Brussels and Rome in standoff over Italian budget

Brussels has rejected Italy’s draft budget for 2019, setting up a standoff with the populist government in Rome.

Saying the budget brazenly broke European Union (EU) rules on public spending, the European Commission on Tuesday asked Italy to submit a new draft within three weeks or face disciplinary action.

The bloc is concerned that markets could lose trust in debt-laden Italy, potentially provoking a new crisis in the eurozone.

The Italian government wants to spend more on welfare, infrastructure and reduce the retirement age. It has planned to finance this through more borrowing.

Italian debt stands at around 130 percent of the country’s gross domestic product (GDP), far above the EU’s ceiling of 60 percent, and second only to crisis-hit Greece.

It is the first time that the commission has rejected a budget presented by a eurozone member since it attained the power to do so amid the 2013 sovereign debt crisis.

“The Italian government is openly and consciously going against the commitments it made,” European Commission Vice President Valdis Dombrovskis told a news conference.

Following the announcement, yields of Italian government bonds surged.

Rome will now have to submit a fresh budget that would cut the country’s structural deficit by 0.6 percent of GDP, rather than increase the deficit by 0.8 percent, the commission said.

If Italy fails to comply, the EU could impose fines of up to 0.2 percent of GDP, or 3.4bn euros ($3.9bn), based on 2017 figures.

Luigi Di Maio, one of Italy’s two deputy prime ministers, responded to the rejection by calling for “respect” for Italians.

“This is the first Italian budget that the EU doesn’t like. I’m not surprised. This is the first Italian budget that was written in Rome and not in Brussels,” he said on Facebook.

Italy’s far-right Deputy Prime Minister Matteo Salvini, who is also an interior minister, said the government was “in the right” and warned that Brussels was angering Italians and eroding faith in the EU.

“No one will take one euro from this budget,” he said.

Speaking on Monday, Italian Prime Minister Giuseppe Conte said the draft budget is designed to create growth and avoid a recession.

The commission is concerned that Italy’s growth assumptions are overly positive, making the debt reduction plan questionable.

“Experience has shown time and again that higher fiscal deficits and debt do not bring lasting growth. And excessive debt makes your economy more vulnerable to future crisis,” said Dombrovskis.

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