Renzi losing, resigning and being replaced by a technocratic government led by new PM Paolo Gentiloni. The Italian banking sector’s problems have also retreated from centre stage, although they are still bubbling below the surface.
That means that Italy is now virtually being ignored in mainstream discourse, despite being a huge issue. BNP Paribas Investment Partners said in a recent note that “a lack of reforms, slow growth, a troubled banking sector and high government debt in Italy may be a bigger risk for the eurozone.”
Alongside a warning to the Italian government, the European Commission also said that France, Italy, Portugal, Cyprus, Bulgaria, and Croatia all have “excessive imbalances” in their macroeconomic environments, and said Spain, Germany, and Ireland have “imbalances.”
Commenting on the findings, EU financial and economic affairs commissioner Pierre Moscovici said:
“Over the past twelve months, many EU countries have made further — albeit not yet sufficient — progress in addressing their key economic challenges. With so much uncertainty around us, one thing is clear: these challenges will be overcome only if they are tackled decisively, by the governments currently in power as well as their successors.”