Italy lowers deficit target, EU sees progress on budget row

BRUSSELS/ROME (Reuters) - The Italian government has offered to lower its deficit target for next year, Prime Minister Giuseppe Conte said on Wednesday, with the European Commission declaring that good progress has been made in a dispute over the country’s budget.

Conte flew to Brussels to try to head off disciplinary measures over his government’s expansionary draft budget, which originally targeted a headline deficit of 2.4 percent of gross domestic product - a level the Commission rejected as too high.

Under pressure from financial markets, Conte proposed reducing the deficit target to 2.04 percent of GDP.

“In its first evaluation, the Commission judged (the proposal) as significant,” Conte told reporters after meeting Commission President Jean-Claude Juncker, adding that he expected a “positive” response from Brussels.

“Good progress has been made,” a spokeswoman for the Commission said after the meeting.

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“The European Commission will now assess the proposals received this afternoon, work will continue in the coming days,” she added, declining to comment on whether the disciplinary procedure could now be avoided.

Finance Minister Giovanni Tria will continue talks with the Commission on Thursday in Brussels, his spokeswoman said.

A disciplinary procedure would keep Italy under prolonged market pressure and could lead to financial sanctions.

Italy is required to reduce its structural deficit, which excludes one-off expenses, by 0.6 percent of GDP next year, but the government had planned to increase it.

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Under EU fiscal rules, Brussels could accept a structural deficit cut of just 0.1 percent, which EU officials and experts had estimated as equivalent to a headline deficit of no more than 1.7 percent.

One-off emergency expenses on infrastructures and on preventing natural disasters, worth 0.2 percent of GDP, could be added to the headline deficit without breaching EU rules.

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Conte did not detail how the deficit will be cut, but added that the government will sell more state assets than initially planned. He also expressed confidence that the economy will grow more than expected.

But planned higher expenses on pensions and welfare handouts will not be changed, Conte said.

Earlier in the day Italian government bond yields tumbled and the euro jumped on the prospect of Rome proposing a 2 percent of GDP deficit target.

Matteo Salvini, a deputy prime minister, said earlier on Wednesday he was confident a solution could be found. France was now in a similar budget position to Italy, added Salvini, who leads the League, one of the two parties in the coalition government.

French President Emmanuel Macron announced on Monday wage rises for the poorest workers and tax cuts for pensioners in response to weeks of public unrest - concessions that risk pushing France’s 2019 deficit through the EU’s 3 percent ceiling.

“I trust in good sense, and I refuse to imagine that Macron’s multi-billion-euro requests will be shunned while Italy’s will be closely scrutinised,” Salvini told journalists during an official visit to Israel.

But European economic affairs commissioner Pierre Moscovici said Italy had violated EU budget criteria for years and that the French and Italian budget situations were not comparable.

Additional reporting by Angelo Amante, Steve Scherer and Giselda Vagnoni in Rome, Hans Seidenstuecker in Frankfurt, writing by Giulia Segreti, Giselda Vagnoni and Francesco Guarascio, editing by Mark Heinrich and David Stamp