Italian finance minister Giovanni Tria faces European Union scrutiny on budget


The draft Italian budget is extremely concerned in Brussels.

However, given that Italy has a debt of around 130% to its GDP - which is second only to Greece in the European Union - the budget proposal was heavily criticised by the European Union commission.

The fiscal plan has spooked European financial markets.

Speaking to reporters in Rome, EU budget chief Pierre Moscovici said the EU Commission and many other EU nations are anxious by Italy's spending plans, which will see the country's budget deficit rise to 2.4 percent of GDP, three times higher than agreed upon by the previous government. That has never happened before.

The stable rating outlook from Moody's reflects the broadly balanced risks at the Baa3 rating level, the company said, noting that Italy still exhibits important credit strengths that balance its weakening fiscal prospects. "This letter asks some questions, now it's up to the Italian government to respond".

"The combination of the tax-cutting right-wing populists and happy-to-spend left-wing populists in Rome has provided Italian bonds with a momentum that very much reminds of 2011", Ulrich Leuchtmann of Commerzbank said.

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".

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The so-called structural deficit, a key measure for the Commission, which strips out effects of the economic cycle and one-off spending items, is also off the mark. The 5-Star Movement opposes such a move.

"The general tone of the letter sent by the EC sounds tougher than what we had anticipated", Fabio Fois of the British bank Barclays Plc said.

The cabinet meeting was called in part because Di Maio had claimed that unauthorized changes were made to the draft budget, involving a proposal to extend a tax amnesty on money held overseas and brought back to Italy.

In its review of Rome's budgetary plans, the EU Commission can raise concerns until Monday. This is not just because the planned 2.4 percent headline deficit is too high to be within European Union limits. Italy projects this will widen by 0.8 percent, more than the 0.6 percent improvement Brussels wants.

Deputy Prime Ministers Luigi Di Maio and Matteo Salvini, head of the anti-establishment 5-Star Movement and far-right League respectively, both reiterated Italy's commitment to the single currency.

Italy insists that the increased spending in its plan is necessary to boost growth, which will bring down debt, and that the higher deficit will in turn come down. The government targets growth of 1.5 percent in 2019, followed by 1.6 percent and 1.4 percent in the following years.

While Brussels has no real powers over countries' budgets, governments go to great lengths to avoid a reprimand because of the potential market implications it could have.