Italian populist government braces for EU budget rejection

Leader of Five-Star movement Luigi Di Maio talks during a rally at Rome's Circus Maximus, Italy, 21 October 2018. [Massimo Percossi/EPA/EFE]

The Italian government expects the European Commission to decide for the first time ever on Tuesday (23 October) to ask a member state to revise its draft budget, a government source said on Sunday.

The Commission has slammed as an unprecedented breach of EU fiscal rules Italy’s 2019 budget plan, which aims to lift the deficit to 2.4% of domestic output next year from 1.8% in 2018.

Italy defies Brussels with budget deficit at 2.4%

Italy’s government on Thursday (27 September) targeted the budget deficit at 2.4% of gross domestic product for the next three years, defying Brussels and marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat.

Since receiving beefed-up powers in 2013 over member states’ budgetary plans, the Commission has never asked a country to submit a revised budget.

Italy’s €2.3 trillion public debt, one of the world’s largest, makes the country vulnerable and a potential source of contagion for other euro zone countries.

Eurozone faces critical budget issue as Italy defies the rules

For the first time since post-crisis rules entered into force, all eurozone countries are to submit their draft budget plans to the European Commission, but the Commission could also make an unprecedented move itself: sending one of budgets back to where it came from, most likely, Rome. 

Investors have shed €67 billion in Italian bonds since a populist government formed in May, sending the risk premium Italy pays over safer German paper to a 5-1/2 year high of 3.4 percentage points.

The source said Economy Minister Giovanni Tria and Prime Minister Giuseppe Conte had unsuccessfully pushed for a reduction of the 2019 deficit target at a cabinet meeting on Saturday.

The source did not rule out an agreement to lower the deficit goal could be found during a three-week period of negotiations with Brussels that will follow the rejection.

Though the decision was expected on Tuesday, the source said it may not be announced on the same day.

Asked for comment, a Commission spokesman said that the Commission had expressed its “serious concerns” over the draft budget to the Italian authorities, seeking clarifications by noon on Monday to facilitate an assessment.

Moscovici slams Italy budget as stocks plunge

The European Union on Friday (28 September) issued a stern warning to Italy’s populist leaders following their defiant pledge to increase spending and run a budget deficit that risks putting Rome on a collision course with Brussels.

Earlier on Sunday, Deputy Prime Minister Luigi Di Maio said the government was working on the letter it would send to the Commission on Monday, adding he expected a speedy reaction.

Di Maio, who leads the ruling anti-establishment 5-Star Movement, told RAI state television he hoped the explanations Rome would provide “over a long discussion process … could lead the Commission to share the goals we have set.”

After riding popular anger at the austerity measures Italy adopted in response to the euro zone crisis of 2011-2012, Italy’s ruling coalition, also comprising the far-right League, wants to lower the retirement age and provide a basic income for the poor.

On Friday, credit rating agency Moody’s downgraded Italy’s debt to one notch above junk status citing concerns over the government’s budget plans.

No plan B

Di Maio said he hoped the Commission would take into account Italy’s strengths such as the private sector’s low debt and high household wealth, which Moody’s cited among reasons supporting a ‘stable’ outlook on the rating.

He joined other government members in efforts to dispel concerns about Italy’s euro membership.

“We understood from conversations with people from the ECB (European Central Bank) and the markets, meaning investors, that the (bond yield spread) jumped because there is a concern that this government wants to leave the euro or the European Union,” Di Maio said.

“I want to say it here, and there will be other solemn occasions to reiterate it as a government and a political party, … there is no Plan B (to leave Europe) but only Plan A which is to change Europe,” Di Maio said.

“As long as I’m head of this movement and a minister of this government I’ll always guarantee that Italy remains within the euro and in Europe,” he added.

The ECB declined to comment on Di Maio’s remark about conversations with people from the central bank.

Di Maio said Italy had a chance to prove public debt could be reduced by “investing in social rights” and trigger important changes across Europe.

He said the 5-Star, founded by comedian Beppe Grillo, was working to present in January-February a programme that brought together similar grassroots movements from other European countries with the goal to “give back a heart and humanity to European institutions.”

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