Italy exit from EU budget procedure at risk due to deficit increase, central bank warns

Italy's EU Budget Procedure Exit Threatened by Rising Deficit, Says Central Bank

Italy's Fiscal Outlook and EU Infringement Procedure

By Giuseppe Fonte

Deficit Projections and EU Limits

ROME, Oct 12 (Reuters) - Italy's plan to run a budget deficit above 3% of GDP both in 2027 and 2028 could complicate the country's plan to exit from the European Union's infringement procedure, the Bank of Italy said on Monday.

Paving the way for Italy's exit from the disciplinary procedure is a longtime goal of Economy Minister Giancarlo Giorgetti that would set ⁠a seal on Rome's fiscal consolidation efforts.

Short-term Improvements and Future Risks

Italy said this month that its deficit in 2026 would fall within the EU's 3% of GDP limit for the first time since 2019, only to rise again from next year as the government uses leeway granted by Brussels ​to lift defence spending and mitigate the impact of rising energy costs.

Central Bank's Warnings and EU Rule Asymmetry

Addressing lawmakers, representatives from the Bank of Italy warned about the risk of missing the target due to "an asymmetry" within the framework of European rules.

Leeway and Exiting the EDP

The EU leeway would prevent the opening of an infringement procedure (EDP) due to excessive deficit, should it exceed the 3% of GDP limit.

"But it does not include a similar provision for exiting the EDP if the country is already subject to it," the central bank said.

Deficit Estimates and the National Escape Clause

Italy estimated its budget deficit to rise to 3.4% of GDP next year from 2.9% expected in 2026, before marginally declining to 3.2% in 2028.

Role of the National Escape Clause

The deficit hike reflects Rome's recourse to the EU's "national escape clause" (NEC) from its budget rules for 1.2 percentage points of GDP over the following two years.

Commission's Assessment and Central Bank's Caution

Italy said in its budget plan that the European Commission would assess the deficit outlook irrespective of the NEC impact, a premise that the central bank suggested should not be taken for granted.

Conditions for Exiting the EDP

Under EU rules, even if this year's deficit comes in below ​3% of GDP as planned, the EU Commission will have to be convinced that Rome's fiscal consolidation is lasting before approving ​Italy's exit from the EDP.

"It remains essential to monitor trends in the latter part of the year so as to promptly address any deviations (from the deficit goal), given the narrow margin relative to the 3% threshold," the Bank of Italy said.

ISTAT Data and Government Expectations

National statistics bureau ISTAT dashed Rome's hopes of an early exit from the EDP ​this year, confirming last month that the 2025 deficit stood at 3.1% of GDP. The government had repeatedly said ​that it expected a downward revision.

(Reporting by Giuseppe FonteEditing by Keith Weir)