Europe’s Italian Stranglehold The EU could punish Rome for pushing pro-growth policy.
https://www.wsj.com/articles/europes-italian-stranglehold-11560716406
Italian Deputy Premier Matteo Salvini is favored to become the country’s next Prime Minister, and European Union mandarins are improving the euroskeptic’s chances. See how Brussels is handling its latest fiscal dispute with Rome.
The European Commission is on course to impose a fine of up to €3.5 billion on Rome to punish it for breaking EU budget rules. Governments are supposed to keep their fiscal deficit below 3% of gross domestic product and total debt under 60% of GDP. Many EU members violate these strictures, but Rome is unusually bad. Italian debt is expected to reach more than 135% in 2020, and the Commission frets about Rome’s deficit, which ran 2.1% in 2018.
This triggered a fiscal showdown last year, which ended when Rome agreed to make minor changes to its budget and Brussels pretended the numbers would add up. But now the EU complains that Italy’s motley left-right coalition government isn’t abiding by that deal and is teeing up another fiscal battle. A June 5 Commission report recommends opening up an “excess deficit procedure,” though it would take weeks and several bureaucratic hurdles before a fine is imposed.
The EU seems alarmed by Mr. Salvini’s tax-reform plan, which goes to show that Brussels doesn’t understand incentives for growth. Mr. Salvini wants to capitalize on the political boost from a recent European Parliament election win to push for a flat tax on personal and small-business incomes up to €50,000. He hasn’t divulged many details, but this is the best idea anyone in Rome has had in years to simplify Italy’s tax code and maybe cut down on evasion.
EU mandarins see only what they view as “lost revenue” from this proposal, but Italy’s fiscal crisis is building despite high taxes. Some 42% of GDP goes to the government. Rome wastes too much of that on misdirected social spending. What’s missing is economic growth to expand the tax base.
Mr. Salvini understands this. “The flat tax and big cuts in taxes for companies and families will have to be a fundamental part of the next budget, so we hope that Europe will allow Italy to return to growth,” Mr. Salvini said recently. “A big, substantial cut in taxes is the only way to reduce debt.”
Europe should give Mr. Salvini and his government partners the room to design a pro-growth 2020 budget—and Brussels shouldn’t be surprised if an ill-considered budget battle with Mr. Salvini bolsters the Italian’s euroskeptic arguments. Greece’s horrible decade should have taught Brussels that the austerity hell of tax increases and scattershot spending reductions can’t be the only acceptable policy mix. The least it could do is get out of the way while Rome tries something else.
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