Italy Will Use EU’s Energy Leeway, Giorgetti Tells Lawmakers

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(Bloomberg) — Italy Finance Minister Giancarlo Giorgetti told lawmakers that he plans to use extra budget leeway authorized by the European Union for energy-related measures. 

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Speaking to the Chamber of Deputies on Wednesday, he said that the government will seek to utilize the full amount of 0.3% of annual output granted by Brussels over two years. Giorgetti also said ministers want to spend as much as 0.9% of gross domestic product on defense. 

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The speech effectively kicks off work by Prime Minister Giorgia Meloni’s government on its 2027 budget, the last before a general election next year. She will have to carefully balance EU fiscal requirements while finding room to deliver on campaign promises.

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The government is under pressure to find resources for higher defense and energy spending. The EU has allowed countries to redirect 0.3% of GDP toward energy-related measures, taking it out of the 1.5% extra fiscal room previously granted solely for more military outlays.

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Giorgetti specified to lawmakers that the extra deficit allowance for energy from the EU does not cover some current measures. 

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“That would exclude measures that aim at just reducing the effects of the current crisis like for example tax cuts,” he said.

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Since March, Meloni has been periodically extending diesel tax reductions to shield consumers from the impact of soaring fuel prices. The latest extension was voted on Tuesday and will last through Aug. 25.

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The European Commission has limited the spending to clean energy investments, rejecting Italy’s push to use the flexibility on fossil fuel price caps or fuel tax cuts.

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With the Iran war putting pressure on the economy, Meloni and Giorgetti face an uphill battle to keep public finances on track. The government is currently forecasting growth of 0.6% this year and remains committed to a deficit of 2.9% from 3.1% last year.

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Better than expected second-quarter growth has boosted hopes of meeting targets, but continuing geopolitical tensions, high energy prices and rising interest rates threatens to put a damper on economic growth.

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“Public debt remains too high and vulnerable to interest and growth shocks,” the International Monetary Fund warned in a report on Italy last month. “Rebuilding fiscal buffers and advancing growth-enhancing reforms, while safeguarding financial stability, are essential.”

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Meloni is also contending with an increasingly fractured governing coalition as parties position themselves for elections. Last month, she unexpectedly lost a vote on an amendment to an electoral reform measure, while the right-wing National Future party headed by retired army general Roberto Vannacci is posing an outside threat to her stability.

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