Italy's Populists Defy Europe on Budget Deficit, Growth Targets

(Bloomberg) -- Italy’s populist government is challenging the European Commission in the reply it is due to deliver by a Tuesday deadline, sticking to its budget deficit and growth targets for next year despite protests from Brussels, according to Premier Giuseppe Conte’s office.

Ministers of the ruling coalition of the anti-migration League and the anti-establishment Five Star Movement agreed to insist on a 2.4 percent deficit target, and a 1.5 percent growth forecast for next year in the letter the government will send the European Commission.

Italy's Populists Defy Europe on Budget Deficit, Growth Targets

Conte is holding a cabinet meeting on the reply to commission demands for a revised budget, a government official said separately. Deputy Premier Matteo Salvini asked by reporters in Rome if the budget will be changed, responded by shaking his head.

Maintaining the targets, which have been contested by the commission concerned about the impact on Italy’s debt mountain, Europe’ biggest, sends the ball firmly in the commission’s court which would have to decide whether to kick start a process that could lead to billions of euros in fines.

Italy's Populists Defy Europe on Budget Deficit, Growth Targets

The European Union’s executive body had demanded Italy provide a fresh budget by a Tuesday deadline after rejecting a first draft last month as a challenge to budget rules. Deputy-premiers Luigi Di Maio of Five Star and Salvini of the League are, however, determined to start delivering on campaign promises to boost benefit spending, cut taxes and lower the retirement age.

The clash with Brussels has roiled investors and sent borrowing costs to the highest in more than four years. The euro earlier pared its advance versus the dollar Tuesday on a Bloomberg report that the government would stick to its deficit and growth targets.

EU’s Dilemma

Italy’s reversal of years of effort to contain the country’s debts presents the EU with a dilemma. The bloc is under pressure from its members to demonstrate that it is not toothless in enforcing budget discipline, yet cracking down on Italy could strengthen the hand of populists and nationalists across the bloc ahead of next May’s European Parliament elections.

The next clue to Italy’s fate is likely to be on Nov. 21 if the commission brings forward an assessment of the country’s finances that would normally come out in the spring. A report showing Italy is in breach of the EU debt rules would be another step down the path toward potential financial penalties.

In a procedure for excessive deficit, EU governments get several opportunities to weigh in and Italy could be given as much as six months more to comply once the process starts. The government would risk an initial fine of 0.2 percent of Italy’s annual GDP of 1.7 trillion euros ($1.9 trillion), rising to 0.7 percent if Rome still doesn’t fall into line. The EU has never fined a country for budget violations.

Playing on anti-EU sentiment helped the populists win March general elections. The League’s Salvini, who is more virulent than Five Star’s Di Maio in denouncing Brussels, has since the vote overtaken his coalition ally in opinion polls. The League was credited with 31.7 percent support in an SWG survey, compared to 27.4 percent for Five Star. The League won 17.4 percent of votes in the March elections, while Five Star got 32.7 percent.

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