Italy Says It Won't Change Budget Plans as Euro Partners Fret

Italy Says It Won't Change Budget Plans as Euro Partners Fret
European Union and Italian flags are seen in downtown Rome, Italy, on Oct. 19, 2018. (Alessandro Bianchi/Reuters)

BRUSSELS/ROME—Italy will stick with its 2019 budget plan despite criticism from the European Commission but talks are continuing, Economy Minister Giovanni Tria said on Nov. 19 after attending a meeting of eurozone finance ministers.

Italy is at loggerheads with the Commission and many fellow eurozone governments over its big-spending budget. Brussels has rejected the package, saying it fails to bring down debt as required by European Union rules.

Describing the budget plan as "very moderately" expansionary, Tria told reporters: "The discussion goes on. Obviously, the plan of the government doesn't change, but there's the intention to carry on the discussion."

The yield on Italian benchmark 10-year bonds rose to 3.56 percent on Tria's remarks, the highest for more than three weeks, while the spread compared with safer German Bunds widened to 319 basis points.

Brussels and the International Monetary Fund see Italian growth forecasts as too optimistic, and eurozone ministers have so far backed the Commission's hard line, concerned that Rome could trigger another debt crisis like the one of 2011 and 2012 that nearly destroyed the euro.

"We are all worried about the existing situation. Clearly this is a matter that not only involves Italy, but all of us," Dutch Finance Minister Wopke Hoekstra told reporters. "It is imperative that the Commission does what is in the interest of all the different European countries."

In Rome, Deputy Prime Minister Matteo Salvini said any budget sanctions against Italy would be "ungenerous". Italy did not want to demolish the EU but wanted to change some rules that damage EU citizens, including its own, he added.

Italy has targeted the deficit to rise to 2.4 percent of gross domestic product next year from a projected 1.8 percent this year, remaining inside the EU's 3 percent ceiling but reversing a previous commitment to reduce borrowing.

Brussels is expected to release a report on Italy's debt on Nov. 21, which could be the first step towards a disciplinary procedure that could eventually lead to fines on Rome.

The debt, at more than 130 percent of national output, is proportionally the highest in the euro zone after Greece's. The Commission expects it to remain broadly stable in the next three years, rejecting Rome's argument that it will come down thanks to a boost to economic growth.

Expansionary Measures

Tria defended the budget strategy, saying expansionary measures were needed to head off an economic slowdown that was affecting the whole of Europe.

The long-standing growth gap between Italy and more buoyant northern European economies is now narrowing as the government planned, he said, but unfortunately, this was only because the others were slowing more sharply than Italy.

"It is false to say Italy has profligate public finances," said Tria, a 70-year-old academic who is not a member of either of the ruling parties: the anti-establishment 5-Star Movement and the right-wing League.

Tria said France had been given greater leeway than Italy on its budget in recent years, and he pointed out that Italy's "primary balance", measuring state accounts excluding debt-servicing costs, had been in surplus for almost 20 years.

He said he did not believe the Commission was prejudiced against Italy—a complaint often made by government supporters—but that it was prejudiced against the idea that fiscal expansion was needed at times of economic slowdown.

"I hope yield spreads come down ... when markets understand that 2.4 percent is a maximum ceiling," Tria said, warning that the stand-off with Brussels could have dangerous consequences.

"I hope that, since we must defend Europe even if we want to change it, we don't play what the British call the 'chicken game', meaning heading towards a ravine and seeing who stops first," he said.

He acknowledged that "something isn't working in our dialogue with the Commission", adding that it was necessary to interrupt a running clash which "has no reason to exist".

By Francesco Guarascio & Gavin Jones
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