Italy faces Brussels disciplinary action over debt

Italy could face EU disciplinary action over spiralling debt that could pave the way for an initial penalty of as much as €3.5 billion.

The European Commission on Wednesday said Italy did not make sufficient progress in reducing its debt, which now sits at €2.3 trillion, or 132% of the country’s GDP.

Debt is way above the 60% ceiling for Eurozone countries.

The procedure proposed by the commission will have to be approved by Eurozone finance ministers when they meet in July.

“Italy’s public debt remains a major source of vulnerability for the economy,” the commission said in its report.

The commission is forecasting that Italy’s debt to GDP ratio will “rise in both 2019 and 2020, up to over 135%, due to a large debt-increasing ‘snowball’ effect, a declining primary surplus, and underachieved privatisation proceeds”.

Although the EU has triggered the excessive deficit procedure against several countries ver the years, this is the first time that it is being initiated because of excessive debt. So far, the EU has never fined any country, opting to set other sanctions instead.

If finance ministers agree with the commission’s proposal, the Brussels executive will have to decide whether it should demand a deposit from Italy, equivalent to 0.2% of GDP, or €3.5 billion.

Italy is the eurozone’s third largest economy and the Brussels reprimand is set to cause friction with the country’s populist government made up of the Northern League and the Five Star Movement.

Italy’s FTSE MIB index of stocks dropped by 0.7% on the news, with banks including UniCredit and Intesa Sanpaolo posting some of the steepest declines.

Italian bonds fell following the report, with the 10-year yield spread over Germany, a widely watched gauge of risk in the nation, touching 280 basis points – more than twice the rate since before the League-Five Star government was formed.