European ministers back Brussels in row over Italy's budget

Germany Screen Shot 2018 11 03

Germany Screen Shot 2018 11 03

Mr Stehn's analysis comes after Commissioner Moscovici reiterated Rome must understand European Union fiscal rules can not be broken with the bumper spending plan.

In a joint statement, the bloc's ministers said they agreed with the assessment by the commission and called on Italy to engage in "open and constructive dialogue" and to co-operate closely with the commission "in the preparation of a revised budgetary plan which is in line with the stability and growth pact".

The Goldman Sachs economist suggested market pressure will play a "key role" on whether the Italian Government carries out its plans despite having signalled no intention to give up the proposed budget.

European Commissioner for Economy and Finance Pierre Moscovici that the cost of servicing Italian public debt is already equal to the country's entire spending on education - €65 billion a year, before adding that the Commission and the Italian government are not now involved in negotiations on a compromise regarding a revised budget.

The budget "is not changing", said Tria after the talks.

He said the eurozone countries were expecting a new draft on which "we will return in December".

"It would be inevitable", a senior European official told AFP. "I really hope that the Italian government will seize the hand offered,"said French Finance Minister Bruno Le Maire".

Italy's debt load is the second highest in Europe, after Greece.

"On Nov. 19 we'll hold an extraordinary Eurogroup here in Brussels and this meeting will be mostly dedicated to euro-area reform", Eurogroup President Mario Centeno tells reporters after the meeting.

On October 23, the EU Commission sent Rome a letter rejecting the budget - a historic first, even if Italy is far from the first country to break the rules of the eurozone.

At issue: the deficit of 2.4% of gross domestic product (GDP) for 2019 presented by the populist coalition in power in Rome, formed the League (far-right) and the Movement Five Stars (M5S, antisystème), well above what was envisaged under the previous government, left-of-centre (0.8 per cent). "Never an Italy to its knees", he launched.

A further complicating factor was last week's news that Italy's economy recorded zero growth in the third quarter of the year.

The coalition's 2019 budget is based on an estimate of annual growth of 1.5 percent - a figure considered optimistic by the International Monetary Fund, which has forecast only one percent.

This would already be more than enough to cause deep concern as eurozone finance ministers meet for the first time since Brussels rejected Rome's 2019 budget.

It doesn't help that Rome, who already stretched beneath a huge debt of 2,300 billion (131% of its GDP), has seen the rating of its debt downgraded by Moody's, while Standard & Poor's lowered its outlook, from stable to negative.

The much watched "spread" - the gap between German and Italian bond yields - has grown to around 300 basis points, up from around 130 in the first quarter of 2018.