Italy's Tria Says Growth Needed for Markets to Gain Confidence

(Bloomberg) -- Italy needs growth to gain the trust of financial markets, Finance Minister Giovanni Tria said, and the government’s spending plans won’t jeopardize its commitment to cut the country’s debt nor membership in the euro zone.

In an interview with business daily Il Sole 24 Ore, Tria said the introduction of a “flat tax” would be done in stages, and that the state will resume selling off holdings.

“One has to separate euroskeptic positions on an academic level, like those of Bagnai, from the fact that the official line of the government does not put our membership in the euro in discussion in any way,” Tria said, referring to Senate finance committee head Alberto Bagnai, whose appointment spooked Italian debt markets.

Tria, a former university professor and political novice with no power base of his own, represents a government headed by two anti-establishment parties whose promises threaten to widen Italy’s deficit and whose campaign rhetoric at times questioned Italy’s euro membership. Tria’s two-page interview sought to allay any fears.

No Selloff

The yield on Italian 10-year bonds has jumped to a recent 2.8 percent from around 1.8 percent in May, but Tria said that while an economic slowdown has favored a move toward more secure debt instruments, there is no “flight” from Italian bonds.

Budget talks began in Rome last week as the two parties in the ruling coalition push to implement their spending plans in 2019. They both agree on the need to boost investment in Italy and want to partially undo recent increases in the retirement age. In addition, the League’s signature economic policy is a flat tax while the Five Star Movement based much of its campaign on introducing a citizen’s income. Ministers will meet again later in the day, Tria said.

“In the end, it was me who assured my colleagues that the onset of the measures in the government contract is compatible with the limits on public finances, and not the other way around,” he said. Tria has committed to maintain the deficit within the EU’s limit.

“We are however talking with the EU commission about avoiding a correction that would be too pro-cyclical, that is, would slow down the economy,” he said.

Spending Program

The government’s spending program is projected to total as much as 120 billion euros ($139 billion) in the first full year, according to calculations by Carlo Cottarelli, a former International Monetary Fund executive. The ruling parties have always questioned that estimate, failing so far to specify in detail how they are going to fund the measures.

Deputy Premier Luigi Di Maio, leader of Five Star, has said the European Union budget rules mustn’t be used as an excuse to block efforts to help struggling Italians. On Sunday, fellow Deputy Premier Matteo Salvini, leader of the League, was quoted in an interview saying the EU deficit cap is not ”the Bible.”

Tria said the Italian economy will grow 1.2 percent this year, lower than the 1.5 percent in the most recent government projections, and between 1 percent and 1.1 percent next year, with the slowdown in line with what’s expected in other major EU economies. Under current legislation, the slowdown would bring next year’s budget deficit to about 1.2 percent of economic output, he said, compared with the 0.8 percent forecast in the estimates of the previous administration.

Tria said the debt burden would continue to narrow, even with sluggish economic growth and the government’s spending plans. “Sure, there will be a slowing in respect to the tendency of a few months ago, but what counts is the continued reduction, and that’s not in question,” he said. “Then there are possible privatization programs, which in past years have been suspended because of capitalization problems, which have now been overcome.”

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