The budget of Italy is unsettling the Eurozone

Frederick Owens
October 19, 2018

"Everyone is taking shots at us - not a single day passes without news bulletins, the European Commission, the Bank of Italy, the state accountant or the statistics agency saying we can't do this", Deputy Prime Minister Matteo Salvini told supporters at a campaign event in northern Italy over the weekend.

That is comfortably below the EU's 3 percent ceiling, but up sharply from a targeted 1.8 percent this year, unnerving financial markets and contravening European Union regulations that call on Italy and similarly highly indebted countries to narrow the deficit steadily toward zero. But the Italian government has repeatedly said it will not back down. It could be months, if not years, before Rome faces penalties.

Prime Minister Giuseppe Conte, who was elected to the post by Salvini and his coalition partner, M5S leader Luigi Di Maio, echoed Salvini's comments that the coalition was sticking to its pledges. Moscovici will reportedly not to submit any counterproposals to the Italian budget, but merely point out the breach of the agreed framework data. That's a step the Commission has never taken before.

The EU Commission is now reviewing Italy's draft budget and can formally raise concerns about it until next Monday. The latest spat was over Di Maio's suggestion that public money could be used to help struggling airline Alitalia SpA.

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European Union officials have signaled it will be very hard not to reject the country's spending plans if the government's targets remain unchanged. "On the strength of this position, we go to Brussels with a budget that we are proud of and that we want to discuss without prejudices". If it does so, it can then decide to send the budget back to Rome for changes by October 29, in what would be an unprecedented move. At 130 percent of annual economic output, Italy's debt is well above the EU's 60 percent ceiling. It rejects Rome's argument that the package can lower debt by expanding the economy.

"It's with concern that we are looking at Italy, especially because of its budget".

"I do hope that at the end the war of words (will end) and that good sense will prevail and everyone will notice that this kind of budget is exactly what Italy needs to cope with its chronic lack of growth", he said in a televised interview with CNBC.

The process that could eventually lead to sanctions wouldn't typically be triggered until the Spring, when the Commission has final 2018 data to work with.

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