ITALY: Rome rejects European Commission demands

The Italian government has defied the European Commission by sticking to its big-spending budget plan.

Deputy Prime Minister Matteo Salvini said a deficit target of 2.4% and a growth forecast of 1.5% were unchanged.

The Commission, worried by the impact of high spending on Italy’s high levels of debt, had told Rome to revise the budget or face possible fines.

It had set Tuesday as a deadline to Italy’s governing populist parties to respond to its objections.

The Commission’s warning to Italy, the eurozone’s third-biggest economy, is an unprecedented move with regard to an European Union member state.

It will now decide whether to begin disciplinary measures against the Rome government.

Italian government bond yields rose sharply early on Wednesday amid fears that its budget decision would raise borrowing costs.

Why does Italy want to spend more?

Italy’s government, made up of the populist Five Star Movement and right-wing populist League, came to power vowing to “end poverty” with a minimum income for the unemployed, along with promises of tax cuts and scrapping extensions to the retirement age.

To fulfil its promises it trebled the previous government’s deficit target of 0.8% of Italy’s economic output.

In its letter to the Commission, Italy reaffirmed its commitment to maintain public finances, but insisted it would stick to a deficit target of 2.4% which it said was an “impassable limit”.

The government said it would aim to generate 1% of GDP by selling state assets with which it would pay back debt.

Mr Salvini, who leads the League party, was quoted as telling Rai radio on Wednesday that the Commission had ” got it wrong if they are even just thinking of imposing fines on the Italian people”.

Luigi Di Maio of Five Star said: “We have the conviction that this is the budget needed for the country to get going again.”

The government argues that servicing its debt of 131% of national output – second only to bailed-out Greece – would hurt Italians, who have still not recovered from the decade-old financial crisis.

Italy’s economy is still smaller than it was in 2008. The governing coalition argues an increase in spending would kick-start growth.

How bad is Italy’s debt?

Italy’s neutral Finance Minister Giovanni Tria and international observers had hoped the country would keep its deficit under 2% of GDP – and perhaps as low as 1.6%.

While 2.4% falls well short of the 3% deficit limit under eurozone rules, Italy’s debt level is alarming.

“For the first time the Commission is obliged to request a euro area country to revise its draft budgetary plan but we see no alternative than to request the Italian authorities to do so,” the EC Vice-President for the euro, Valdis Dombrovskis, said last month.

He pointed out that Italian taxpayers were having to spend as much servicing the national debt as on education.

“Breaking rules can appear tempting at the first look – it can provide the illusion of breaking free,” he said.

“It is tempting to try and cure debt with more debt. At some point, the debt weighs too heavy… you end up having no freedom at all,” Mr Dombrovskis said.

German Chancellor Angela Merkel said on Tuesday that the EU wanted to reach out to Italy but that it had adopted budget rules “that we all now have in common”.

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