Business World

Thursday 19 September 2019

Italy's populists secure EU budget blessing - for now

European Commission Vice-President Valdis Dombrovskis (AP Photo/Virginia Mayo)
European Commission Vice-President Valdis Dombrovskis (AP Photo/Virginia Mayo)

John Follain and Viktoria Dendrinou

Italy's populist government has secured a deal with the European Union over its spending plans which reassures financial markets and stabilises public finances ­- at least in the short term.

The European Commission gave a green light yesterday to the country's 2019 budget, after Rome offered concessions on welfare and pension election promises in order to lower the deficit target to 2.04pc from the initial 2.4pc that Brussels had rejected as an "unprecedented" breach of EU rules.

Senior officials of the commission, the EU's executive arm, said after a meeting in Brussels that Italy's concessions meant there was no reason for now to trigger a sanctions process, which could lead to fines.

"Let's be clear, the solution is not ideal but it avoids opening the excessive deficit procedure at this stage and it corrects the situation of serious non-compliance," commission vice president Valdis Dombrovskis told reporters.

He said the process would be avoided "if agreed measures are fully implemented," adding that the budget as a whole and individual measures remain concerning.

The verdict marks a victory for Premier Giuseppe Conte and Finance Minister Giovanni Tria, who persuaded the two main powers behind the government ­- eurosceptic Deputy Premiers Matteo Salvini and Luigi Di Maio - to take a conciliatory stand toward Brussels and cut €4bn in funding for a 'citizen's income' for the poor and a plan to lower the retirement age.

Markets, which have been whipsawed by the standoff amid concerns about the budget's impact on Italy's debt mountain, surged.

Italian 10-year bond yields fell as much as 18 basis points to 2.76pc, the lowest level in over three months, while Milan's main FTSE MIB index of shares rallied as much as 2pc with banking stocks leading gains.

The revised budget package lowers the GDP outlook for 2019 to 1pc from 1.5pc, narrows the pool of people expected to take advantage of pension and welfare measures and delays their implementation to February and March respectively. It also pledges more sales of state-held real estate and other privatisations.

Brussels and Rome met each other halfway to lock up the compromise, as Italian populists held off on their most ambitious spending plans, while the commission turned a blind eye to Italy's failure to comply with the obligation to lower its structural deficit next year.

Uncertainty over the budget, which the government says provides much-needed stimulus, has pushed up sovereign borrowing costs and damaged sentiment, taking a toll on the economy which could see the country's first recession in five years.

On the eve of the Brussels decision Mr Conte, a former law professor, argued his government's case with commissioners Dombrovskis and Pierre Moscovici, then sent them a letter they'd demanded in which he detailed measures to cut deficit spending and thus reduce debt, newspaper 'La Repubblica' reported yesterday.

In the Senate, Mr Conte confirmed that Italy's target for growth in 2019 has been revised to 1pc from 1.5pc to take account of a worsening economic outlook due mainly to a slowdown of global trade.

The government now faces a year-end deadline to get the bill through parliament. The budget bill is expected to be debated by the Senate from today, with approval needed in both the upper and lower houses.

Bloomberg

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