Italy’s rightwing government has scrapped plans to allow local merchants to refuse digital payments for transactions under €60, averting a potential a showdown with Brussels on the use of cash

Finance minister Giancarlo Giorgetti told legislators the controversial proposal, which would have scrapped penalties for merchants rejecting digital payments for transactions under €60, was being dropped from Italy’s draft 2023 budget.

However, the government does plan to raise the legal limit for cash transactions to €5,000, up from the current €2,000, reversing pledges by the previous government to lower the limit for cash transactions to €1,000 from the start of next year in a bid to counter tax evasion.

Prime Minister Giorgia Meloni’s €60 proposal was popular among small business owners, who complain bitterly about bank fees for processing digital payments.

It was less popular in Brussels, with the European Commission warning last week that empowering merchants to legally refuse digital payments was “not in line” with past advice to Italy to “fight tax evasion . . . by strengthening the compulsory use of e-payments”.

Analysts say the government’s tactical retreat reflects its awareness that it cannot afford to antagonise Brussels, as its confronts headwinds from slowing growth, and the European Central Bank’s plans for aggressive monetary tightening.

“The commission had been very tough, and [the government] probably figured it was not worth a big battle, given that they will be facing lots of problems in a few months,” said Lucrezia Reichlin, economics professor at the London Business School. “They are pragmatic — that has been clear from the start. They don’t want to rock the boat.”

Italy is counting on the receipt of billions of euros in funds from an EU-funded Covid-19 recovery plan for its 2023 budget plans, and is racing to complete mandated milestones to secure the release of its next tranche of funds, worth €19bn.

The 2023 budget must be endorsed by Italy’s parliament by the end of the financial year on December 30. However, before it passes in Rome, the government must, as with other member states, receive the commission’s feedback.

At present, all Italian business owners are legally obliged to accept digital payments for any transaction, no matter how small. Businesses that refuse face a fine of €30, plus 4 per cent of the transaction value — though in reality such penalties are rare and depend on complaints from consumers.

Meloni, leader of the arch conservative Brothers of Italy, wanted to scrap the threat of punishment for transactions under €60, calling digital payments “private currency” and endorsing the euro as the country’s only legal tender.

“They proposed it because their constituency is basically the small shopkeepers and this is a little present that makes them popular,” said Reichlin. “They have to keep their electorate happy and they don’t have much to give.”

However, critics — including the country’s central bank — said allowing businesses to refuse digital payments was a backward step that would make it easier for enterprises to evade tax by under-reporting sales revenues.

The government’s about-turn comes as Italy’s public finances appear increasingly precarious, as the fallout from Russia’s invasion of Ukraine continues to rile economies.

The ECB’s plans for aggressive monetary tightening to combat runaway inflation will significantly raise the cost of refinancing Italy’s public debt, which is estimated by the commission to be 145.7 per cent of GDP.

Italian cabinet ministers criticised the ECB’s hawkish tone as it raised interest rates last week. Eurozone borrowing costs have risen 2.5 percentage points this year following a series of increases by rate-setters, with more set to follow in early 2023. The tightening of credit conditions has also caused the spread between German and Italian bond yields, a key gauge of risk sentiment, to widen.