EU hands Italy unprecedented budget rebuke for breaching rules

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The EU's executive wants the Italian government to produce a new budget proposal, ratcheting up a dispute with the country. The tangle contributed to a selloff in global equities.

Over the weekend Mr Salvini said he would continue to push for the "people's budget" despite looming threats from credit rating agencies like Moody's which downgraded Italian credit to Baa3 status on Friday. Both sides have been fighting over the budget for weeks, but EU Commissioner Pierre Moscovici said over the weekend he wants to avoid a major conflict with the eurozone's third-biggest economy. This could lead to fines of 0.2 per cent of its GDP, or 3.4 billion euros, based on 2017 figures.

The eurozone's bailout fund director, Klaus Regling, said shortly before the announcement there was no need to panic over Italy's high-spending plans.

Italy's government says it will stick to a deficit of 2.4 percent of annual economic output next year, which would be triple the amount forecast by the previous government and approach the European Union limit of 3.0 percent.

But it says there are concerns about the budget's impact on Italy's people.

Rome will now have to send a new draft budget that would cut the structural deficit, which excludes one-offs and business cycle swings, by 0.6 percent of GDP, rather than increase it by 0.8 points as in the current plan, the Commission said. That's why we won't disappoint you.

The proposed budget would also aggravate Italy's already huge debt mountain, at some 130 percent of gross domestic product (GDP), way above the EU's 60-per cent ceiling and second only to Greece's in Europe.

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Dombrovskis said a year ago Italy's debt represented an average burden of 37,000 euros per inhabitant and the country spent about the same amount to service its debt as it did on education. We know that if we give up, the pro-bank and pro-austerity "experts' will return", he wrote. And the increased spending mean Italy would not reduce its debt as it had promised.

Luigi Di Maio, one of Italy's two deputy prime ministers, responded to the rejection by calling for "respect" for Italians.

Italy immediately replied that it would stick to its plans and that the EU Commission had no right to meddle.

But both populist leaders also have something to gain with their voter base by leveraging a confrontation with the European Union, which has been seen as the bogeyman requiring austerity cuts in recent years.

Markets were quick to punish Italy over the dispute, with the government's cost of borrowing on worldwide bond markets rising and the Milan stock market falling 1 percent.

"It doesn't surprise me: it's the first Italian move that has been decided in Rome and not in Brussels!"

Eni, which is 30-percent government-owned, said in a statement that the action was taken despite "favorable prospects for the company and the expectation of strong credit metrics".

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