Bonds News

Euro zone worried by Italy 2019 budget, expects changes

LUXEMBOURG, Oct 1 (Reuters) - Top euro zone officials expressed concern on Monday over Italy’s 2019 draft budget that could increase the country’s debt, and signalled they expected changes in the coming weeks.

Italy’s eurosceptic government proposed on Thursday a budget that increases the deficit to 2.4 percent of the Gross Domestic Product (GDP) next year, tripling it in comparison with the plans of its predecessors.

European Commission Vice President for the euro Valdis Dombrovskis said on entering a meeting of euro zone finance ministers that Italy’s draft budget was clearly breaking EU rules, while Dutch Finance Minister Wopke Hoekstra said the draft was “not reassuring”.

Under EU law Italy should reduce its public debt rather than increase borrowing. Rome has a debt of 133 percent of GDP, the second highest in the euro zone as a share of economic output after bailed-out Greece. Markets reacted to the budget plans by selling Italian debt.

Italy has to formally submit its draft 2019 budget to the Commission for scrutiny by Oct 15. The Commission would have up to a week to announce if it has found the budget in clear breach of EU rules, and another week after that to demand a new draft.

Such a rejection has never taken place since the Commission was granted the power to vet draft budgets in 2013.

The EU executive has dealt in previous years with budgets breaking EU rules from France, Spain, Portugal and Italy itself. It has always opted to enter some form of negotiation with the government concerned, branding the draft as “at risk of non-compliance” or “at serious risk of non-compliance”.

But officials indicated it might be different now.

“Never were rules broken so bluntly, without the slightest grain of elegance,” one senior official said.

Yet, Hoekstra noted the drafting of the 2019 budget was not over and things could still change in coming weeks, especially until Rome submits the draft to the Commission on Oct 15.

European Commission Economic and Monetary Affairs Commissioner Pierre Moscovici said that while rules had to be respected, he was keen to maintain dialogue with Rome -- code for negotiations that would be face-saving for both sides.

The chairman of euro zone finance ministers Mario Centeno expressed a similar view.

“We know that there are still negotiations going on in Rome, and we have to wait for that to happen and have our answers at the end of the process,” Centeno told reporters on arrival.

The higher spending that Itay seeks is meant to finance the campaign promises of the ruling parties - the anti-establishment 5-Star Movement and right-wing League - to lower the retirement age, cut taxes, invest in infrastructure and boost welfare.

French Finance Minister Bruno Le Maire said Italy’s euro zone peers would be gradually applying pressure on Rome.

“I think we have to go step by step,” he told reporters before the meeting. He said respecting EU rules was even more important now that the European Union was facing a serious threat from rising “populist and nationalist movements”.

“What is a stake now is clearly the future of Europe,” he said, urging euro zone states to respect common rules and to quickly agree on a reform of the euro zone, because the bloc was not fit to face a new major financial crisis. (Reporting by Jan Strupczewski Editing by Peter Graff)