Italy Pushes Back After EU Says Its Budget Plans Won't Fly
(Bloomberg) -- Italy was quick to rebuff the European Commission’s latest criticism of its budget, accusing it of sloppy and outdated analysis.
Shortly after the European Commission published its latest forecasts for Italy, most of which were more pessimistic than the government’s, Finance Minister Giovanni Tria said the numbers come from an “inadequate and partial analysis.” He added that the EU ignored “clarifications provided by Italy.”
Rome’s unusually strong response included another refusal to change its budget targets, despite demands from the EU.
It signals further gridlock and marks yet another entry in the dispute over the expansionary budget. Italy says it’s needed to support an economy that’s underperformed the euro area for years, but the EU and investors are worried about what it will do to the country’s mountain of debt.
Tria reiterated that the government is committed to maintaining its “maximum deficit” target at 2.4 percent of economic output. The commission has rejected that as being too expansive, while predicting the actual 2019 gap will be even wider at 2.9 percent, close to the EU’s 3 percent limit.
Italian bonds slipped after the report, pushing the 10-year yield up seven basis points to 3.41 percent. The spread over German bunds widened, though remained below recent highs.
While the EU’s forecast language is gloomy, some say the reality may turn out to be worse. Lorenzo Codogno, a former chief economist at the Italian finance ministry, said Europe’s predictions “look too optimistic.”
In the report, the European Commission forecasts:
- Economic growth of 1.2 percent next year, below the populist government’s target of 1.5 percent.
- Budget deficit seen widening to 2.9 percent next year and 3.1 percent the following year.
It said the growth outlook is subject to “high uncertainty amid intensified downside risks,” including a further jump in government borrowing costs. Given the “fiscal deterioration” and risks to growth, the EU also said Italy’s large debt-to-GDP ratio won’t decline through 2020.
In a separate statement, Italian Prime Minister Giuseppe Conte said that the EU underestimates the impact of the budget law and other government measures on growth.
The commission warned about the impact of higher debt-financing costs on lenders, singling out Italy as one of the “high-debt euro area countries” where “disruptive sovereign-bank loops could also re-emerge in case of doubts about the quality and sustainability of public finances.”
What Our Economists Say...
“The European Commission’s latest forecasts for Italy envisage economic growth of 1.2% in 2019 -- we think even that sluggish pace is too optimistic.... If, as seems likely, borrowing overshoots the government’s projections, an escalation of the budget standoff will probably follow.”
--Jamie Murray and Maeva Cousin, Bloomberg Economics. Read the full INSIGHT
Tria met with euro-area counterparts this week and said he wants a dialogue with the commission, which has set a Nov. 13 deadline for a re-submission of the budget.
“I hope we will come up with a common solution, but if you’re talking about splitting things down the middle -- I don’t see how that’s possible,” EU Economic Commissioner Pierre Moscovici said Thursday. “We need to get closer together, but we need to respect the rules.”
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