Italy strikes budget deal with European Commission

‘It allows us to avoid an excessive deficit procedure at this stage’ said commission vice-president Valdis Dombrovskis

The Italian government has reached a deal with the European Commission over its budget deficit, ending a stand-off that upset bond markets and threatened to reopen the wider eurozone crisis.

The administration in Rome, made up of the populist Five Star Movement and the far-right League party, had originally said it would let its budget deficit rise to 2.4 per cent of GDP in 2019, from 1.5 per cent this year, breaking pan-European Union rules that state structural deficits must fall steadily, especially in countries with high debt stocks.

The extra borrowing was set to fund a “basic citizens’ income”, a lower retirement age and tax cuts.

But Rome has now agreed to target a headline deficit for next year of 2.04 per cent instead, meaning the underlying structural deficit will be unchanged.

“The solution on the table is not ideal. It does not yet deliver a long-term solution to Italy’s economic problems. But it allows us to avoid an excessive deficit procedure at this stage,” said the vice-president of the European Commission Valdis Dombrovskis at a news conference in Brussels on Wednesday.

But he added that the decision could be overturned and fines could be levied on Rome in January if the government does not deliver on its side of the agreement.

The citizens’ income and the rolling back of pension reforms have only been delayed, rather than scrapped as policy goals.

The leader of the League and deputy prime minister, Matteo Salvini, had previously pledged that the government would not change “a comma of the budget” but pressure from the financial markets and the hardline from Brussels seems to have caused them to rethink.

“To have avoided the infringement procedure is a victory of common sense for the good of Italian citizens,” he said on Wednesday.

“The agreement reached today shows unambiguously that the European Commission is not the enemy of the Italian people,” said the economic commissioner Pierre Moscovici.

“We are not a machine made up of insensitive bureaucrats, imposing austerity and denying democracy. I hope that today we can move beyond such caricatures. I hope that today we can also put to rest any doubts over Italy’s place in Europe.”

Italian 10-year bond yields spiked to 3.7 per cent in October, the highest since 2014, after the Italian government said it would allow its deficit to rise, threatening to push the government in Rome into another fiscal crisis.

They have since retreated to 2.7 per cent, as markets reacted to signals of a likely compromise between the populists and the commission.

At the height of the eurozone crisis in 2011, when it looked like the single currency area could break apart, Italian 10-year yields were above 7 per cent.

The Italian stock market was up 1.94 per cent on the day on Wednesday lunchtime in response to the deal, with bank stocks 3.6 per cent higher.