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Italy Tries to Reassure EU on Deficit Without Giving 2020 Target

Italy Gives EU Reassurances for 2020 Budget, Repubblica Says

(Bloomberg) -- In a last ditch effort to avoid European Union sanctions, Italy’s Finance Minister Giovanni Tria and Prime Minister Giuseppe Conte sought to reassure Brussels that the government’s commitment to fiscal discipline will extend beyond this year into 2020.

The European Commission meets Wednesday to decide on disciplinary action against Italy over its debt. The letter sent by Tria and Conte on Tuesday evening says that favorable 2019 budgetary trends -- higher revenue and lower-than-expected welfare costs -- will continue next year.

However, it stops short of setting a new goal for the country’s budget shortfall in 2020, merely referring to a previous plan in April that included a deficit at 2.1% of output. The government also reiterates its commitment to a structural improvement in line with the EU rules, according to a different official.

Read More: Italy Bonds Surge as Investors Eye Summer Respite From Politics

Italy Tries to Reassure EU on Deficit Without Giving 2020 Target

While Italy’s cabinet on Monday lowered its 2019 deficit target to 2.04%, the government didn’t set any new goal for 2020, when the Commission forecasts the shortfall to soar well above the threshold of 3% set by the so-called Stability and Growth Pact.

The European Commission is focusing on the 2020 deficit projections to determine whether it will start the disciplinary proceeding.

Italy Tries to Reassure EU on Deficit Without Giving 2020 Target

Italian bonds rose on Wednesday after daily Il Messaggero reported the EU’s executive arm is unlikely to move forward with a penalty procedure. Ten-year yields have tumbled this week to 1.71%, with the spread over Germany at 209 basis points, the lowest level in over a year.

The governing coalition of the right-wing League and anti-establishment Five Star Movement will have to find 23 billion euros ($26 billion) to avoid an automatic value-added tax increase and fund tax cuts promised by League leader Matteo Salvini.

But Tria, in his bid to avoid a clash with the EU, is instead squirreling future funds so that they can be used to cut the deficit. The government announced on Monday it would set aside the savings from its flagship basic income program and early-retirement measure for 2019.

According to a draft of the decree law seen by Bloomberg, any similar savings in coming years will also be use toward reducing the shortfall.

The letter was first reported by La Repubblica, which said that if Italy avoids the disciplinary action, discussions with the Commission may be resumed in October, when the government must submit its 2020 budget.

--With assistance from John Ainger.

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net;Chiara Albanese in Rome at calbanese10@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Alessandro Speciale, Flavia Krause-Jackson

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