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EU Says Italy Risks Penalties on Debt, Seeks Explanations

EU Says Italy Risks Penalties on Debt, Seeks Explanations

(Bloomberg) -- The European Commission confirmed it will take the first step in a disciplinary process that would put Italy at risk of financial penalties, and demanded the government explains its failure to rein in debt before the EU’s executive makes its final decision next week.

In a letter sent to the Italian Finance Minister Giovanni Tria on Wednesday, the commission’s finance chiefs Valdis Dombrovskis and Pierre Moscovici said the country hasn’t “made sufficient progress towards compliance with the debt criterion” of the EU’s fiscal laws. The two officials asked Rome to cite any factors that explain this deterioration by May 31, according to the letter seen by Bloomberg.

The commission is considering proposing a disciplinary procedure for Italy, which could pave the way for a 3.5 billion-euro ($3.9 billion) penalty. The step may come as part of the EU’s regular budget monitoring reports, most likely on June 5, and would mark an escalation of Rome’s budget tussle with Brussels that roiled markets at the end of 2018.

Italy’s Tria “received as expected” the Commission’s letter and “stands ready to reply,” a spokesperson for the ministry said, declining to be identified in line with internal policy. The spokesperson declined to comment on the timing of Tria’s reply.

Italian bonds pared gains after news of the EU letter and the euro touched its intraday low against the dollar.

The commission’s recommendation would be only one step in a long, convoluted process, which requires EU governments to weigh in several times. EU finance ministers would have to sign off on a so-called excessive deficit procedure recommendation, at which point a “non-interest bearing deposit” of up to 0.2% of gross domestic product -- around 3.5 billion euros -- could be demanded.

EU Says Italy Risks Penalties on Debt, Seeks Explanations

EU finance chiefs would also have to say whether they agree with the commission’s proposal -- probably at their next gathering in early July. If Italy doesn’t comply with the deposit request, it would be a breach of EU law.

Italian Deputy Prime Minister Matteo Salvini signalled that Rome has no intention to comply with requests for more fiscal measures. “I think Italians gave me and the government a mandate to completely, calmly and constructively re-discuss the parameters that led to unprecedented job instability, unemployment and anxiety.”

The Italian government will likely cite an improved economic outlook, one-off extra tax revenue, spending cuts and planned privatizations in its reply to the letter, Corriere della Sera reported on Tuesday. Italy will also mention a lower-than-expected use of funds allocated this year to finance a new welfare tool and a measure to lower the retirement age, the newspaper said.

The government targets debt at 132.6% of output this year, up from 132.2% in 2018, the Treasury said last month in its draft budget. The ratio should fall to 131.3% of GDP next year and to 130.2% in 2021, according to the plan.

--With assistance from Nikos Chrysoloras and Zoe Schneeweiss.

To contact the reporters on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net;Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Richard Bravo, Dan Liefgreen

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