Italy's Populists Dig in After US Rejects Their Budget as a Danger

ROME – In the case of a global budget, the European Union is in danger of becoming a member of the European Union. .

The European Commission, the bloc's administrative body, has repeatedly warned Italy to reduce the deficit in its 2019 draft budget to avoid heavy fines early next year. But Italy's populist government, which has bristled against Europe's austerity measures, went ahead and submitted a budget deficit to 2.4 percent of gross domestic product. That figure is considered to be 131 percent of G.D.P., more than double the eurozone limit.

As expected, the commission rejected the plan, saying that it included irresponsible deficit levels that would "suffocate" Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could be a global economic crisis unseen since 2008, or worse.

But Italy's populists are not scared. They have made their budget, fat with unemployment, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt that helped America emerge from the Great Depression.

"Luigi Di Maio, Italy's first vice and the leader of the anti-establishment Five Star Movement told reporters as it became clear that the European Commission would reject the plan.

Mr Di Maio wrote on Facebook, "We know what we are on the right path, and we will not stop."

His first partner partner and fellow vice president, Matteo Salvini, the leader of the Far-right League Party, was also scathing. "This does not change anything. Let the speculators be rebadured, we're not going back, '' he told reporters during a trip to Romania. "They're not attacking a government but a people. These are things that will anger Italians even more. "

Italy has three weeks to revise its budget under the bloc's rules, but the European Union's unprecedented response may have been the instigation to a fight that Mr. Di Maio and his coalition partners have been itching for.

Both the Five Star and the League ran for election this year in direct opposition to Brussels. With European Parliament elections on the horizon in May, it does not hurt their cause to reintroduce the specter of a bureaucratic boogeyman preventing them from stimulating the Italian economy and delivering on their promises.

All of which make for strong political arguments that have an impact on the debtors. Still, the markets are less moved by the talking points.

Mr. Salvini and Mr. Di Maio have spoken to the issue of the yield between Italian and German 10-year benchmark bonds as if they were just another political enemy to be demonized or ridiculed. (The "spread," Mr. Salvini has joked, is what he is doing on his breakfast bread.)

But the spread is no joke. The most powerful of the eurozone economies in the world.

In the 2011 European bond crisis, it's dead to the bloc's governments – including, notably, that of Prime Minister Silvio Berlusconi, who was forced to resign because of a lack of confidence in the international markets.

Giuseppe Conte, the Prime Minister of Italy, has suggested that the leaders in Brussels have sought to raise the issue of the European economy. Mr. Di Maio said "enemies of the people" were working to increase the spread.

The question for Italy, and all of Europe, is how far Italy is government is willing to go. Will it be forced into submission by the gravity of economic reality? Gold will Italian leaders convince their voters that the country's financial health is worth risking in a blow to a political and economic establishment that they say stripping Italians of their sovereignty?

And Brussels must decide how strict it will be. Loath to a member state of gravity that it would loosen the ties that bind the union, its leaders must ask themselves if it is worse than an open revolt.

"Breaking rules can appear tempting at a first look," said Valdis Dombrovskis, the European Commission's vice president in charge of the euro and financial stability.

"It can provide the illusion of breaking free," he added. '' It is tempting to try to cure debt with more debt. But at some point, the debt weighs too heavy, and at the end of the day with no freedom at all. "

Mr. Dombrovskis called Italy's budget "consciously going against commitments made" and said "the ball is now in the court of Italy's government."

That ball has already been wrought havoc inside the Italian government.

At the end of September, Italy's populists agreed on a budget that delivered on the priorities of the Five Star, which sought a broad-based unemployment benefit, and the League, which is a flat tax for small business owners. It also included more generous pensions, allowing people to get back to work.

"In a decisive manner, with this measure, we will have abolished poverty," Mr. Di Maio said at the time.

Italy's leaders have complained they are unchallenged by the European Union, and they have risen to 2.4 percent deficit.

The previous, center-left government had a budget of 0.8 percent deficit, which would have allowed the country to continue its total debt.

Establishment forces inside the government, including Economics Minister Giovanni Tria, sought to shrink the budget deficit but were outmaneuvered by the populists. At one point, a member of the League shut off Mr. Tria's microphone to keep him talking about the budget.

But the major pressure on Italy's budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody's dropped its rating for Italian bonds to one level above "junk" last week.

As the spreads rose, Pierre Moscovici, the European commissioner in charge of economic and fiscal affairs, provoked the government's rage when he said Italians had chosen a xenophobic government.

Italy's leaders have responded less than diplomatically. Jean-Claude Juncker in the aftermath of the European Commission Mr. Salvini portrayed him as a drunk, saying he only speaks with "sober people."