Italian government signals willingness to compromise on deficit

EPA-EFE/DANIEL DAL ZENNARO

Italian Minister of Economy and Finance Giovanni Tria delivers a speech at an event in Cernobbio, Italy, September 9, 2018.

Italian government signals willingness to compromise on deficit


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In a Eurogroup meeting on September 7, Italy Economy Minister Giovanni Tria offered reassurances that his government will not breach the EU’s mandated 3% deficit ceiling and promised to cut spending both this year and next to help reduce the country’s massive debt

Tria said the Italian government had agreed to reduce the current structural deficit, albeit marginally, saying a gradual cut would be easier due to the economic growth that Italy has experienced over the last year. The thinking from Rome is that this will allow the government to implement its policy commitments without breaching EU rules.

Ahead of the Eurogroup meeting, Tria met with the European Commission’s Vice-President, Valdis Dombrovskis, where he vowed to adopt measures that would promote economic growth in line with the Bloc’s rules and also allow for an improvement of Italy’s public finances.

Dobrovskis said he backed Tria in his attempt to bring down the debt and pursue a comprehensive improvement of the structural deficit in Italy, moves that are also supported by Eurogroup President Mario Centeno who said he expected Tria and the Italian government to fully abide by the EU’s rules.

Earlier this month, Tria committed to a budget deficit below 2%, but his statement was undermined by Italy’s two populist deputy prime ministers Luigi Di Maio of the Five Star Movement and the right-wing party the League’s Matteo Salvini.

Di Maio wants to increase social transfers and establish a €780 monthly minimum wage for all Italians. Salvini, on the other hand, has been pushing for the introduction of a two-tier flat corporate tax of 15% and 20%.

Both Di Maio and Salvini have agreed to annul a planned VAT hike whose combined effect would likely expose the Italian government to a violation of its 3% deficit commitment to the European Union.

By October 15, all of the EU Member States must submit draft budget to the European Commission as Brussels has the authority to reject the proposals if they are not in line with the EU’s rules or its own economic projections.

Salvini’s League is pushing for a deficit of at least 2%, which the European Commission considers problematic given the 132% debt-to-GDP ratio. Until May, the Italian government was committed to a 1.7% deficit for 2018 and 0.6% for 2019. In the best-case scenario, however, the 2019 deficit will remain at current levels.

Earlier in September, Fitch Ratings downgraded Italy’s outlook from “stable” to “negative”, and maintained an overall BBB rating, but downgraded the country’s systemic lenders.

Italian 10-year bond yields now stand at approximately 3%, up from 1.9% last year.

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