IMF warns Italy not to breach EU spending rules in next budget

IMF warns Italy not to breach EU spending rules in next budget

Deputy PM Matteo Salvini insists Italy will not cave to financial market pressure

The International Monetary Fund has thrown its weight behind Brussels in its battle with Italy’s coalition government over plans to increase the indebted country’s borrowing in its next budget.

The Washington-based lender of last resort, which is holding its annual conference in Bali this week, warned Rome to abide by the EU’s financial rulebook or risk a rebellion by investors that could trigger a debt default.

Global stock markets fell sharply on Monday amid growing concerns that Italy’s coalition government, formed from the far-right League party and the radical Five Star Movement, was poised to submit a budget in breach of EU spending rules.

Italy’s borrowing costs jumped by as much as 30 basis points to the highest levels since early 2014 after the Italian deputy prime minister, Matteo Salvini, criticised the European commission president, Jean-Claude Juncker, and the economics commissioner, Pierre Moscovici, for failing to back his budget plan.

Speaking at a news conference with the French far-right leader Marine Le Pen, he said the country would not cave to pressure from the financial markets or retreat from its plan for government spending. “We are against the enemies of Europe – Juncker and Moscovici – shut away in the Brussels bunker,” he said.

Brussels has rejected the idea of Italy running a larger budget deficit – the gap between income from taxes and government spending – than previously planned over the next three years.

Rome is due to submit its draft budget by 15 October to the EU commission, the bloc’s executive arm, which will check whether it is in line with EU rules. Salvini has said he wants to use a spending boost to kickstart investment and consumer spending to boost growth.

The IMF chief economist Maurice Obstfeld said it was important to maintain the confidence of international money markets, especially when the risks of an escalating trade war and a damaging no-deal Brexit were rising.

The IMF’s intervention could prove significant while both sides seek allies in the budget battle. The IMF is considered an important ally by governments as they seek to persuade electorates that debt-fuelled spending could lead to a collapse in confidence and rising borrowing costs.

Obstfeld said EU rules that prevent governments adding to already sky-high levels of debt to GDP should be maintained in the current unstable economic climate.

Speaking in Bali, he said: “Our concern about Italy is that there is a real imperative for the fiscal policy to maintain the confidence of markets.

“And we have seen the spreads increase over the past months. This has certainly contributed to our downgrade of Italian growth and makes the economy more susceptible to shocks.

“So we think it is important that the government operate within the framework of the European rules, which are also important for the stability of the eurozone itself.”
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