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Italy “Sleepwalking into Instability”, Says European Commission

Eurogroup Finance Ministers meeting in BrusselsEurogroup Finance Ministers meeting in Brussels
Eurogroup finance ministers meet in Brussels to discuss Italy's new budget plans Anadolu Agency Getty Images

The European Union sent back Italy’s draft budget Tuesday, coupled with a warning to tighten it up or face fines of 0.2% of GDP.

“We see a risk of the country sleepwalking into instability,” European Commission Vice President Valdis Dombrovskis added Wednesday, Reuters reports.

“The impact of this budget on growth is likely to be negative in our view. It does not contain significant measures to boost potential growth, possibly the opposite.”

The 19 European Union countries that share the euro also share commitments on acceptable levels of government budget deficits and overall debt. Italy and other members have broken those rules before, but have usually negotiated face-saving agreements with the union and calendars for returning to compliance.

This time, Italy proposed a deficit of 2.4% of GDP, three times its EU target, with boosts to previously cut pensions.

Since each eurozone country sets spending priorities, but shares a unit of currency with the others, investors must judge whether the risks taken by any one country undermine the reliability of the euro. One of the commitments of members is to keep public debt below 60% of GDP. Italy’s was 131.2% last year and would climb under its proposed budget for 2019.

On Wednesday the EU declared Italy’s plans “a particularly serious case of non-compliance” and activated a process called an “excessive deficit procedure” that could eventually result in a fine. However, despite previous crises, such as with Greece, the only eurozone country with a greater proportion of public debt, the EU is yet to fine a single member over a budget.

Italy’s deputy prime minister Matteo Salvini said the budget was non-negotiable and that fines would be “disrespectful,” Reuters reports.