EU Reviewing Italy’s Call to Ease Fiscal Rules as Costs Rise

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(Bloomberg) — The European Union is considering Italy’s plea to get more leeway on the bloc’s fiscal rules as the Iran war raises costs for households and businesses. 

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“We are evaluating various options,” EU economy chief Valdis Dombrovskis said Friday after a meeting of the bloc’s euro-area finance chiefs in Nicosia, when asked about Italy’s request. “There seems to be agreement on a need to have a focused fiscal policy response without doing some broad based fiscal stimulus.”

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Countries like Italy and Spain have been pushing the European Commission, the EU’s executive arm, to relax spending rules as the Iran war has snarled global supply lines for crucial supplies, including fuel.

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Thus far, EU officials have stressed that any aid must be temporary and focused on the most vulnerable populations. 

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“We must remain vigilant in safeguarding sound public finances,” Dombrovskis said. 

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Still, the economic fallout from the war in the Middle East is only deepening, as the Strait of Hormuz — a vital commercial passageway — remains closed. 

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In response, Italian Prime Minister Giorgia Meloni has asked Brussels to ease EU budget rules for measures aimed at tackling rising energy costs. The government is seeking to include such investments in the so-called national safeguard clause, according to a letter Meloni sent to European Commission President Ursula von der Leyen and seen by Bloomberg.

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The provision, which is typically used for defense spending, allows EU member states to temporarily deviate from the bloc’s budget rules under exceptional circumstances.

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Dombrovskis confirmed that the EU is looking at options based on Meloni’s letter and requests from Italian Finance Minister Giancarlo Giorgetti.

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“We believe this proposal is entirely reasonable and makes good sense,” Giorgetti told reporters in Nicosia. “We continue to press the issue because we believe we are in the right.”

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Governments across the bloc have already taken action to minimize the impact of rising prices on citizens and business. Meloni has often highlighted that not all EU countries have the same fiscal headroom to cushion the blow of higher energy prices.

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Italy’s government is seeking fresh resources to finance the extension of cuts to petrol levies, which cost around €1 billion ($1.16 billion) and are likely to be renewed on Friday.

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Eurogroup chief Kyriakos Pierrakakis argued that the EU economy has still shown strength in the face of the war’s economic headwinds.

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“As the crisis persists,” he said, “Europe must maintain a difficult but necessary balance” between protecting fiscal stability and aiding those in need.

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“We all adhere to what the commission is proposing,” he added. “We certainly all understand that we shouldn’t contradict monetary policy. Fiscal policy and monetary policy should go hand in hand.” 

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—With assistance from Kamil Kowalcze and Daniel Basteiro.

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(Adds comment from Italian minister in the 10th paragraph.)

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