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Italy says won't change deficit goal despite EU 'threats'

ROME (Reuters) - Italy dug in its heels on Tuesday over its budget deficit despite pressure from authorities in Brussels and its EU partners, as Deputy Prime Minister Luigi Di Maio backed the uncompromising line of his coalition ally.

FILE PHOTO: Italian Deputy PM Luigi Di Maio speaking during a news conference in Cairo, Egypt August 29, 2018. REUTERS/Mohamed Abd El Ghany/File Photo

The government, in a tripling of its predecessor’s target, last week set out a deficit goal of 2.4 percent of gross domestic product for the next three years, unnerving markets and prompting criticism and calls to reconsider from European Commission officials.

“We are not turning back from that 2.4 percent target, that has to be clear ... We will not backtrack by a millimetre,” Di Maio said in radio interview.

While a headline deficit of 2.4 percent would be within the 3 percent European Union limit, under its current draft Italy’s structural - or underlying - deficit would rise along with the headline figure, which runs contrary to EU rules.

The Commission is also concerned that the budget will push up Italy’s mammoth public debt pile, proportionally the second highest in the EU after Greece’s. The government says the debt-to-GDP ratio will fall thanks to stronger economic growth spurred by the expansionary budget.

In Luxembourg, Commission Vice President for the euro Valdis Dombrovskis said it hoped Italy would bring the budget draft into line with EU rules and was open to dialogue.

In other remarks, Di Maio, who leads the anti-establishment 5-Star Movement, said there was “no doubt” the leaders of France and Germany wanted the Italian government to fall.

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Late on Monday Italy’s other deputy Prime Minister Matteo Salvini, leader of the right-wing League, hit back at Commission President Jean-Claude Juncker who had said the EU must be “strict” with Italy to avoid putting the euro project at risk.

“No-one in Italy is taken in by Juncker’s threats,” Salvini said in a statement. He said the government’s priority was to respond to the basic needs of its citizens and the criticism of its budget “will not stop us.”

The government’s task is made harder by a sell-off of Italian bonds which accelerated on Tuesday, when eurosceptic League lawmaker Claudio Borghi said the country’s economic situation would be easier if it were outside the euro zone.

Borghi is not a minister and did not suggest the government planned to leave the euro, but nonetheless his comments sent the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4 percent, while shares in Italian banks plunged.

Di Maio later reiterated the government’s official line that it has no intention of leaving either the euro zone or the EU.

He blamed EU officials for stoking market tensions over Italy’s budget and said the government’s adversaries were hoping to use financial markets to weaken the ruling coalition.

Those attempts would fail, Di Maio said, because the coalition of 5-Star and the right-wing League that took office in June was totally united.

Economy Minister Giovanni Tria left a gathering of EU finance ministers in Luxembourg late on Monday to return to Rome in order to put the finishing touches on the government’s budget plan, which has still not been published.

additional reporting by Giselda Vagnoni, Editing by John Stonestreet