October 21, 2018 / 4:27 PM / 24 days ago

Italy expects EU budget rejection on Tuesday: source

MILAN (Reuters) - The Italian government expects the European Commission to decide for the first time ever on Tuesday to ask a member state to revise its draft budget, a government source said on Sunday.

Italian Deputy PM Luigi Di Maio speaks at the 5-Star Movement party's open-air rally at Circo Massimo in Rome, Italy, October 21, 2018. REUTERS/Max Rossi

The Commission has slammed as an unprecedented breach of EU fiscal rules Italy’s 2019 budget plan, which aims to lift the deficit to 2.4 percent of domestic output next year from 1.8 percent in 2018.

Since receiving beefed-up powers in 2013 over member states’ budgetary plans, the Commission has never asked a country to submit a revised budget.

Italy’s 2.3 trillion euro ($2.65 trillion) public debt, one of the world’s largest, makes the country vulnerable and a potential source of contagion for other euro zone countries.

Investors have shed 67 billion euros in Italian bonds since a populist government formed in May, sending the risk premium Italy pays over safer German paper to a 5-1/2 year high of 3.4 percentage points.

The source said Economy Minister Giovanni Tria and Prime Minister Giuseppe Conte had unsuccessfully pushed for a reduction of the 2019 deficit target at a cabinet meeting on Saturday.

The source did not rule out an agreement to lower the deficit goal could be found during a three-week period of negotiations with Brussels that will follow the rejection.

Though the decision was expected on Tuesday, the source said it may not be announced on the same day.

Asked for comment, a Commission spokesman said that the Commission had expressed its “serious concerns” over the draft budget to the Italian authorities, seeking clarifications by noon on Monday to facilitate an assessment.

Earlier on Sunday, Deputy Prime Minister Luigi Di Maio said the government was working on the letter it would send to the Commission on Monday, adding he expected a speedy reaction.

Di Maio, who leads the ruling anti-establishment 5-Star Movement, told RAI state television he hoped the explanations Rome would provide “over a long discussion process ... could lead the Commission to share the goals we have set.”

After riding popular anger at the austerity measures Italy adopted in response to the euro zone crisis of 2011-2012, Italy’s ruling coalition, also comprising the far-right League, wants to lower the retirement age and provide a basic income for the poor.

On Friday, credit rating agency Moody’s downgraded Italy’s debt to one notch above junk status citing concerns over the government’s budget plans.

NO PLAN B

Di Maio said he hoped the Commission would take into account Italy’s strengths such as the private sector’s low debt and high household wealth, which Moody’s cited among reasons supporting a ‘stable’ outlook on the rating.

He joined other government members in efforts to dispel concerns about Italy’s euro membership.

“We understood from conversations with people from the ECB (European Central Bank) and the markets, meaning investors, that the (bond yield spread) jumped because there is a concern that this government wants to leave the euro or the European Union,” Di Maio said.

“I want to say it here, and there will be other solemn occasions to reiterate it as a government and a political party, ... there is no Plan B (to leave Europe) but only Plan A which is to change Europe,” Di Maio said.

“As long as I’m head of this movement and a minister of this government I’ll always guarantee that Italy remains within the euro and in Europe,” he added.

The ECB declined to comment on Di Maio’s remark about conversations with people from the central bank.

Slideshow (2 Images)

Di Maio said Italy had a chance to prove public debt could be reduced by “investing in social rights” and trigger important changes across Europe.

He said the 5-Star, founded by comedian Beppe Grillo, was working to present in January-February a program that brought together similar grassroots movements from other European countries with the goal to “give back a heart and humanity to European institutions.” ($1 = 0.8686 euros)

($1 = 0.8686 euros)

Additional reporting by Robin Emmott in Brussels, Editing by Adrian Croft

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