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article imageEurozone ministers face defiant Italy on budget

By Alex PIGMAN (AFP)     Nov 4, 2018 in Politics

Exasperated eurozone finance ministers are expected to back Brussels in the row over Italy's budget on Monday, setting the stage for market turmoil not seen since the debt crisis.

Eurozone finance ministers are meeting for the first time since the European Commission rejected Rome's 2019 budget in a historic move.

Italy's populist government does not seem to want to play by EU rules on running a national budget and ratings agencies could send shockwaves through teetering Italian banks by downgrading the country's credit score.

"Everyone is worried," a senior European Union official said, as several sources told AFP most of the 19 ministers would back the Commission's tough stance.

Members of the single currency bloc have flouted collective budget guidelines before but none so "openly and consciously" -- in the Commission's terms -- as the unrepentant populist coalition south of the Alps.

The unprecedented provocation may draw an unprecedented response. If Prime Minister Giuseppe Conte's government does not fall into line, it could face huge fines.

"It would be inevitable," a senior European official told AFP.

Italy, and in particular its far-right vice premier Matteo Salvini, is not planning to back down, and seems even to relish the opportunity to thumb its nose at Brussels.

The government -- a coalition of Salvini's League and the anti-establishment Five Star Movement -- plans to run a public deficit of 2.4 percent of GDP, three times the target of its centre-left predecessor.

On October 23, the EU Commission sent Rome a letter rejecting the budget -- a historic first, even if Italy is far from the first country to break fiscal EU rules.

Italy has until November 13 to submit a revised budget, but Salvini's response has been categoric: "No little letter will make us back down. Italy will never kneel again."

His coalition partner, the Five Star movement's Luigi Di Maio, urged other EU partners to embrace his government's policies, which he said are the only ones that can inject job-creating growth into Europe.

"If the recipe works here, it will be said at a European level: 'We should apply the recipe of Italy to all other countries'," Di Maio told The Financial Times.

Brussels might have had more sympathy for Rome's decision to increase spending if the underlying economic situation had promised better times ahead.

But Italy's jobless rate is more than 10 percent, way above the eurozone average, and growth in the third quarter of this year ground to a complete halt.

The coalition's 2019 budget is based on an estimate of annual growth of 1.5 percent -- a figure considered optimistic by the IMF, which has forecast only one percent.

- Watching the spread -

Italian leaders insist the low growth rate is all the more reason to kickstart the economy through a spending spree, but Brussels fears the rising deficit could further feed Italy's exploding debt.

Italy already owes 2.3 trillion euros ($2.6 trillion)  a sum equivalent to 131 percent of its GDP  a...
Italy already owes 2.3 trillion euros ($2.6 trillion), a sum equivalent to 131 percent of its GDP, and even if Brussels fails to punish Rome then markets surely may do so
Daniel ROLAND, AFP

Italy already owes 2.3 trillion euros ($2.6 trillion), a sum equivalent to 131 percent of its GDP, and even if Brussels blinks and fails to punish Rome, EU official assume the markets will.

Rating agency Moody's has already downgraded Italian debt, and Standard & Poor's has dropped its outlook on the economy from stable to negative.

The governor of the Italian central bank, Ignazio Visco, has expressed concern that borrowing rates will have to rise and political experts warn the coalition could come under pressure from League voters.

The much watched "spread" -- the gap between German and Italian bond yields -- has grown to around 300 basis points, up from around 130 in the first quarter of 2018, as the markets demand higher returns to put their money in Rome.

The situation is reminiscent of the Greek debt crisis, except with Italy's much bigger and more central eurozone economy at the heart of the storm, the size of the bailout would be so large as to make it virtually impossible.

"While the confrontation between the government and the EU is likely to worsen... we continue to expect the government to ultimately change course if faced with a more severe bout of market pressure," said Federico Santi, an analyst at Eurasia Group.

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