Italy brushes off downgrade as it plans European Union budget response

21 October, 2018, 17:49 | Author: Sheila Harris
  • During a visit to Moscow Matteo Salvini said that Rome might block the renewal of sanctions that have been in place since 2014

Italy's response to the European Union comments was not well taken by financial markets. Under EU rules, the letter could precede a Commission's rejection of the Italian budget.

At the same time Italy's budget drama continues to exert downward pressure on the euro this morning after European Union officials expressed their opposition to Italy's draft budget in a letter on Thursday.

Brussels says Rome needs to cut the deficit in order to begin reducing its massive debt, which exceeds 130 percent of annual economic output - way above the EU's 60 percent ceiling. That has never happened before.

"I cannot imagine the euro without Italy and Italy without the euro, " Moscovici said after his meeting with Tria during which he delivered the letter.

Tria for his part said Italy and Brussels had "different evaluations" of the situation, but added that he too looked forward to "a constructive dialogue".

The gap between Italian and German 10-year bond yields reached its widest in 5 1/2 years after news of the Commission letter broke.

Moscovici said he did not expect ongoing market jitters in Italy to spread to other eurozone economies. The Prime Minister essentially defended his government's right to establish the free-spending budget.

The letter stated that Italy's budget proposal, which was initially announced in September was in contravention of the EU's budget regulations. "We would therefore ask for your arguments for not taking on board the PBO's opinion", the commission said.

On Wednesday Conte said he saw no room for changing tack and on Thursday described the budget as "beautiful".

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Italy's deficit is now projected at 2.4 percent of GDP, far higher than the 0.8 percent estimate given by the earlier center-right government.

"Most of the government's spending increases are structural in nature, implying that they will be hard to reverse", Moody's wrote.

"Our goal is to increase growth", the finance minister said, adding that the Italian government should communicate better with the European Commission on the reform programme.

"That makes Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth", they said in a statement.

While he is confident the crisis would remain contained within Italy, the suggestion that the Eurozone's third largest economy may be close to imploding remains a major concern for euro investors.

An escalation is programmed in if Italy opts not to change its spending plans and sticks to its deficit target.

"I'm aware this is not the budget the Commission expected".

Conte, in a post on Facebook Thursday, said that the measures are "well-considered, well-constructed and well-realized", and he said the draft was "the only instrument that we have to ensure economic growth and social development to our country".

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