Italy Says No Plan B as EU Demands First Ever Budget Changes

October 23, 2018 Updated: October 23, 2018

Italian Prime Minister Giuseppe Conte insisted his government has no “Plan B” for its budget as the European Union demanded unprecedented changes to bring the country into line with spending rules.

While EU commissioners were discussing Italy’s violations at a meeting in Strasbourg Oct. 23, Conte said in a Bloomberg News interview that he was looking forward to explaining the 2019 budget to them. He suggested that Italy has some leeway to tweak aspects of the plan, but not actual spending. If he is asked to change the substance, “it will be difficult for me because I cannot accept that.”

Hours later the European Commission, the bloc’s executive arm, officially rejected the budget and asked Italy to take back, revise and resubmit its plans—the first time such demands have been made of a member state.

“There isn’t any B plan,” Conte said in the interview in English at his Rome office. “I said that the deficit at 2.4 percent of GDP is the cap. I can say this will be our cap,” he said.

While many euro nations have at times struggled to meet the deficit constraints built into the single currency since its creation almost two decades ago, Italy’s decision to reverse course on the budget plan it had agreed with the commission is particularly egregious. It puts the country’s populist government on a collision course with Brussels as its spending targets far exceed EU limits.

“The Italian government is openly and consciously going against commitments made,” Commission Vice-President Valdis Dombrovskis told reporters in Strasbourg. “Europe is built on cooperation. The euro area is built on strong bonds of trust.”

Italy’s Chafing

Financial markets are responding to Italy’s chafing at EU rules. Italian bonds fell for the fourth time in five sessions earlier on Oct. 23, while the 10-year spread over similar German debt touched a five-year high during trading on Oct. 19. The yield spread widened five basis points to 309 basis points after the EU rejection was reported.

“We are ready to reduce maybe, to operate a spending review if necessary,” Conte said. Still, he insisted that economic growth is “the best way in order to take us out of a debt trap.”

Conte dismissed the prospect of the spread with German bunds reaching 400 basis points, a level that Credit Suisse AG said could put unsustainable pressure on Italy’s banking system. He also reaffirmed Italy’s commitment to the euro. “I have the evidence that part of the spread is due to the prospect of Italexit,” Conte said.

‘Our Currency’

“I can assure that this executive will not accompany this country, Italy, out of Europe,” he said. “We feel very comfortable, we feel at home in Europe and we think that the euro is our currency and will be our currency, the currency of my kid, he’s 11 years old, and the currency of my grandchildren.”

While any actual EU sanctions against Italy are still improbable and wouldn’t be levied for months, the rejection of the country’s budget could strain the governing coalition in which Conte stands as mediator between powerful deputy premiers Matteo Salvini of the League and Luigi Di Maio of the Five Star Movement.

Conte said the coalition is solid and stands united and that he is proud of his role as mediator between the two political forces.

Now that the EU has rejected Italy’s budget, the country will have three weeks to revise its spending plans and resubmit them to Brussels. While the commission has no real powers over national budgets, governments have in the past sought to avoid an official reprimand because of the stigma and potential market implications.

“This decision should be a surprise for no one,” Economic Affairs Commissioner Pierre Moscovici said at a briefing in Strasbourg to announce the measures. “We are not looking at a borderline case. We are looking at a clear deviation.”

Conte said that he is confident the country’s budget will boost economic growth thus helping Italy keep its finances in order in the long run. The budget is overall “very prudent,” he said, adding that “there is a robust investment plan” which can jump start the economy.