EU rejects Italy’s budget plan for 2019, sending bond yields higher

  • Rome has said it plans to incurs a budget deficit of 2.4 percent of GDP in 2019.
  • The European Commission has told Italy that it must make revisions to its draft budget proposal.
  • Italian bond yields have risen while Milan-listed stocks have sold off.

 

The European Commission, the EU’s executive arm, has told lawmakers in Italy that it must make revisions to its draft budget proposal.

  • Rancour between Rome and Brussels has grown in recent weeksafter a draft Italian budget for 2019 proposed a deficit equal to 2.4 percent of the country’s annual output. A previous Italian administration had promised a deficit goal of just 0.8 percent of GDP (gross domestic product).
  • In a press statement in Strasbourg, the European Commission Vice-President for the Euro and Social Dialogue Valdis Dombrovskis said there was no alternative than to reject Italy’s current proposal, before adding that Italy now had three weeks to come up with another plan.
  • “Unfortunately the clarifications were not convincing to change our earlier conclusions of particularly serious non-compliance,” said Dombrovskis before adding: “The Italian government is consciously and openly going against commitments made.”
  • The commissioner also said that Italy risked becoming trapped by debt and claimed that in 2017, Italy spent the same servicing its debt pile as it did on education.
  • “Breaking rules can appear tempting at a first look, it can provide an illusion of breaking free. It is tempting to cure debt with more debt, but at some point the debt weighs too heavy,” he added.

It is the first time that the European Commission has effectively rejected a draft budget proposal by a member country.

Italian bond yields rose in anticipation of the decision and the 10-year yield accelerated to a session high, after the announcement was made official. Bond yields move inversely to prices. Stocks listed on the FTSE MIB in Milan also sold off.

  • There are fears in Brussels that Italy’s fiscal plan will derail the reduction of the country’s debt pile — which is the second largest in the euro zone, totaling 2.3 trillion euros ($2.6 trillion). Within Europe, countries are expected to not run an annual deficit greater than 3 percent of GDP. However, in Italy’s case its debts have led to Brussels requesting that Rome work toward balancing its books.
  • The country’s populist and partly right-wing coalition want the fiscal blow out in order to make good on pre-election spending pledges.
  • Last week the European Commission sent a letter to the Italian finance minister, Giovanni Tria, warning him that the 2019 budget draft seemed to point to a “particularly serious non-compliance with the budgetary policy obligations laid down” in European rules.

In a response Monday, Tria replied that while he recognized the budget plan was not in line with Europe’s Growth and Stability Pact rules, Rome planned to stick to the proposal.

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