October 17, 2018 / 5:01 PM / a month ago

EU right to criticise Italy's budget - ECB's Weidmann

FRANKFURT, Oct 17 (Reuters) - The European Commission is right to be critical of Italy’s budget proposal, Bundesbank President Jens Weidmann said on Wednesday, adding that Rome must obey its fiscal commitments.

Taking the unusual step of commenting on another euro zone member’s domestic politics, Weidmann argued that monetary policy normalisation will place an increasing burden on highly indebted countries so there is no place for leniency with Rome.

Italy is locked in a showdown with Brussels over its plans to raise its deficit to 2.4 percent of its economic output, breaching the EU’s requirement for it to cut the fiscal shortfall.

With a debt burden equivalent to 130 percent of its GDP, Italy is one of Europe’s most indebted countries. Some investors fear that any big selloff in Italian assets could also spread to other weaker members of the euro zone, potentially derailing the bloc’s recovery.

“As part of the necessary monetary policy normalization, interest rates will rise again and that will place a heavy burden on highly indebted countries,” Weidmann, often mentioned as a potential candidate to replace ECB President Mario Draghi, said in Berlin.

“The European Commission has therefore rightly made a very critical comment on Italy’s recent budget plans and the breach of the rules,” said Weidmann, who sits on the European Central Bank’s Governing Council.

A previous critic of Italian fiscal prudence, Weidmann has been involved in public spats with Italy’s government in the past. In 2016, Italian Prime Minister Matteo Renzi told Weidmann to fix Germany’s banks before criticising Rome.

This open hostility has led some in Italy to question Weidmann’s qualifications to succeed Draghi, and his diplomatic skills are seen as a disadvantage in the race for the top ECB job, which comes up at the end of next year.

“With this (deficit increase), the structural balance would deteriorate noticeably, and the very high level of debt would at best decrease only slightly,” Weidmann said.

He added that concerns over the budget are pushing up the premium investors demand for holding Italian debt, which restricts the country’s scope for more spending as debt service costs rise.

Earlier on Wednesday, EU budget commissioner Guenther Oettinger said that in his “personal” opinion, the EU was very likely to ask Italy to correct the draft budget. (Reporting by Balazs Koranyi; Editing by Hugh Lawson)

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