Italy lowered its deficit target in 2019 in an attempt to avoid sanctions by the EC

The Italian populist government has lowered its budget deficit target in 2019 in an attempt to comply with EU requirements and avoid sanctions. Now the shortage expected for the year should be 2.04% of the GDP, while the draft budget for April foresaw 2.4%.

Meanwhile, Italian government securities continue their rally for the fifth consecutive day. The yields on 10-year bonds declined to 1.895% – the lowest level of nearly a year, while the spread against the German benchmark reached 224 points.

The Italian finance ministry announced that following a ministerial meeting on Monday it was agreed that the deficit would fall by 7.6 billion EUR this year thanks to higher revenues and lower costs. This includes the previously set 1.5 billion EUR for social programs for which demand is lower than expected.

This means that the Italian structural deficit – a measure eliminating the temporary measures and effects that the EU uses to assess a country’s fiscal discipline – will improve by 0.3 percentage points in 2019 compared to the previous estimates of deterioration with 0.2 percentage points.

The authorities in Rome are facing the risk of a multi-billion-dollar EU fine in a debt-breaching procedure. But Prime Minister Giuseppe Conte’s government wants to use the lower deficit for the year as a gesture of goodwill for the committee, but it is yet to be evaluated. The European Commission is expected to meet later this week to decide whether to initiate the legal proceedings against Italy.

The budget maneuver has led to the widespread perception in the government that the EC will still not take action against Rome.

The 2020 deficit will be in line with previous targets – 2.1% of the gross domestic product (GDP).

The EC had to meet on the Italian issue on Tuesday, but the meeting was canceled after the leaders of the member states could not agree on who should take the leadership positions in the bloc and continue the debate.