Europe News

Italy's finances are under intense scrutiny from Brussels. Here's how

Key Points
  • Euro zone countries are expected to maintain their deficit levels below 3% of their growth and a public debt threshold above 60% of GDP, according to the European treaties.
  • However, the rules are flexible. If a country did not respect the EU Treaty due to "exceptional and temporary" reasons, then the European Commission takes no action against the member state.
ROME, ITALY - JULY 24: Minister of Economy Giovanni Tria attends a press conference.
Simona Granati | Corbis News | Getty Images

Italy is on the brink of being scrutinized further by European authorities, given its massive debt pile.

The European Commission, the EU's executive arm, said last week that Rome had not reduced its public debt levels in 2018. The commission stated that the current Italian government spending shows the debt levels could rise to 135% by 2020 – breaching the EU's fiscal rules.

As a result, European finance ministers are due to decide whether the European Commission needs to step up its oversight on Italy in a process that could ultimately lead to fines.

CNBC looks at how the process works and whether the risk of sanctions is likely to materialize soon.

Why is Italy under growing scrutiny?

Euro zone countries are expected to maintain their deficit levels below 3% of their growth and a public debt threshold above 60% of GDP, according to the European Treaties.

However, the rules are flexible. If a country did not respect the EU Treaty due to "exceptional and temporary" reasons, then the European Commission takes no action against the member state.

If the deviation from the fiscal rules seems an ongoing matter – as the European Commission deemed to be the case for Italy – then Brussels opens an Excessive Deficit Procedure (EDP).

VIDEO2:0602:06
'We're not a punishment house,' says EU's Moscovici

What is an Excessive Deficit Procedure?

It is essentially a step-by-step process that tracks whether a country is taking actions to bring down its deficit and/or public debt level. The process becomes official when European finance ministers give their green light.

During the step-by-step process, the European Commission helps the member state by suggesting ways to change its fiscal position.

If there is no willingness from that country to change its finances, this procedure then states that European funds given to that capital be suspended as well as a fine of up to 0.2% of the country's growth be applied.

The latter has never taken place since the establishment of the rules in 1993.

"They (Italy) must demonstrate that in 2019 and 2020, they are going to lead a sound fiscal policy which is compatible (and) compliant with our rules," Pierre Moscovici, European Commissioner for economics, told CNBC in Japan on Sunday.

"I think (Giovanni Tria, the Italian finance minister) is conscious. Now he needs to move from consciousness to action."

How likely is it for Italy to get fined?

"An ongoing standoff with Brussels might pay off politically in Italy, especially for Matteo Salvini's Lega. This, in conjunction with the drawn-out timeline for next steps, lends itself to a prolonged confrontation rather than a quick escalation towards sanctions and fines," Wolfango Piccoli, co-president of the research firm Teneo Intelligence said in a note last week.

The job of the European Commission is particularly limited this year, given that a new set of policymakers is due to take power in November.

Matteo Salvini, the country's deputy prime minister and a vocal opponent of the EU's fiscal rules, said last week that the only way to cut the debt from previous administrations is by cutting taxes. He has also made previous remarks noting that the current executive in Brussels would be changing soon.

"The fines are in the end of a very long procedure… It can be several months… the fines are not the question," Moscovici told CNBC's Nancy Hungerford.

He added that Italy "must be conscious that their future is not combatting the euro zone with some extreme right ideas."