Italy stands by main pillars of budget as EU deadline nears

© Reuters. FILE PHOTO: Italian Finance Minister Giovanni Tria attends a euro zone finance ministers meeting in Brussels© Reuters. FILE PHOTO: Italian Finance Minister Giovanni Tria attends a euro zone finance ministers meeting in Brussels

By Giuseppe Fonte and Anne Kauranen

ROME/HELSINKI (Reuters) – Italy stood by the main pillars of its 2019 budget on Friday, as a deadline neared for it to change what Brussels called overly optimistic assumptions or face penalties for breaking EU fiscal rules.

Luigi Di Maio, the deputy prime minister in Rome, and Economy Minister Giovanni Tria said they were committed to respecting a maximum budget deficit of 2.4 percent of economic output next year.

But the European Commission, which has given Rome until Tuesday to present a new budget, has forecast a deficit of 2.9 percent and a structural fiscal gap – excluding one-offs and business cycle swings – rising to 3.0 percent.

Under EU requirements, Italy should cut its structural deficit next year to 1.2 percent and continue reducing it every year until it reaches a balanced budget.

Tria said the government was “busy drafting an answer to the European Commission with regards to the most contentious points of the budget.”

But Rome would confirm its “main pillars,” as an economic slowdown had made fiscal expansion even more necessary, he told a parliamentary hearing.

The Commission rejected Italy’s 2019 fiscal plan last month, saying it flouted a previous commitment to lower the deficit and that it did not guarantee a reduction in the country’s debt, the second highest in the euro zone as a proportion of GDP.

In Helsinki, Valdis Dombrovskis, the Commission Vice President responsible for the euro, on Friday reaffirmed the EU executive was considering starting an excessive deficit procedure if Italy did not change the budget.

He said Brussels believed Rome’s fiscal calculations were “overly optimistic.”

“Basically the assumption is that if they … increase public spending, it will stimulate the economy and thus will help to reduce the budget deficit. We see that this is actually not materializing,” he said.

The standoff between Rome and Brussels has spooked financial markets and, after Tria spoke, 10-year Italian bond yields climbed to 3.46 percent , their highest in over a week.

That pushed the closely-watched gap over safer German Bund yields back above 300 basis points ().

Di Maio, whose anti-establishment 5-Star Movement governs in a coalition with the far-right League, said he believed market pressure would ease when investors realized the government was committed to holding the deficit inside its 2.4 percent target.

But he gave no indication that the government was willing to change the 2019 budget draft.

Asked it Italy would pay any fines the EU might levy, Di Maio said “pacts must be honored”, but that he did not expect any charges to be levied and was confident an agreement with Brussels would be reached.

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