Italy's budget inflexibility likely to widen divide with EC

Italy signalled it is not ready to budge on its controversial budget even as eurozone finance ministers called on it to prepare revised spending plans that comply with the bloc’s rules, in a sign that the standoff between Brussels and Rome is set to escalate in the coming weeks.

The finance chiefs’ call comes amid a dispute over budget plans that the European Union says go against Italy’s commitments to reduce it’s debt load. In an unprecedented rebuke, the European Commission asked Italy last month to submit revised spending plans by November 13, after it essentially rejected the country’s budget for 2019, saying that it constitutes a clear deviation from commonly agreed rules.

But despite repeated warnings, Italian Finance Minister Giovanni Tria said after a meeting in Brussels on Monday with his eurozone counterparts that the government would not change the budget law. The defiance means that even though Italy is willing to engage in talks with the commission over its spending plans, it’s unlikely to make sufficient concessions to appease Brussels.

“We expect a new and revised draft budgetary plan by November 13 and that is a necessity,” EU economic affairs chief Pierre Moscovici said after the meeting. “And the questions we have raised are still on the table.”

The commission’s call for a revised budget came after months of discord over the spending targets, which sent Italian bond yields to a four-year high last month.

But Mr Tria also expressed optimism that Italian securities would recover. “We hope that the spread will go down when our strategy is better understood,” he said. “And maybe after the dialogue with the commission.”

During Monday’s meeting, the Italian finance chief told his colleagues that the country’s planned deviation was not huge and that EU rules allow for some flexibility, while he reiterated his government’s commitment to reduce the country’s debt load, an official familiar with the discussion said.

But Italy’s willingness to further explain the numbers and policies in the spending plans is unlikely to be enough to address the commission’s concerns.

In a joint statement, the bloc’s ministers said they agreed with the assessment by the commission and called on Italy to engage in “open and constructive dialogue” and to co-operate closely with the commission “in the preparation of a revised budgetary plan which is in line with the stability and growth pact".

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The statement also stressed the importance of sufficient debt reduction, a clear message to Italy, which has the highest debt ratio in the eurozone after Greece.

Despite repeated warnings, Prime Minister Giuseppe Conte has said there’s no “Plan B” for the fiscal programme, indicating the government has little intention to comply with EU demands.

Once Italy responds to the commission, the EU’s executive arm will have three weeks to publish its final assessment on whether the country’s spending plans are in breach of EU rules. One possible outcome, EU officials say, would be for the commission to bring up to November 21 the publication of a report on Italy’s compliance with EU rules on debt that was originally planned for the spring.

If the report shows that Italy is failing to comply with rules on reducing its debt - which is more than twice the EU limit - then that could trigger the so-called excessive deficit procedure, a process that could eventually lead to financial sanctions for the government in Rome. The penalty could reach 0.2 per cent of the country’s annual economic output, which was €1.7 trillion  (Dh7.12tn) in 2017.

Financial penalties proposed by the commission have to be approved by member states, which can block the process. But while Brussels has limited powers over national budgets, governments have in the past sought to avoid an official reprimand because of the stigma and the potential market implications.

Under EU rules, no country should have a budget deficit larger than 3 per cent of gross domestic product or debt above 60 per cent of output and those that are outside of those limits must set annual targets to show they’re moving in the right direction.

While Italy’s deficit is well within the 3 per cent limit, the commission has demanded smaller gaps for the country to bring down its debt load.