Italy's Populists Win Budget Blessing From Brussels, For Now

(Bloomberg) -- Italy’s populist government has secured a deal with the European Union over its spending plans which reassures financial markets and stabilizes public finances, at least in the short term.

The European Commission gave a green light on Wednesday to the country’s 2019 budget, after Rome offered concessions on welfare and pension election promises in order to lower the deficit target to 2.04 percent from the initial 2.4 percent that Brussels had rejected as an “unprecedented” breach of EU rules.

Senior officials of the commission, the EU’s executive arm, said after a meeting in Brussels that Italy’s concessions meant there was no reason for now to trigger a sanctions process, which could lead to fines.

“Let’s be clear, the solution is not ideal but it avoids opening the excessive deficit procedure at this stage and it corrects the situation of serious non-compliance,” Commission Vice President Valdis Dombrovskis told reporters. He said the process would be avoided “if agreed measures are fully implemented,” adding that the budget as a whole and individual measures remain concerning.

The verdict marks a victory for Premier Giuseppe Conte and Finance Minister Giovanni Tria, who persuaded the two main powers behind the government -- euroskeptic Deputy Premiers Matteo Salvini and Luigi Di Maio -- to take a conciliatory stand toward Brussels and cut some 4 billion euros ($4.6 billion) in funding for a “citizen’s income” for the poor and a plan to lower the retirement age.

Meeting Halfway

Markets, which have been whipsawed by the standoff amid concerns about the budget’s impact on Italy’s debt mountain, surged. Italian 10-year bond yields fell as much as 18 basis points to 2.76 percent, the lowest level in over three months, while the FTSE MIB index of shares rallied as much as 2 percent with banking stocks leading gains.

The revised budget package lowers the GDP outlook for 2019 to 1 percent from 1.5 percent, narrows the pool of people expected to take advantage of pension and welfare measures and delays their implementation to February and March respectively, and pledges more sales of state-held real estate and other privatizations.

Brussels and Rome met each other halfway to lock up the compromise, as Italian populists held off on their most ambitious spending plans, while the commission turned a blind eye to Italy’s failure to comply with the obligation to lower its structural deficit next year.

Uncertainty over the budget, which the government says provides much-needed stimulus, has pushed up sovereign borrowing costs and damaged sentiment, taking a toll on the economy which could see the country’s first recession in five years.

On the eve of the Brussels decision Conte, a former law professor, argued his government’s case with commissioners Dombrovskis and Pierre Moscovici, then sent them a letter they’d demanded in which he detailed measures to cut deficit spending and thus reduce debt, newspaper la Repubblica reported Wednesday.

Conte in the Senate on Wednesday confirmed that Italy’s GDP target for 2019 has been revised to 1 percent from 1.5 percent to take account of a worsening economic outlook due mainly to a slowdown of global trade.

The government now faces a year-end deadline to get the bill through parliament. The budget bill is expected to be debated by the Senate beginning Thursday, with approval needed in both the upper and lower houses.

©2018 Bloomberg L.P.