Italy’s populists make budgetary concession to Brussels

Italy's economy minister insisted his government will reduce the country's budget deficit from 2020 onwards, in a small concession to Brussels ahead of Rome sending its formal spending plan to the European Commission for approval later this month.

The populist coalition governing Italy announced last week that it planned to keep the deficit at 2.4 per cent of gross domestic product for the next three years, busting though spending EU targets and sparking a sell-off in Italian assets.

Yet economy minister Giovanni Tria said the government had shifted its plans and would begin lowering the budget deficit as a percentage of gross domestic product from 2020.

“The deficit will increase compared with the previous forecast in 2019, but then there will be a gradual reduction in the following years,” Mr Tria said at a press conference on Wednesday. Mr Tria repeated his pledge that Italy’s debt would come down as a percentage of economic output over the next three years in spite of higher spending.

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Italian bonds rebounded on Wednesday following reports of Mr Tria’s shift. Yields on the benchmark 10-year bond fell by 5 basis points to 3.378 per cent after closing at 3.44 per cent on Tuesday, the highest level since March 2014. Less than a week ago it had been loitering at 2.85 per cent. Bond yields move in the opposite direction of prices.

Plans from Rome’s populist coalition government to sharply increase government spending have unnerved financial markets and put Italy on a possible collision course with Brussels over the approval of its budget.

Citizens income

Earlier in the day Luigi Di Maio, leader of the Five Star party which is the largest within the coalition, said the government would spend €10 billion on his party's "citizens income" plans, but that growth from investment would bring down the country's deficit and debt.

Senior figures within the European Commission have already warned Rome that its planned deficit target for next year would be in breach of spending rules, raising the prospect that Brussels could take the unprecedented step of vetoing the plan this month and entering into an open battle with Mr Di Maio and his coalition partner Matteo Salvini.

Mujtaba Rahman, head of European analysis for the Eurasia Group risk consultancy, said Brussels was now in a "lose-lose situation": vetoing would provoke a dangerous confrontation with Rome's populist politicians while inaction would give "credence to the view in Berlin that the commission is simply unwilling, or incapable, of enforcing the euro's collective rules".

Milan’s FTSE MIB also opened 1.3 per cent higher before cutting its rise to 0.83 per cent. – Copyright The Financial Times Limited 2018