Salvini Tax Cut Demand Squeezes Conte’s Room for EU Negotiations

(Bloomberg) --

Prime Minister Giuseppe Conte said Italy will obey European Union budget rules while calling for their overhaul, even as his dominant deputy Matteo Salvini said the country will push ahead with controversial tax cuts or he’ll pull the plug on the government.

With Europe seeking billions of euros in additional spending cuts, the premier was reduced to complaining that the union’s rules are capricious and applied “without intelligence,” according to an interview with Italian newspapers published Friday. Conte also charged that EU demands to rein in Italy’s debt are based on inaccurate estimates for economic growth.

The prime minister is counting on “fair play” from EU counterparts in their negotiations with Italy over its budget plans, he told reporters in Brussels on Friday.

Conte has mostly gotten the cold shoulder during meetings with European Union counterparts this week, as he tries to avoid a disciplinary action over Italy’s failure to contain its debt. A written response from the premier was deemed long on rhetoric and short on detail, with an EU source cited in daily La Stampa saying that if Italy is ultimately able to avoid the procedure, “it won’t be thanks to this letter.”

Working in Italy’s favor is a rally in bond yields fueled by expectations of further monetary easing by the European Central Bank. Yields on the 10-year note fell over 60 basis points since the start of June.

But the premier may have even bigger problems than the tussle in Brussels. His room for maneuver in negotiations is linked to Salvini, the ascendant force in Italian politics and the heavyweight in the populist coalition. While Salvini was conciliatory on 2019 accounts, he made it clear in an interview with daily Corriere della Sera that Italy won’t compromise on future budgets and won’t raise taxes to satisfy EU demands.

“Enough of being caged in,” the League party leader said in the interview. “Enough strangling of growth.” Salvini has long insisted that slashing taxes, not reducing spending, is the only way to kick-start the Italian economy, and he has a number in mind: “There’s no such thing as a serious tax cut that requires less than 10 billion euros.”

And if the government isn’t able to follow through with his proposal, including the League’s signature flat tax policy? Salvini said he’s ready to “say goodbye” and break up the populist coalition.

Conte responded to Salvini’s threat by saying the government is planning a fiscal overhaul. “We’re not mentioning it every day, we have set up a working group to work on reforming taxes,” he told reporters after arriving for the second day of the EU summit.

To contact the reporters on this story: Jerrold Colten in Milan at jcolten@bloomberg.net;John Follain in Brussels at jfollain2@bloomberg.net

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

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