Strengthening France-Italy Alliance... Leading EU Fiscal Rules Reform?

[Asia Economy Reporter Park Byung-hee] France and Italy, boasting the 2nd and 3rd largest economies in the Eurozone, will sign a friendship treaty this week. Analysts predict subtle shifts in regional power dynamics amid Germany’s regime change, the largest economy in the Eurozone.

According to major foreign media on the 23rd (local time), French President Emmanuel Macron is scheduled to visit Rome, Italy this week to sign a mutual friendship treaty. The two countries plan to strengthen cooperation across all fields including diplomacy, defense, and culture.

Foreign media analyzed that the reason France and Italy are strengthening ties is to expand their influence within the European Union (EU). Meanwhile, in Germany, Chancellor Angela Merkel’s 16-year tenure is ending, and a new coalition government led by Chancellor Olaf Scholz is launching. Scholz is expected to focus on domestic stability early in his term. This creates a vacuum in the EU’s leading power, Germany.

There are also forecasts that France and Italy will lead reforms of the EU’s fiscal rule, the 'Stability and Growth Pact.' The pact was established with the introduction of the euro. According to the pact, euro member countries must keep their government budget deficit ratio within 3% of GDP and government debt ratio within 60%. It serves as a safeguard to prevent certain member states from reckless fiscal management that could devalue the euro.

However, as prolonged economic crises continued, the Stability and Growth Pact became a subject of controversy. Member states increasingly complained that the pact’s fiscal policy constraints hinder economic recovery. In 2009, right after the global financial crisis, as many as 22 member states violated the fiscal rules.

The EU decided not to apply the fiscal rules until 2023 following the COVID-19 pandemic. This allowed member governments to operate flexible fiscal policies to aid economic recovery. At the same time, the EU has begun discussions on revising the fiscal rules amid growing dissatisfaction.

France and Italy agree on the need for more flexible fiscal rules. France is a habitual violator of the fiscal rules. Italy was one of the main culprits in the Eurozone fiscal crisis in 2012.

In early October, the Italian government unveiled a 2022?2024 budget plan that completely disregards the current fiscal rules. The government set three-year fiscal deficit targets at 5.9%, 3.9%, and 3.3%, respectively. This bluntly expresses that even if the fiscal rules are reapplied in 2024, the 3% rule will not be accepted. Earlier in June, Prime Minister Draghi argued before parliament that the Stability and Growth Pact should not be applied in the same form as before COVID-19.

The departure of Chancellor Merkel, who emphasized fiscal rules during the prolonged economic crisis over the past decade, is also good news for countries advocating fiscal rule reforms.

Olaf Scholz, who will become Germany’s new chancellor, is considered less conservative than Merkel regarding fiscal issues. France and Italy have thus encountered a favorable opportunity to revise the fiscal rules according to their will.

The friendship treaty between France and Italy was initially promoted during the tenure of Italian Prime Minister Paolo Gentiloni in 2017. However, the treaty’s progress was halted after Gentiloni’s government was defeated in the 2018 general election. A far-right coalition led by the Five Star Movement, which won the election, was formed, and relations between the two countries deteriorated to their worst in 2019. Members of the Italian coalition repeatedly exchanged verbal clashes with French government officials, and France even recalled its ambassador to Rome. However, the coalition party 'Italia Viva (IV),' which was part of the Italian government, withdrew from the coalition in January this year, causing the coalition to collapse. In February, a new coalition government was formed by appointing former European Central Bank (ECB) President Mario Draghi as prime minister, dramatically restoring relations with France.

This content was produced with the assistance of AI translation services.