EU Spares Italy From Debt Censure as Budget Update Convinces
EU Spares Italy From Debt Censure as Budget Update Convinces
(Bloomberg) -- The European Commission decided to withhold disciplinary action against Italy over its debt after the government in Rome offered fresh commitments that address some of Brussels’ concerns.
“The commission has concluded that a debt-based Excessive Deficit Procedure for Italy is no longer warranted at this stage,” Economic Affairs Commissioner Pierre Moscovici told reporters in Brussels on Wednesday after a meeting of the European Union’s executive arm.
“We will need to continue to monitor Italy’s budgetary execution very closely in the second half of this year,” Moscovici added, citing the assessment of the 2020 budgetary plan due mid-October.
The commission’s decision marks a significant detente between Italy and the EU after a months-long tussle over the country’s debt mountain.
The two sides have been clashing over fiscal policy since the Italian populist government took power last year. Brussels wanted swift action to cut Italy’s debt load, the second-biggest in the euro area. But Rome argued that its fiscal targets meet EU rules and that it needs to cut its deficit slowly to jumpstart the economy after years of stagnation.
The commission escalated tensions last month when it said the situation warranted a disciplinary procedure, triggering frantic negotiations to reach a compromise on Italy’s budget targets for this year and next.
On Monday evening, Italy’s cabinet agreed the deficit would fall by 7.6 billion euros ($8.6 billion) this year thanks to higher revenue and lower spending -- including 1.5 billion euros previously set aside for social programs for which demand has been lower than expected.
A decision not to take action should allow Italy to respect its commitment that the budget deficit for 2019 would be at 2.04% of output. In a last ditch effort to avoid EU 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.
But the government in its letter stopped 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.
Italian bonds rose Wednesday after daily Il Messaggero reported the EU’s executive arm is unlikely to move forward with a penalty procedure. Ten-year yields tumbled this week, falling to to 1.7% at 3:26 p.m. in Rome, with the spread over Germany at 208 basis points, the lowest level in over a year.
“You need to be conscious of the fact that the populist government wants to keep on spending and at the same time they want to stay in government,” Davide Serra, chief executive officer of Algebris Investments, said in a Bloomberg TV interview on Tuesday.
--With assistance from Lorenzo Totaro.
To contact the reporters on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net;Alessandro Speciale in Rome at aspeciale@bloomberg.net;Lorenzo Totaro in Rome at ltotaro@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Dan Liefgreen, Caroline Alexander
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