The standoff between the Italian government and the European Commission over the 2019 budget deficit appears to be reaching a resolution.

European Economic Affairs Commissioner Pierre Moscovici acknowledged on December 14 that progress in the negotiations had been made, although an agreement still needed to be finalised.

Italian Prime Minister Giuseppe Conte has in recent days hinted at the possibility that Italy’s deficit target could drop from 2.4% — rejected by the European Commission – to 2.04% of GDP. Conte brought the latter proposal to Brussels for bilateral talks with President of the European Commission, Jean-Claude Juncker on December 12 in the hope of making a breakthrough

“It’s a step in the right direction, but we aren’t there yet,” said Moscovici. Under EU fiscal rules, Brussels must see its structural deficit cut below the 1.8% achieved in 2018. That means Brussels will insist on a 1.7% deficit target, which is 0.1% lower than the 2018 deficit.

The European Commission, however, could allow for one-off “emergency expenses” to the tune of 0.2% of GDP.

The Italian government insists that an expansionary budget is necessary given growth deceleration in the Eurozone. The European Commission insists that Italy must reign over its debt, the largest among the G7 economies and second only to Greece in terms of the debt-to-GDP ratio in the Eurozone.

The European Commission rejected Italy’s previous budget proposal and is expected to begin infringement procedures that could lead to a penalty equal to 0.2% of GDP. Italy’s Deputy Prime Minister Matteo Salvini expressed confidence on that an agreement with Brussels could be secured, saying Italy’s proposal is far more manageable compared to that of France, whose 2019 budget appears to have been utterly derailed due to a series of concessions President Emmanuel Macron was forced to make to appease the Yellow Vest protest movement.