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Italy confident Brussels will drop budget disciplinary action

ROME/BRUSSELS (Reuters) - Italian officials said on Tuesday a lower-than-expected budget deficit this year meant it complied with European Union fiscal rules and they expected the bloc’s executive Commission to drop a threat of disciplinary action over Rome’s public accounts.

Italy's Prime Minister Giuseppe Conte speaks to media as he arrives to take part in a European Union leaders summit, in Brussels, Belgium July 2, 2019. REUTERS/Piroschka Van De Wouw

Brussels is unhappy with Italy’s failure to reduce its large public debt in 2018 as promised, and has called on its anti-austerity government to bolster state finances.

The EU Commission is expected to decide on Wednesday whether to launch a procedure, which could eventually end in fines.

Rome believes it has little to fear after it unveiled new data showing the deficit will be some 7 billion euros ($7.91 billion) less than targeted in April thanks to lower-than-expected spending and higher revenues.

“We have worked hard and very seriously. It should go well,” a senior government source told Reuters, asking not to be named because negotiations were still in progress.

A Commission official told Reuters that despite the reassuring 2019 data, Brussels was still seeking a “political commitment” for 2020, when Italy’s debt and deficit are expected to rise unless the government changes its spending plans.

However, the Italian source said any EU concerns over 2020 will follow the usual procedure in which all countries’ fiscal plans are reviewed when they present budgets in October, meaning Italy is out of the woods for now.

Italy’s deficit target has bounced up and down since autumn, when the government of the anti-establishment 5-Star Movement and the right-wing League infuriated Brussels by raising it to 2.4% of gross domestic product, from 0.8% set by the previous, center-left administration.

After a drawn-out tussle in which the Commission threatened Rome with a disciplinary procedure, the sides agreed in December on a 2.04% target, which is unusual because deficits are usually only rounded to one decimal point.


After a slump in growth, the government raised the target back to 2.4% in April and the Commission again threatened action.

Prime Minister Giuseppe Conte said in Brussels on Tuesday the latest data showed the public finance trend had improved sharply and “allows us to say that we are in line with the forecast of the famous 2.04% of GDP”.

Italian government bond yields dropped to the lowest levels in at least a year on Tuesday, boosted by the lower deficit target and hopes for a detente with Brussels.

Although the pressure from Brussels appears to be easing, the Commission could still decide that a procedure against Rome should be pursued, in which case it would have to be approved by EU finance ministers at a meeting on July 8-9.

Italian officials said on Monday the deficit target for 2020 remained at 2.1%, as set in April.

That may not please the Commission because it would show no reduction from this year, in defiance of EU rules, which require steady deficit reduction toward a balanced budget.

Italy has not yet clarified how it intends to finance promised tax cuts next year, and the EU official said Brussels was waiting for more information from Rome on its 2020 fiscal plans before it could decide over disciplinary action.

However, Italian deputy economy minister Laura Castelli, from the 5-Star Movement, said the situation was improving and the government was focused on preparing next year’s budget.

“Our accounts are in order, the data is fine and revenues are flowing in,” she said in a radio interview. “People expect a lot of us and we don’t want to disappoint them.”

Additional reporting by Gavin Jones, Francesca Piscioneri and Crispian Balmer; Writing by Gavin Jones; Editing by Kevin Liffey, Larry King, Andrew Cawthorne