Italy set to back down in EU budget row

Italian prime minister Giuseppe Conte turns to camera, smiling, as he is led away by President of the European commission Jean Claude JunckerImage copyright

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Best of friends? Italian PM Giuseppe Conte discussed the budget standoff with the head of the European Commission

Italy looks set to defuse a row with the EU after weeks of publicly defying officials in Brussels over its high-spending budget plans.

Italy had refused to budge on its plans to rack up a deficit of 2.4% of GDP.

In an unprecedented move, the European Commission told Italy to revise its budget and deal with its debt pile.

Deputy Prime Minister Luigi Di Maio said on Monday his government might be willing to reduce the deficit target to end the standoff.

“If, during the negotiating process, the deficit has to be reduced a bit, that’s not a big deal,” Mr Di Maio said.

Italy’s draft budget contains expensive measures for introducing a guaranteed basic income of about €780 (£700) for poor families, and raising the retirement age. The government declared its budget measures would “end poverty”.

“The important thing is that not one person misses out on the (pledged) measures,” Mr Di Maio added.

The apparent change of mind followed a weekend meeting in Brussels between Italian Prime Minister Giuseppe Conte and European Commission President Jean-Claude Juncker.

Italian media were on Monday morning reporting that the deficit could be slashed from 2.4% to 2.2% of GDP – but government sources quoted by Reuters suggested the deficit could be reduced to as low as 2%.

The revelations prompted share prices in Milan to soar while a keenly watched measure of economic turmoil in Italy, the “spread” between Italian and German bond prices, fell to 280 points amid expectations of a resolution to the crisis.

A meeting to discuss the details was scheduled for Monday evening.

But it was not clear how any reduction in spending would be financed if key election promises made by the ruling populist League and Five Star parties remained untouched. Nor was it certain that the changes would be enough to satisfy the European Commission.

Matteo Salvini, the joint deputy PM and leader of The League, had already hinted at change on Sunday, saying “no-one is stuck” at a specific number for the deficit.

Giuseppe Conte told Italy’s Ansa news agency “I do not talk about decimals”, and argued it was more important to assess the wider economic impact of the proposed reforms.

‘Sleepwalking into instability’

The Commission announced last Wednesday that Italy was “sleepwalking into instability” and that opening a case under the eurozone’s “excessive deficit procedure” was now on the cards.

Fines under that procedure could start at 0.2% of Italy’s entire GDP – which would measure in the billions of euros.

The reason for Europe’s concern is that while Italy is the third-largest economy in the eurozone, with a GDP of more than two trillion euro, it also has a large amount of debt.

Eurozone rules say that countries should both keep their deficit to less than 3% of GDP – which Italy’s plans do – but also keep national debt to 60% of GDP or less.

Many countries exceed that debt limit without any action being taken. But at almost 132% of GDP, Italy has the second highest rate in the bloc.

When Brussels received Italy’s draft budget, it said the country’s refusal to deal with its debt and essentially triple the planned deficit was unacceptable.

Italy, meanwhile, maintained that investment was needed to kick-start the sluggish Italian economy and reduce the suffering of its citizens.

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