EU reaches deal over Italy budget; Italian bond yields
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[December 19, 2018]
By Jan Strupczewski and Francesco Guarascio
BRUSSELS (Reuters) - The European
Commission has reached a deal with Italy over the country's 2019 budget
that avoids immediate EU disciplinary steps against Rome, Commission
Vice President Valdis Dombrovskis said on Wednesday, sending Italian
bond yields sharply lower.
His announcement signaled a breakthrough in a market-shaking clash
between Italy and Brussels, whose fiscal rules are designed to protect
the euro zone from a debt crisis. The row has worried investors, pushed
up Italy's borrowing costs and depressed bank stocks.
Under the compromise, Italy has lowered its headline deficit for next
year to 2.04 percent of gross domestic product from its originally
planned 2.4 percent. It has also cut its economic growth forecast for
2019 to 1.0 percent from 1.5 percent.
On the more important structural gap, which excludes one-off items and
business cycle swings, it reached what Dombrovskis called a "borderline"
compromise with the Commission.
Under recommendations from EU finance ministers in July, Rome was
supposed to reduce the structural deficit by 0.6 percent of GDP next
year, but instead made plans to increase it by 1.2 percent, according to
the Commission.
Under the compromise reached, the structural deficit will not change in
2019 from 2018 levels, although the Commission wanted at least a 0.1
percent reduction.
The Commission expects the structural deficit to be 1.8 percent of GDP
in 2018, the same as in 2017. Italy itself says it will be 1.6 pct of
GDP.
"The solution on the table is not ideal. It does not yet deliver a
long-term solution to Italy's economic problems. But it allows us to
avoid an excessive deficit procedure at this stage," Dombrovskis told a
news conference.
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European commission Vice President Valdis Dombrovskis at a news
conference with Greek Finance Minister Euclid Tsakalotos (not
pictured) in Athens, Greece, June 15, 2018. REUTERS/Costas Baltas/File
Photo
Italian benchmark 10 year bond yields fell sharply on the news to 2.79 percent
at 1214 GMT. from 2.833 before the announcement.
Dombrovskis said the Commission would monitor closely whether Italy voted
through the changed budget draft, as agreed with the EU. If parliament changed
the deal again, the Commission was ready to resume the disciplinary steps
against Rome, which could eventually mean fines.
EU Economic and Monetary Affairs Commissioner Pierre Moscovici told the news
conference the Commission would also hold budget discussions with France, which
wants to increase spending next year to deliver on President Emmanuel Macron's
promises in the wake of street protests.
Moscovici said EU fiscal rules would be applied equally to all countries,
including France.
(Reporting by Jan Strupczewski and Francesco Guarascio; editing by Andrew Roche)
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