Italy digs in spending, jolting markets and worrying EU

Italy’s leaders refused to budge from new spending targets that have been spooking investors, pushing the eurozone’s third-largest economy on a collision course with its EU partners.

Deputy Prime Minister Luigi Di Maio said Tuesday that the government “will not back up one millimeter” from spending targets that will increase the country’s deficit to 2.4 percent of Italy’s annual GDP, which is beyond previous commitments.

The government’s plan has jolted investors, who are now charging Italy more to borrow in bond markets. On Tuesday, the yield on Italy’s 10-year bond was up 0.10 percentage point at 3.40 percent, and that’s increased the difference between the Italian benchmark and the sturdy German benchmark to 3 percentage points, the highest level this year.

“This verbal toing and froing between Italy and Brussels is likely to keep investors a little cautious of piling back into Italian assets,” said Michael Hewson of CMC Markets.

On Monday, Economic Minister Giovanni Tria was warned by his counterparts in the 19-country eurozone that Italy’s plans break the rules of the single currency bloc. The EU’s economy commissioner, Pierre Moscovici, said the plans represent “a very significant deviation from the commitment which had been taken.”

That claim drew an angry response from Di Maio, who accused Moscovici of “creating terrorism with the markets.” And Tria said the government’s plans would promote much-needed growth in Italy, which would be to the benefit of Italy’s long-term finances.

Italy’s economy has been a laggard for years, with growth paltry compared with many other countries in the eurozone. Unemployment also remains relatively high at 9.7 percent, according to official statistics Monday from Eurostat.

Tria skipped Tuesday’s wider meeting of the EU’s 28 finance chiefs to return to Rome to work on the budget that must be submitted to Brussels by mid-October.

In Luxembourg, European Commission Vice President Valdis Dombrovskis kept up the pressure on Italy on the sidelines of the finance ministers’ meeting, noting that Italy has been a chief beneficiary of rules for more flexibility.

“Discussions about draft budget plan seem to be heading into a direction which goes substantially beyond this flexibility,” Dombrovskis said.

“It is a fact that Italy has the second highest debt-to-GDP ratio in the EU, second after Greece and the highest debt servicing costs in the EU. It’s important that Italy sticks with responsible fiscal and macroeconomic policy also to maintain interest rates at acceptably low levels,” he said.

Italy’s government announced last week it would increase spending next year to push through promises made during this year’s election. The government’s plan sees the country’s budget deficit rising to 2.4 percent of GDP despite pledges to keep it under 2 percent. While still within the 3-percent limit set by EU rules, the higher limit will pile on more to the country’s debt burden in the short-term.

During the election, the 5-Star Movement backed calls for a basic income for job seekers, while its partner in government, the League, pledged to reduce taxes.

The government hasn’t given details on how the increased spending would be paid for, but 5-Star leader Di Maio defended the budget targets, saying on RTL radio that he “hopes'” the plans would raise GDP by 2 percent in 2019.

This article provided by NewsEdge.