Arms around the budget: Italy seems ready to reduce its deficit

Conjuncture

The Italian government, so far inflexible, now seems willing to change its budget 2019 to avoid a standoff with Brussels but, above all, to reduce tensions in the financial markets.

This change of tone caused Monday a 2.77% jump of the Milan Stock Exchange, led notably by the banks, and a net relaxation of the "spread": the closely watched discrepancy between the Italian and German ten-year loan rates. years fell to 290 points, against 307 Friday night.

"If during the negotiation (with Brussels) the deficit should decrease a bit, for us, it is not important," said Luigi Di Maio, leader of the 5-star movement (M5S, anti-system), one of the two parties of the ruling coalition in Italy with the League (far right).

The European Commission rejected on 23 October the draft Italian budget for 2019, which officially provides for a deficit of 2.4% of GDP.

Brussels considers unrealistic the Italian forecasts, estimating that the deficit will reach 2.9%, far from the commitments of the previous center-left government (0.8%).

The populist coalition had since maintained an inflexible line, seeming ready to badume the risk of an "excessive deficit procedure" and thus of financial sanctions.

"Relaunching growth"

But the day after a working dinner on Saturday evening in Brussels between the President of the European Commission, Jean-Claude Juncker, and members of the Italian government, the tone has changed in Rome.

League leader Matteo Salvini, who is still ready to attack the Commission, said Monday that the government would use "common sense".

"If in Brussels, they think to hold hostage the government and 60 million Italians on a figure after the decimal point, we are ready to remove them all alibi," he said.

At the end of a meeting on Monday evening, the head of government Giuseppe Conte and MM. Di Maio and Salvini pointed out in a statement that the government's goal was to "revive growth" and that it was "not a question of decimals".

They reaffirmed the "fixed objectives" in terms of program, namely the introduction of a citizenship income for the poor, a reform of the law on pensions to allow early departure and compensation for small savers cheated by the bankruptcy of banks.

But, they said, regarding the "ongoing dialogue with the European institutions", the government decided "to wait for the technical reports on the reform proposals with the greatest social impact, in order to accurately quantify the expenses. "

"The recovered funds will be reallocated, prioritizing investment spending, especially the security of the territory" and weather management, they added.

A drop to where?

Earlier, Mr Conte had already refused to give a precise figure on a possible reduction of the deficit, waiting for "the technical information and the economic impact" of the reforms to do it. A deficit of 2.2% represents a difference of 3 billion euros, he noted.

The question that now arises is indeed: at what level will Rome reduce its deficit and will that be enough to satisfy Brussels?

"The possibility of a compromise before the final decision on an excessive deficit procedure is rather slim.The distance between the Italian position and what would be required by the (European) budgetary framework is so wide that, if the government were to try to to respect him, he would change direction completely, "said economist Lorenzo Codogno, founder of LC Macro Advisors.

But Rome seems to have become aware, at least in part, of the impact of the tensions on the financial markets that its policy generates.

The spread has doubled since May in the secondary market, affecting banks, and the rate that the government must offer to place debt has increased significantly. In addition, an investment in treasury bills among individuals was a flop last week, reflecting concern over Italian sovereign debt and investors' low appetite for it.

Italy will have to make more than 250 billion euros of sovereign debt issues next year.