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Commission rejection of Italian budget may be justified, but what comes next?

The European Commission has returned Italy’s Draft Budgetary Plan (DBP) to Rome with the request to provide a redraft more in line with European rules. By rejecting the DBP for “severe divergences” from ECOFIN’s July 13, 2018 recommendations, the Commission is taking an unprecedented step under the European Semester procedure. In its Opinion of October 23, the Commission objects to Italy’s DBP on four main grounds: 1-That the DBP has openly abandoned its convergence path towards a public sector structural budgetary balance (the medium-term objective, or MTO), planning in effect an increase of 1.4 per cent points of GDP relative to previously agreed commitments. This deviation would furthermore also be maintained in 2020 and 2021; 2-That the independent parliamentary budget office (PBO) has refused to validate the underlying nominal growth projections (above 3 per cent per annum), which exceed the maximum confidence interval of the PBO panel of forecasters by close to one percentage point; 3-That, consequently, the stated objective in the DBP of reduction of the public debt-to-GDP ratio is not credible; 4-That the decision by the Italian government to raise the public sector deficit raises the question of sustainability of Italy’s public debt that could produce negative spillovers on the rest of the eurozone and the Union.[…]