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Italy sticks to budget in high-stakes EU standoff

ROME (AFP) -- Italy's populist government defied the European Commission Tuesday by sticking to its big-spending budget plan, risking financial sanctions in a high-stakes standoff with Brussels.

Despite pressure from the European Commission, which rejected Rome’s budget outright last month in a first for the EU, Italian Deputy Prime Minister Luigi Di Maio vowed to stand firm on the country's anti-austerity plans.

“The budget will not change, neither in its balance sheet nor in its growth forecast. We have the conviction that this is the budget needed for the country to get going again,” Di Maio, who leads the anti-establishment Five Star Movement, said Tuesday evening after a ministerial meeting.

M5S and its coalition partner, the far-right League party, insist the budget will help kick-start growth in the eurozone’s third largest economy and reduce the public debt and deficit.

Italian Deputy Prime Minister Luigi Di Maio (AP-Yonhap)
Italian Deputy Prime Minister Luigi Di Maio (AP-Yonhap)

The Commission gave Italy until Tuesday to make changes to its 2019 plans and warned non-compliance could activate the “excessive deficit procedure,” a complicated process that could lead to fines and possibly provoke a strong, adverse market reaction.

Italy intends to run a public deficit of 2.4 percent of gross domestic product in 2019 -- three times the target of the government's center-left predecessor -- and one of 2.1 percent in 2020.

But Brussels forecasts Italy’s deficit will reach 2.9 percent of GDP in 2019 and hit 3.1 percent in 2020 -- breaching the EU's 3 percent limit.

League head Matteo Salvini, who is also a deputy prime minister, vowed Monday to put his back into “defending the budget, as if it were a rugby scrum.”

While Rome targets economic growth of 1.5 percent, Brussels anticipates just 1.2 percent, putting Italy at the bottom of the EU table.

The IMF forecasts growth of 1 percent for 2020 and was skeptical of Italy’s reform program in its latest report on the country.

Italy's Economy Minister Giovanni Tria has accused Brussels of getting its sums wrong.

It would be “suicide” to try to reduce the deficit to the previous goal of 0.8 percent of GDP, he has said, insisting “we must get out of the trap of weak growth.”

The big problem is Italy’s public debt, now a huge 2.3 trillion euros ($2.6 trillion), or 131 percent of Italy's GDP -- way above the 60 percent EU ceiling.

The fine for refusing to review the budget could correspond to 0.2 percent of Italy’s GDP -- about 3.4 billion euros ($3.8 billion)

European Economics Commissioner Pierre Moscovici has said he hopes a compromise can be found to avoid sanctions.

Speaking Tuesday to the European Parliament, German Chancellor Angela Merkel said the EU wanted to reach out to Italy, a founding member.

“But Italy also adopted the many rules that we now all have in common,” she added.

The European Commission “will make the first step to move Italy into EDP” after a debt update expected on Nov. 21, said Lorenzo Codogno, former chief economist at the Italian Treasury Department.

The country will likely be given three to six months to prepare correction plans, after which nothing will happen until a new Commission takes up office at the end of next year following European Parliament elections, he said.

“The true guardians of fiscal discipline will be, as usual, financial markets,” he said.

All eyes are now on the “spread” -- the difference between yields on 10-year Italian government debt compared with those in Germany -- which has more than doubled since May, when negotiations to form the coalition government in Rome began.

Uneasy investors have already cost the taxpayer an additional 1.5 billion euros ($1.7 billion) in interest over the past six months.

A wider fear is that stress in Italy could spread to other European countries which are only just recovering from the eurozone debt crisis.

“We do not expect a crisis that would lead to a loss of market access,” said Agnese Ortolani, analyst at The Economist Intelligence Unit.

But the country's debt and the weakness of its banking sector mean “Italy would be too large to rescue without massive ECB support in the event of a large-scale financial crisis,” she said.