Defiant Italy says no turning back on Budget despite EU ‘threats’

Italy dug in its heels on Tuesday over its Budget deficit despite pressure from Brussels and its euro zone partners, as leaders of the coalition in Rome threatened to sue EU officials over a deepening market sell-off.

The government last week set a deficit target of 2.4 per cent of economic output for the next three years. That tripling of its predecessor’s goal unnerved already jittery investors and prompted criticism and calls for a rethink from the European Commission.

“We are not turning back from the 2.4 per cent target... We will not backtrack by a millimetre,” Luigi Di Maio, deputy PM and leader of the anti-establishment 5-Star Movement, said in radio interview.

As Italian bonds and banking shares sold off sharply on Tuesday, Di Maio said there was “no doubt” the leaders of France and Germany wanted the Italian government to fall, while one lawmaker suggested the country would be better off outside the euro.

The ruling coalition, which joined forces in June on promises to slash taxes and boost welfare spending, directed its anger at Brussels. Its other deputy PM, right-wing League leader Matteo Salvini, said it might seek compensation from the EU over Italy’s rising borrowing costs.

“The words and the threats of Juncker and other high EU bureaucrats continue to raise the spread (between Italian and German bond yields). We are ready to seek damages from those who want to harm Italy,” Salvini said.

EU Commission President Jean-Claude juncker drew parallels on Monday between Italy’s Budget plans and the finances of Greece, which emerged from its third international bailout as recently as August.

While the headline deficit of 2.4 per cent that Italy is proposing would be within the Commission’s 3 per cent limit, under the current plan the structural — or underlying — deficit would rise, which runs contrary to EU rules.

The Commission is also concerned the proposal will add to Italy’s huge public debt pile, proportionally the second highest in the EU after Greece’s. The government says the debt will fall as the expansionary Budget spurs economic growth.

‘Saving euro’

In Luxembourg, the Commission’s vice-president for the euro Valdis Dombrovskis said it was open to dialogue and hoped Italy would bring the budget draft into line with EU rules.

On Monday, Juncker said the EU must be “strict” with Italy to avoid putting the euro project at risk.

Salvini called that a “threat” that “no-one in Italy is taken in by”. He said the government’s priority was to respond to its citizens’ needs and criticism of its Budget “will not stop us.”

The government’s task is made harder by the pressure on Italian bonds which intensified on Tuesday, when eurosceptic League lawmaker Claudio Borghi said the country’s economic situation would improve outside the euro zone.

Borghi is not a minister and did not suggest the government planned to drop the euro, and Di Maio and PM Giuseppe Conte later reiterated the official line that Rome has no intention of leaving either the euro zone or the EU.

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