EU could fine Italy £3bn for breaking spending and borrowing rules

The EU is poised to punish Italy over its “snowballing” spending and borrowing, putting Brussels on a collision course with the populist government in Rome.

In a move expected to raise tensions with Italy, the European commission paved the way for an initial fine of as much as €3.5bn (£3.1bn) on Wednesday after advising the country had met the threshold for disciplinary action.

The commission found the Italian government had failed to make sufficient progress in the past year to reduce its debt, the servicing of which amounted to more than the annual education budget.

The commission’s report said Italy was not expected to meet its debt reduction targets in 2019 or 2020, and an excessive deficit procedure – under which Italy could be forced to hand over 0.2% of its GDP as a deposit to guarantee remedial action – was warranted.

“Italy’s large public debt is a major vulnerability for the Italian economy and decisively reducing it should remain a priority in the best interest of Italy,” the commission said. “Italy’s public debt-to-GDP ratio, at 132.2% in 2018, is the second-largest in the union and one of the largest in the world.”

The report will now be put before member states and the EU’s finance committee for input. It is unlikely a decision on sanctions will be made for many months.

Beyond issuing a warning, the first financial sanction involves a “non-interest bearing deposit” of up to 0.2% of gross domestic product, but the penalties could become steeper if the Italian coalition government fails to change its ways.

Ahead of the publication of the commission’s report, Italy’s interior minister, Matteo Salvini, whose far-right League is in a coalition government with the Five Star Movement (M5S), said he would not let Brussels give instructions to Italy.

“We are the second industrial power in Europe,” Salvini tweeted. “Each year, we give €6bn more than we receive. We don’t need money from other countries, we’re asking to use our money how we want to.”

Marco Zanni, the League’s foreign affairs spokesman, claimed the move was politically motivated.

“We’re not concerned about the procedure; we will work so that there is no longer a political use of EU economic rules,” Zanni said. “If we look at the numbers and at who doesn’t respect the rules, there are other states that preach to Italy and don’t respect them.”

Despite Salvini’s tough talk, the commission’s review will be a destabilising factor for the Italian government.

On Monday, the Italian prime minister, Giuseppe Conte, warned his two deputies, Salvini and Luigi Di Maio from M5S, that he would resign if they continued to try to flout the EU’s rules.

Salvini, in response, signalled his determination to move forward with a plan to lower taxes.

“We will do everything possible to stay within the established parameters, but if a child is hungry and in order to feed him parameters need to be rediscussed … my child comes first,” he said.

Under EU rules, no country should have a budget deficit larger than 3% of gross domestic product or debt above 60% of GDP.

Italy‘s public debt was 132.2% of GDP in 2018 and is forecast to rise to 135%.

The commission’s vice-president Valdis Dombrovskis said economic growth had additionally “come to almost a halt”.

He added: “Italy pays as much in debt servicing as for the entire education system. In 2018, Italy’s debt represented an average burden of €38,400 per inhabitant, and in addition, the average debt servicing cost was around €1,000.”

Dombrovskis said the commission was not opening the excessive debt procedure as EU member states had to express their views on the matter first.

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