Economy

EU and Italy strike crucial budget agreement

Breakthrough comes after two-month stand-off with populist Italian government

European commission vice-president Valdis Dombrovskis said Italy urgently needed to restore investor confidence. Photograph: Reuters

Wed Dec 19 2018 - 12:02

Rome and Brussels have ended their long-running feud over Italy’s 2019 budget, striking a deal on spending plans that had rattled investors and stoked tensions between the country’s populist government and the rest of the EU.

Valdis Dombrovskis, the EU commission vice-president responsible for the euro, said the agreement that had been reached would lead to a budget deficit next year of 2.04 per cent of gross domestic product, compared with 2.4 per cent in Rome's original plans.

He said the European Commission’s hope is that the budget will be “the basis for balanced budgetary and economic policies in Italy”. The country “urgently needs to restore confidence in its economy to ease financial conditions and support investment,” he said.

The breakthrough came after a two-month stand-off over budget plans, which Italy’s populist government insisted were essential to reviving the country’s flagging economy but the commission warned would simply add to its mountainous debt pile while smashing euro area fiscal rules.

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Brussels made clear that, despite Wednesday’s deal, it still had underlying concerns about the state of Italy’s finances.

“Let’s be clear: the solution is not ideal,” Mr Dombrovskis said, citing the rolling back of planned pension reforms as one source of anxiety.

The deal is the result of days of intensive talks between Italy and the commission, with Rome having decided to seek a negotiated solution despite previously warning it would never sacrifice the spending plans.

Matteo Salvini, deputy prime minister and leader of the far-right League, said in October that Italy would not change "a comma of the budget."

Sleepwalking

Brussels had warned that Italy’s original plans risked the country “sleepwalking into instability.”

The plans included the introduction of a basic citizens income – a policy dear to deputy prime minister Luigi Di Maio and his Five Star Movement – as well as tax cuts favoured by Mr Salvini.

Until several days ago, the commission had pencilled in December 19th as the day it would announce an “excessive deficit procedure” against Italy for breaching fiscal limits - a process that would have seen the country handed deadlines to mend its finances or face fines if it refused to comply.

Mr Dombrovskis said an EDP was no longer needed “at this stage” and that Brussels would monitor the commitments Rome had given. – Copyright The Financial Times Limited 2018

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