Italian finance minister Giovanni Tria faces European Union scrutiny on budget

Speaking to reporters in Rome, EU budget chief Pierre Moscovici said the EU Commission and many other EU nations are anxious by Italy's spending plans, which will see the country's budget deficit rise to 2.4 percent of GDP, three times higher than agreed upon by the previous government.

For context, the budget proposes increasing both Italy's overall government debt and its deficit in the short run, pushing the deficit as high as 2.4% of GDP over the coming years.

While Italy's deficit is well within the 3 per cent limit laid out in treaties, the Commission has demanded smaller gaps for Italy to bring down its debt load.

Barclays' analysts also said the European Union is likely to make a substantial effort to bring Italy in line with the Eurozone's fiscal rules in the coming weeks.

European Union leaders discussed eurozone reforms and the Italian draft budget at their summit in Brussels, with concerns on the rise over the planned budget boost by Rome's populist coalition government.

The budget drew stinging criticism from the EU's top economic affairs officials, who penned a letter to Rome describing the plans as "unprecedented" and warning that Brussels does not rule out rejecting the entire budget.

The concerns about the budget Italian, however, have pushed the rating agency Moody's to lower Friday night the rating of Italy by one notch to "Baa2" to "Baa3", the last level of investment grade.

The EU's Executive Commission, which must vet Italy's 2019 draft budget, has already warned that the nation's significantly higher deficit targets represented a deviation "unprecedented in the history" of EU budget rules. The previous government promised to keep the deficit at 0.8 percent next year.

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"Even in the near term, Moody's believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes".

However there is potential for the single currency to appreciate throughout the latter half of the week as focus turns to the European Central Bank's (ECB) latest rate decision, with investors hoping the ECB will detail its plans to wrap up its bond-buying programme by the end of 2018.

Analysts say Rome is in a good bargaining position, given the Eurozone's ongoing difficulties with Brexit.

"There is no discrimination against Italy", Moscovici said during a press conference alongside Tria.

"That makes Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth", they said in a statement.

The so-called structural deficit, a key measure for the commission, which strips out effects of the economic cycle and one-off spending items, is also off the mark.

Concerns over Rome's expansive budget plans have weighed heavily on Italian government bonds in recent weeks, with the spread between German and Italian benchmark 10-year paper hitting 5-1/2 year highs on Friday.

(Copyright © 2015. All Rights Reserved.)
 
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