Italy Set to Warn Against Budget Tightening in Reply to EU

Italy Set to Warn Against Budget Tightening in Reply to EU

Finance Minister Giovanni Tria’s response will cite factors that led to a rise in Italy’s debt-to-GDP ratio, including the negative impact of near-zero inflation and global trade tensions that harmed the export-reliant economy in 2018, daily Il Messaggero reported Thursday.

Italy will tell the European Commission that any budget tightening this year would jeopardize a sluggish economic recovery, pushing back in its reply to a demand from Brussels to explain the nation’s increasing debt load, newspapers reported Thursday.

The executive arm of the European Union has called for a response to its request by Friday, confirming that it plans to go ahead and take the first step in a disciplinary process that could put Italy at risk of financial penalties.

Finance Minister Giovanni Tria’s response will cite factors that led to a rise in Italy’s debt-to-GDP ratio, including the negative impact of near-zero inflation and global trade tensions that harmed the export-reliant economy in 2018, daily Il Messaggero reported Thursday. The Treasury declined to comment.

The coalition of Deputy Premiers Matteo Salvini of the rightist League and Luigi Di Maio of the anti-establishment Five Star Movement is on a collision course with Brussels even as tension between the two partners triggers speculation of early general elections, possibly as soon as September.

Salvini’s victory in Sunday’s European parliamentary vote has made him the dominant force in the fractious coalition while weakening Di Maio, who’s now under fire from some Five Star lawmakers. Party activists vote Thursday in an online referendum on whether Di Maio should continue as party leader.

Tria Letter

Tria’s letter will also include references to upbeat industrial production data from the early months of this year and lower-than-expected costs for some welfare measures, Messaggero said. The letter will reiterate the need for growth-friendly policies and the government’s commitment to selling state assets, Corriere della Sera reported.

The Brussels-based Commission warned earlier this month that Italy’s fiscal situation will worsen this year and next as an economic pickup isn’t enough to keep its debt and deficit from rising. The EU’s spring forecasts saw Italy’s deficit-to-gross domestic product rising to 2.5 percent this year, higher than the government’s 2.4 percent target.

The projections for next year assume that planned hikes in indirect taxes like VAT won’t kick in. Based on the forecasts, Italy could be the only euro nation above the 3 percent deficit level in 2020.

The nation’s structural deficit, which excludes one-time expenditures and cyclical effects and is a key figure for EU budget rules, is forecast to worsen by 0.2 percentage point in 2019 and 1.2 points next year, when the debt will exceed 135 percent of economic output.

With economic tensions rising, Salvini and Di Maio are also headed for their first political face-off since the European vote, as a corruption case involving the League’s Edoardo Rixi nears its conclusion.

The newly empowered League has pledged that Rixi, a deputy infrastructure minister who’s among the politicians linked to the “Crazy Expenses” probe, will keep his job whatever the verdict. Five Star, which has long campaigned to clean up politics, has called for his dismissal if convicted.

By John Follain and Lorenzo Totaro

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