Renzi indicates Italian budget cuts of up to €2bn

Italian premier Matteo Renzi signalled willingness at the European summit to introduce new spending cutbacks ahead of talks today in which EU leaders will attempt to plot a course to revive the struggling euro zone economy.

Italy and France are each at risk of their budgets being rejected by the European Commission but Mr Renzi indicated yesterday he might adopt another €1 billion or €2 billion in cuts to ensure the plan receives the body’s blessing.

Although European leaders are under mounting pressure to boost the stagnant economy, German chancellor Angela Merkel maintained her resistance to deficit spending to stimulate growth.

After a renewed bout of market turmoil last week the divergent positions suggest the EU authorities are far from a consensus on the matter. With bank stress test results due on Sunday before the European Central Bank assumes responsibility for bank regulation, they will receive a briefing today on the situation in the euro zone from ECB chief Mario Draghi.

Fiscal policy

Mr Renzi’s manoeuvre comes as he campaigns for a change in Europe’s fiscal policy to promote growth: “We’ve put forward a big package to reduce taxes, and since Europe has asked us several times to reduce taxes, now that we’ve done it, it certainly won’t be a small discussion about decimals and commas that will derail our course of change.”

There was no sign of any budgetary change from French president François Hollande, who insisted he would not be swayed from his objective of boosting jobs and growth.

Under new fiscal rules the commission has the right to demand amendments to a budget if it deems binding fiscal targets will not be met. The commission has never previously invoked these powers since the fiscal rulebook was strengthened at the height of the sovereign debt crisis.

“We will respect the rules with the maximum of flexibility and that is valid also for the growth objective that we will bring tomorrow during the European Council,” Mr Hollande said.

Lessons from past

Dr Merkel insisted higher deficits did not help growth.

“I think it’s about bringing both together, growth and budgetary consolidation,” she said at the summit’s start. “We have had times in Europe with very high deficits and yet no growth, so we must learn from the past and I hope we will find a common solution.”

The chancellor has backed plans for a €300 billion investment plan from incoming commission chief Jean-Claude Juncker but wants no dilution of the fiscal rulebook.

“I support that Jean-Claude Juncker has proposed an investment programme as well as supporting that the rules of the stability and growth pact must be credibly observed.”

Although EU leaders will not push to adopt the investment plan until December, Dr Merkel has also argued that much of the €300 billion would have to be raised from private sources.