The “infringement procedure” against Italy for the excessive deficit.

 

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First of all, the infringement procedure, all the Italian newspapers talk about, is not an infringement procedure (sorry, as EU law prof I cannot but suffer for all these wrong terms, words are important).

Second, there is no conspiracy against Italy or its recovered sovereignty, just the (usual?) consequence of an infringement of a rule, which, by the way, is quite common sense:  excessive deficits are prohibited as they threaten the whole Euro area, its very existence under its current institutional structure.

But let me clarify the first point first.

The infringement procedure is a legal procedure started by the European Commission against an EU country that fails to implement EU law. The Commission – after a pre-judicial exchange of communications – may refer the issue to the Court of Justice, which in certain cases, can condemn the state and even impose financial penalties.

Otherwise, in this case, we are witnessing the first step of the procedure for the application of the prohibition of an excessive deficit, set up by article 126 TFEU and further specified by a number of legal acts, which is radically different.

First of all, it is not a judicial procedure, but a political one. The main decisional body is the ECOFIN Council (the Council of Financial Ministers of the Union), not the Court of Justice. Second, it is grounded in economic reasoning, and the only possible line of defence is on the same ground.

But let’s take a step back

The States of the Union have “almost” full sovereignty over budgetary matters, they are absolutely free to decide how to compose the basket of income and expenditure.

The only limit is the prohibition of an excessive deficit.

The rationale is simple: the default of one state would spread among the others like a contagion. Moreover, the EU budget is too small to save anyone. And taking money from one state’s budget to rescue another is difficult and unpopular (we have witnessed all this during the Greek crisis).

So the EU Treaties try to prevent all this through two basic rules: one is article 125 TFEU stating that every state is responsible for its own budget and no government (not even the European one) is obliged to take over the responsibility stemming from a state’s budget. The second is article 126, intended -with its prohibition – to prevent unsustainable deficits.

The ECOFIN Council is in charge of assessing, on a proposal from the Commission, whether the deficit is excessive. In this case, with a predefined step by step procedure, it may adopt a recommendation, then an intimation, and finally a sanction (but it takes almost a year to get to this final stage). The spirit is to promote correction: the procedure can be stopped at any moment presenting a correction plan. It has happened many times for other EU countries, it happened in 2003 for France and Germany.

These rules, in the treaties since 1992, have been signed and ratified by Italy, even willingly.

Among the fathers of the euro, some eminent Italians as Guido Carli, Carlo Azeglio Ciampi, Tommaso Padoa Schioppa were well aware of the damage that was being inflicted on future generations with a debt out of control. They thought that an external bond could save Italy and acted accordingly.

In general terms, excessive debts are not a good thing for States: they generate interests and reduce oxygen for expansive policies, they compress the discretion of States on current policies and they transfer a burden over the future generations. In a currency union, they are even more unsustainable as we cannot print money to cover them.

But, let’s think for a moment that we could, would it be the solution? Are you aware of the price of inflation over the economy and over the population? Just on everybody? In a short span of time, we would all be¬†poorer as the purchasing power drops and savings lose their value.

Or are you thinking that we have the choice of not honouring the debt?

Unfortunately, it’s not a debt with some foreign power or financial institution. It is a diffused debt, which we find in most of the mutual funds, in the retirement funds, in the portfolios of all Italian banks. Not repaying it would be just a different way to spread poverty.

Now, I personally do not like either the stability pact or the austerity approach. I think there are times when expansive policies have to be made (and the Commission has tried to do so with an investment plan that has greatly benefited our country, but we do not talk about it). Of course, it is too little, and the EU budget is also too little if we think (as I think) that it is useful having some kind of corrective and balancing function of a central budget in a currency union. But this is another point.

We can promote new rules at European level, we can negotiate the new EU budget multiannual framework having in mind our needs and the needs of the disadvantaged areas (not just our ones), we can suggest new funding for unemployed people, wherever they are (you know Italy studied this proposal some years ago?).

This nonetheless would not stop the procedure. We can stop it, anytime, implementing sounder public finances, whatever the political vision we want them to mirror.

By the way, we are already paying the sanction. It is the so-called sanction of the markets: call it spread, call it interest, call it difficult allocation of the new debt emissions. It is, in broader terms, the price of loss of credibility.

I don’t think my country deserve this, but I can only blame its current political choices and not some financial monster in the shadows.

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