Business World

Sunday 26 May 2019

Collision course: Italy vows to defy EU and press on with budget but offers guarantee to hold deficit


Economy Minister Giovanni Tria said he realised Italy’s budget plans breached EU rules, but said his Government had to respond to years of anaemic growth
Economy Minister Giovanni Tria said he realised Italy’s budget plans breached EU rules, but said his Government had to respond to years of anaemic growth

Ellie Donnelly Additional reporting Reuters and Bloomberg

Italian government bonds and stocks rallied after a credit ratings decision by Moody's Investors Service removed the immediate threat of a downgrade to junk.

Yields on 10-year securities fell to their lowest level in over two weeks following Friday's cut to Baa3 - its lowest investment-grade rating - with a "stable" outlook instead of a two-notch cut as had been expected and that was enough to tempt back investors. Italy is due to be reviewed by S&P, who have the nation two notches above junk, on Friday.

The country yesterday told the European Commission it would stick to its 2019 budget plans in defiance of EU fiscal rules, but promised not to inflate its deficit any further in the years ahead. In a letter to the commission, Economy Minister Giovanni Tria said he recognised that the budget, which is set to hike next year's deficit to 2.4pc of gross domestic product (GDP), was not in line with the EU Stability and Growth Pact.

However, looking to silence growing alarm from EU allies, he said the government had to respond to years of anaemic growth in the eurozone's third-largest economy. "(The budget) was a hard, but necessary decision in light of Italy's delay in catching up to pre-crisis levels of GDP and the desperate economic conditions in which the most disadvantaged citizens find themselves," Mr Tria wrote.

The commission sent Rome a warning letter about the budget last week - the first formal step of a procedure that could lead to Brussels rejecting the package and imposing fines. An EU spokesman said the commission would decide today its next step.

Underscoring the tensions, German Finance Minister Olaf Scholz said Italy had to be "careful" over its debt, while Austrian Chancellor Sebastian Kurz called on the commission to reject the budget unless changes were made.

Italian Prime Minister Giuseppe Conte dismissed Mr Kurz's criticism as "incautious" and reiterated that Rome wanted to have "constructive dialogue" over the budget, which includes tax cuts, welfare hikes and a rolling back of tough pension reform. Conte also stressed that his government had no intention of abandoning either the euro currency or the EU.

"Read my lips. There is no way Italy will leave the euro," he said. However, he added that the EU was damaging itself by not meeting the needs of ordinary people.

Italy's economy is still some 6pc smaller than it was at the start of 2008, hobbled by a slew of long-standing problems, including a national debt mountain at around 131pc of GDP - the second-highest in Europe after Greece. Mr Conte predicted that growth would "take off" once government reforms were enacted. To help fund its expansionary programme, the Treasury sharply hiked the deficit goal from a targeted 1.8pc this year. "For us, 2.4pc is the ceiling," Mr Conte said.

Irish Independent

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