October 6, 2018 / 4:17 PM / 11 days ago

UPDATE 1-EU concerned by Italy's budget gaps for next 3 years, Italy defiant

(Adds Italian reaction)

By Jan Strupczewski and Agnieszka Flak

BRUSSELS/MILAN, Oct 6 (Reuters) - The European Commission has told Italy it is concerned at its budget deficit plans for the next three years since they breach what the EU asked the country to do in July, but Rome insisted on Saturday it would “not retreat” from its spending plans.

In a letter to Italy’s Economy Minister Giovanni Tria, the Commission said that with a planned headline deficit of 2.4 percent of GDP in 2019, Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8 percent of GDP.

The council of EU ministers, however, asked Italy in July to reduce that structural deficit by 0.6 percent of GDP next year, which means the deficit would be 1.4 points off track.

Italy is planning to bring down the headline deficit to 2.1 percent in 2020 and to 1.8 percent in 2021, but that would not be enough either, the Commission letter said, because it would mean Italy’s structural deficit would not change in 2020-21.

Under EU rules Italy, which has a public debt to GDP ratio of 133 percent and the highest debt servicing costs in Europe, should cut the structural deficit every year until balance.

“Against this background, Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path recommended by the Council. This is therefore a source of serious concern,” the Commission letter said.

“We call on the Italian authorities to ensure that the Draft Budgetary Plan will be in compliance with the common fiscal rules,” it said.

“MANY WRONGS”

Italy is to submit its draft budget to the Commission for checks if it is in line with EU rules by Oct 15.

“It needs to be clear that we are not going to go back because as far as I’m concerned, these measures are not meant to challenge Brussels or the markets, but they need to compensate the Italian people for many wrongs,” Deputy Prime Minister and 5-Star leader Luigi Di Maio told journalists at an event in Rome.

“There is no plan B because we will not retreat. We will explain the reasons for these measures ... but we are not going back,” he said.

If the Commission decides the draft budget blatantly breaks the rules it can send it back to Rome to be revised, something that has never happened before.

While institutional pressure from the Commission and other euro zone governments might prove insufficient for Italy to change the draft, Rome is paying attention to how financial markets react. Yields of Italian bonds have risen to 4.5 year highs last week on the planned higher borrowing.

“What counts for us today is the judgement of the markets. And we can only convince them if our GDP growth is realistic and if we push to invest,” Deputy Economy Minister Massimo Garavaglia told La Stampa daily in an interview. (Reporting by Jan Strupczewski, Editing by Alexander Smith, William Maclean)

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