June 19, 2019 / 11:35 AM / in a month

Italy says will respect EU budget rules but fight to change them

ROME (Reuters) - Italy will respect European Union fiscal rules but will fight to change them to allow more public investment and stronger growth, Prime Minister Giuseppe Conte said on Wednesday, as Rome struggles to avoid EU action over its rising debt.

The European Commission has threatened Italy with a procedure that would entail closer oversight of its fiscal policy and could eventually lead to fines.

The Commission, the EU’s executive, complains Rome did not cut its public debt in 2018 as promised and sees it continuing to increase this year and next unless the anti-austerity government adopts belt-tightening measures.

“We are determined to avoid an EU infringement procedure and we are convinced about our economic policies,” Conte told the Chamber of Deputies ahead of an EU summit beginning on Thursday.

“Italy intends to respect EU rules,” he said, but added that they need to be revised to ensure a better “balance between stability and growth and (between) the reduction of risks and the sharing of risks”.

At some 132% of gross domestic product, Italy’s debt is proportionally the highest in the euro zone after Greece’s.

Conte said the government backed a resolution tabled by the ruling coalition of the right-wing League and the anti-establishment 5-Star Movement calling on it to seek specific changes to the bloc’s rules on members’ fiscal deficits.

The resolution, which passed in the lower house by 287 votes to 188, calls for “the exclusion of productive investments, including those in human capital” from deficit calculations, and “the revision of reference to the structural balance”.

The so-called structural balance attempts to strip out the effect of economic growth fluctuations on countries’ budgets.

However, it is a complicated calculation which uses countries’ past growth performances to determine their potential, or non-inflationary, growth rate, and has been criticized by many economists.

The coalition’s resolution said it was “internationally recognized” that reliance on structural deficit calculations leads to pro-cyclical policies, meaning that countries are forced to tighten fiscal policy when growth is already weakening.

Previous Italian governments have called for investments to be stripped from deficit calculations, but the change has always been rejected by northern European countries unwilling to amend the rules at the behest of high-debt Italy.

While Conte used moderate tones in parliament, League leader Matteo Salvini was more aggressive.

“Maybe someone in Europe is afraid of Italy growing more,” he said on Facebook. “Some European norms and constraints were deliberately drawn up to help Berlin and Paris and cheat all the others,” he added, without giving details.

Conte, a former academic close to 5-Star, is expected to use the June 20-21 EU summit in Brussels to plead with outgoing Commission President Jean-Claude Juncker and EU leaders to scrap or postpone the disciplinary procedure against Italy.

If no compromise is found, the Commission could recommend the procedure be opened at a meeting on June 26, officials say. EU states would then have to agree whether to formally launch it at their last meeting before the summer break on July 8-9.

Writing by Gavin Jones; Editing by Catherine Evans

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