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Italy risks EU sanctions by sticking to debt-happy budget

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Italy risks EU sanctions by sticking to debt-happy budget
Italian Prime Minister Giuseppe Conte (C) with his deputies Luigi Di Maio (L) and Matteo Salvini (R). Photo: Filippo Monteforte/AFP
09:02 CET+01:00
Italy's government defied the European Commission on Tuesday by sticking to its big-spending budget plan, risking financial sanctions in a high-stakes standoff with Brussels.

Despite pressure from the European Commission, which rejected Rome's budget outright last month in a first for the EU, Italian Deputy Prime Minister Luigi Di Maio vowed to stand firm on the country's anti-austerity plans.

"The budget will not change, neither in its balance sheet nor in its growth forecast. We have the conviction that this is the budget needed for the country to get going again," Di Maio, who leads the anti-establishment Five Star Movement (M5S), said on Tuesday evening after a ministerial meeting.

M5S and its coalition partner, the League, insist the budget will help kickstart growth in the eurozone's third largest economy and reduce the public debt and deficit. League head Matteo Salvini, who is also a deputy prime minister, vowed on Monday to put his back into "defending the budget, as if it were a rugby scrum".

The Commission had given Italy until Tuesday to make changes to its 2019 plans and warned non-compliance could activate the "excessive deficit procedure" (EDP), a complicated process that could lead to fines and possibly provoke a strong, adverse market reaction.

READ ALSO: EU predicts Italy's deficit will soar next year

Italy intends to run a public deficit of 2.4 percent of gross domestic product in 2019 -- three times the target of the government's centre-left predecessor -- and one of 2.1 percent in 2020. But Brussels forecasts Italy's deficit will reach 2.9 percent of GDP in 2019 and hit 3.1 percent in 2020 -- breaching the EU's 3.0 percent limit.

While Rome targets economic growth of 1.5 percent, Brussels anticipates just 1.2 percent, putting Italy at the bottom of the EU table. The IMF forecasts growth of 1.0 percent for 2020 and was sceptical of Italy's reform programme in its latest report on the country.

Italy's Economy Minister Giovanni Tria has accused Brussels of getting its sums wrong. It would be "suicide" to try to reduce the deficit to the previous goal of 0.8 percent of GDP, he has said, insisting "we must get out of the trap of weak growth".

The big problem is Italy's public debt, now a huge €2.3 trillion, or 131 percent of Italy's GDP -- way above the 60 percent EU ceiling.

The fine for refusing to review the budget could correspond to 0.2 percent of Italy's GDP -- about €3.4 billion.


A ticking 'debt clock' in Milan. Photo: Filippo Monteforte/AFP

European Economics Commissioner Pierre Moscovici has said he hopes a compromise can be found to avoid sanctions. Speaking on Tuesday to the European Parliament, German Chancellor Angela Merkel said the EU wanted to reach out to Italy, a founding member.

"But Italy also adopted the many rules that we now all have in common," she added.

The European Commission "will make the first step to move Italy into EDP" after a debt update expected on November 21st, said Lorenzo Codogno, former chief economist at the Italian Treasury Department.

The country will likely be given three to six months to prepare correction plans, after which nothing will happen until a new Commission takes up office at the end of next year following European Parliament elections, he said.

"The true guardians of fiscal discipline will be, as usual, financial markets," he said.

READ ALSO: Italians rush to put money into Swiss banks as budget fears grow

All eyes are now on the "spread" -- the difference between yields on ten-year Italian government debt compared with those in Germany -- which has more than doubled since May, when negotiations to form the coalition government in Rome began. Uneasy investors have already cost the taxpayer an additional €1.5 billion in interest over the past six months.

A wider fear is that stress in Italy could spread to other European countries which are only just recovering from the eurozone debt crisis.

"We do not expect a crisis that would lead to a loss of market access," said Agnese Ortolani, analyst at The Economist Intelligence Unit.

But the country's debt and the weakness of its banking sector mean "Italy would be too large to rescue without massive ECB support in the event of a large-scale financial crisis," she said. 

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Photo: Gerard Cerles/AFP

By AFP's Ella Ide

 

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