Far-right deputy PM defiant despite threat of sanctions of up to 0.7% of GDP

This article is more than 1 year old

This article is more than 1 year old

Italy’s deputy prime minister Matteo Salvini has said he is prepared to confront EU leaders after the European commission rejected his country’s draft 2019 budget for a second time, while calling on them to “respect the Italian people”.

Italy is facing sanctions after the commission said in a report that the government of the far-right League and anti-establishment Five Star Movement had seriously violated fiscal rules.

Both parties’ leaders have refused to succumb to pressure to change their deficit target of 2.4% of GDP as they endeavour to push through campaign promises, such as introducing a universal basic income, cutting taxes and lowering the retirement age.

Italy has about €2.3tn (£2tn) of public debt and the Bank of Italy warned this month that the cost of servicing the debt could rise to €5bn in 2019 and €9bn in 2020.

The government is convinced that the budget would help the Italian economy grow by 1.5% over the next year.

However, the economy stagnated in the third quarter. On Wednesday Italy’s national statistics agency, Istat, revised down its growth forecast for the year to 1.1%; in May it predicted 1.4% for 2018.

Salvini, who leads the League, responded sarcastically to news of the commission’s report. “A letter from the EU? I’m also waiting for one from Father Christmas,” he told reporters.

Referring to the commission president and economics commissioner, Salvini said he was ready to “confront [Jean-Claude] Juncker, [Pierre] Moscovici or whoever” over a budget he said responded to the needs of Italians.

It is widely suspected that Salvini is exploiting the standoff to whip up anti-EU anger before May’s European parliamentary elections.

The markets took the news in their stride. The yield gap, or effective interest rate, on 10-year Italian government bonds fell to 309 basis points above German debt within a few hours of the announcement.

Wolfango Piccoli, the co-president of the research firm Teneo Intelligence,, said in a note that the Italian government was unlikely to adopt meaningful changes to the budget, which must be approved in parliament by the end of the year.

Unless a compromise is reached, Italy could face an initial fine of 0.2% of GDP, which would add a further €8bn to its financial woes. The penalty could rise to 0.7% if it still refuses to comply.

But Piccoli warned that the wrangling could rumble on well into next year, saying: “Given the complexity of the overall procedure and the fact that political considerations might prevail ahead of the May 2019 European elections, Italy is not expected to face sanctions until late spring at the earliest, if they materialise at all.”