Italy Offers 2.04% Budget Deficit Target in EU Peace Gesture

(Bloomberg) -- Italian Prime Minister Giuseppe Conte proposed to cut the deficit target to 2.04 percent of output for next year in a significant concession to the European Commission.

Conte told reporters after meeting commission President Jean-Claude Juncker in Brussels that technical analyses had allowed the government to recover resources and lower the 2019 deficit from an initial 2.4 percent. The original number was rejected for being in breach of European Union rules.

“We are not betraying the trust of Italians and we respect the commitments made with the measures which have the most impact,” such as a lower retirement age and a citizen’s income for the poor, Conte said.

The offer now places the ball in the commission’s court, and follows a long tussle between Conte and Finance Minister Giovanni Tria on one side, and on the other the two euroskeptic deputy premiers: Matteo Salvini of the anti-migration League and Luigi Di Maio of the anti-establishment Five Star Movement.

Tria was scheduled to be in Brussels Thursday to guide the remaining phases of the talks on the new budget, his spokeswoman said.

Officials cautioned that there is more work to be done to satisfy EU regulations. Newspaper La Stampa cited an EU “source” as saying that there is “still a gap to bridge, hopefully we can do it with the work that will continue in the coming days.”

Salvini and Di Maio had insisted that their landmark election pledges should not be diluted or delayed.

Financial Markets

The budget tug-of-war has whipsawed financial markets amid concerns about the impact of the proposals on Italy’s sluggish economiy and its mountain of debt, which is the biggest in the euro area in real terms.

Italy Offers 2.04% Budget Deficit Target in EU Peace Gesture

Conte said the structural deficit would also fall, and added that “growth will be above our expectations.” He said he was working to avert an infringement procedure that could lead to fines, and called the negotiations “very fruitful.”

The government has said both the pension reform and the welfare benefits should start early next year, and Conte said they would begin “in the period we have set out.” He did not detail where the extra resources were found or how reforms would be tweaked.

Juncker’s commission sounded a similarly encouraging note. A spokesman said Juncker “listened attentively” to Conte, adding that good progress has been made and the commission would now assess the proposals.

The commission has repeatedly insisted that beyond a deficit reduction, what matters most is the impact reforms will have on Italy’s structural balance, which strips out one-off expenditures and the effects of the economic cycle.

Even a deficit of 2.04 percent may still not be low enough to avoid EU sanctions. It could increase tensions between Salvini and Di Maio, who will have less money to divvy up for their costly promises to voters.

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