Italy Dismisses Concern the EU Will Reject Its Budget Plan

October 4, 2018 Updated: October 4, 2018

ROME—The Italian government on Oct. 4 dismissed concerns that the European Commission would reject its plan to raise deficit spending next year and signaled that it would not backtrack, even under market pressure.

After a selloff hit Italian bonds on Oct. 2, the government made up of the anti-establishment 5-Star Movement and the right-wing League on Oct. 3 watered down its original plan to keep its deficit steady at 2.4 percent of gross domestic product (GDP) in 2020-21.

But it stuck to its 2.4 percent target for next year, and on Oct. 4 government officials said they had no plans to make further revisions to that goal, which is three times more than one set out by the previous government.

Speaking about the multi-year budget targets that must be reviewed by Brussels by mid-month, Deputy Economy Minister Massimo Garavaglia said on Oct. 4: “(Either) it passes or it doesn’t, but this isn’t the problem. We’re more focused on what is happening in the markets.”

Garavaglia also said the government’s GDP growth forecast for next year would be 1.6 percent, much higher than the 1.2 percent median projection of 51 analysts polled by Reuters last month.

That goal was later confirmed by Economy Minister Giovanni Tria in a letter to the European Commission, which called for “open and constructive dialogue” over the budget plan.

Growth was forecast at 1.6 percent in 2020 and 1.4 percent in 2021, Tria said.

The gap between Italy’s benchmark 10-year bond yields and their safer German equivalent on Oct. 2 widened to more than 300 basis points, its widest since May, on concerns about Italy’s plans. On Oct. 4, the spread had narrowed to 278 basis points.

League leader Matteo Salvini, speaking on RAI state radio, said that next year’s deficit spending was needed to spark growth and create jobs, and added that the government would not back down even if the spread widened to 400 basis points.

“This is a budget that looks to the future, and we will absolutely not go backwards,” Salvini said.

The government’s confident tone came as la Repubblica newspaper reported that the commission had already sent Italian officials an informal note saying it would reject next year’s spending plans.

 

By Giuseppe Fonte & Steve Scherer

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