Italy digs in on spending, jolting markets and worrying EU

Italy’s leaders refused to budge from new spending plans that have been spooking investors, pushing the eurozone’s thirdlargest economy on a collision course with its EU partners.

Deputy Prime Minister Luigi Di Maio said Tuesday that the government “will not back up one millimeter” from spending that will increase the country’s deficit to 2.4 per cent of annual GDP, beyond previous commitments.

The government’s plans and subsequent clashes with EU technocrats have jolted investors, who are now charging Italy more to borrow in bond markets. On Tuesday, the yield on Italy’s 10-year bond was up 0.10 percentage point at 3.40 per cent, and that’s increased the difference between the Italian benchmark and the sturdy German benchmark to 3 percentage points, the highest level this year.

“This verbal toing and froing between Italy and Brussels is likely to keep investors a little cautious of piling back into Italian assets,” said Michael Hewson of CMC Markets.

On Monday, Economic Minister Giovanni Tria’s was warned by his counterparts in the 19-country eurozone that Italy’s plans break the rules of the single currency bloc. The EU’S economy commissioner, Pierre Moscovici, said the plans represent “a very significant deviation from the commitment which had been taken.”

That claim drew an angry response from Di Maio, who accused Moscovici of “creating terrorism with the markets.” Tria insisted the government’s plans would promote growth in Italy of 1.6 per cent next year, which would keep public finances in control.

But political analyst Wolfango Piccoli of Teneo Intelligence called the growth target optimistic, with growth trending around 1.1 per cent. Italy’s economy has been a laggard for years, with growth well below that of many other countries in the eurozone. Unemployment also remains relatively high at 9.7 per cent.

Tria skipped Tuesday’s wider meeting of the EU’S 28 finance chiefs to return to Rome to work on the budget, which must be submitted to Brussels by midoctober.

In Luxembourg, European Commission Vice-president Valdis Dombrovskis kept up the pressure on Italy on the sidelines of the finance ministers’ meeting, noting that Italy has been a chief beneficiary of rules for more flexibility.