Italy could reduce its deficit target in an effort to appease the EU, markets, government and the economy

Mon 26 Nov 2018 – 23:25

[ROME] The Italian government coalition could reduce the budget deficit target for next year to 2% of gross domestic product in order to avoid disciplinary sanctions on the part of Brussels, two government sources said Monday.

This decision triggered a recovery in the financial markets, but it was unclear whether the downward revision would be enough to satisfy the European Commission.

The target set in the draft budget is now 2.4% of GDP, which is significantly higher than the 0.8% rate set by the previous government before the end of its term.

The European Commission took a first step last week to discipline Italy in terms of budget after Rome's refusal to amend it, which made the issue of a dispute that alarmed any euro zone and could eventually lead to fines.

The leaders of both parties in the coalition, consisting of the Rightwing League and the Five-Star Anti-Settlement Movement, indicated that they were willing to reduce the deficit target before holding. a meeting on Monday to discuss the issue.

The meeting, which would have been announced at 18:30 GMT, could give rise to a decisive break with Brussels, which has shaken the financial markets concerned about the sustainability of Italy's massive debt and a long struggle with its partners of the European Union.

Since the presentation of the draft budget two months ago, the two coalition party leaders have repeatedly refused to dwell on their spending plans.

The European Commission has called for a reduction in the structural deficit adapted to the economic cycle and ad hoc measures.

On Monday, league leader Matteo Salvini said Brussels had made "positive comments" on plans to lower the target.

Italy's benchmark bond yield spread relative to the German equivalent reached its tightest level in more than a month at 279 basis points. The stock market grew by more than 2%.

Before the crucial meeting, Prime Minister Giuseppe Conte said that the coalition parties were united, but that the way spending would be reduced would remain uncertain.

According to a parliamentary source, one of the options considered was to delay the implementation of the citizen's income and the expected increase in the retirement age to April instead of February or March, which could save billions of dollars. dollars.

Vice-Minister of Transport Armando Siri of the League also reportedly plans to allocate the salaries of citizens to companies hiring and training unemployed, which would probably limit spending on unemployment offices and employment programs. state formation.

"5-star is ready to talk about incentives for companies that hire workers who collect the citizen's income," said the Senate's 5-star group leader, Stefano Patuanelli.

A meeting between President Conte and European Commission President Jean-Claude Juncker on Saturday seemed to pave the way for a relaxation of Italy's position.

The Bank of Italy said on Friday that the rise in Italian government bond yields was hurting private wealth and the financial sector, making borrowing more expensive for companies.

Peter Praet, chief economist of the European Central Bank, said Monday that rising borrowing costs would offset all the possible economic benefits of an increase in spending in violation of EU rules. Next year.

Salvini said Sunday that "nobody is stuck" on the goal of 2.4%.

Deputy Prime Minister Luigi Di Maio, who heads the 5-star, said that as long as the fiscal measures remain unchanged, including the income of the Movement's flagship citizen, the deficit reduction target has not been reduced. not a problem.

"What is important is that the budget contains the objectives we have set," said Di Maio on Monday. "So if trading means that the (objective) deficit has to be reduced a bit, for us it's not important."

REUTERS