Italian budget concession to Brussels overshadowed by jibe from coalition leader

Market fears were quelled by pledge to reduce budget deficits.

Italian Interior Minister Matteo Salvini attends a 'question time' in the Chamber of Deputies in Rome. EPA

Taking aim at Europe’s “wobbly” leadership, Italy’s deputy prime minister warned on Wednesday that Brussels was seeking to bring his country to its knees after a market sell-off over Rome’s plans to lift government spending.

Matteo Salvini, interior minister and leader of the anti-EU League party, was defiant in the face of EU pressure for the country to keep to previous spending limits, making a deeply personal attack on the president of the European Commission Jean Claude Juncker.

“There is someone who is aiming to see Italy on its knees in order to buy its industries” Mr Salvini said. “They [want to] come to Italy and buy for cheap what out grandfathers have built with their efforts.”

While the anger from the populist leader was raw, the government announced it would trim its plans. Giovanni Tria, the economy minister, said the budget deficit would grow to 2.4 per cent in 2019 but would gradually taper down in the following two years in compliance to EU demands.

The tensions between Rome and Brussels revolve around a draft budget that is scheduled to be handed to the European Commission later this month.

Brussels warned that the Italian plan risks compromising the EU’s economic stability pact and asked the country to reconsider.

Mr Tria effectively renounced its proposal of running a deficit of 2.4 per cent for next three years. "In 2019 there will be a deviation from targets agreed with the European Commission by the previous government [but] then there will be a gradual reduction in the deficit in the following years," he said.

While the euro rose from six-week lows on Wednesday, Italian bonds remained under pressure despite Mr Tria’s pledges to cut the deficit faster than expected. Worries about increased spending had pushed the euro down in the past few weeks as Italian bond yields spiked in the past four days.

For both Rome and Brussels the spat could be far from over. Mr Salvini has drawn a personal feud with Mr Juncker into the open. Both men have very different personalities and views of Europe’s future.

“This man is someone who governs 500 Europeans, he comes from a fiscal paradise like Luxembourg – and the fact that the Italian people should be dependent on the whims of a guy who was a minister in Luxembourg seems very odd to me,” Mr Salvini said.

He then brought up claims that Mr Junker has an alcohol problem, saying that “if anyone googles ‘Juncker sober or staggering’ will find very explicit images, impressive even”.

Meanwhile Brussel remains concerned that Italy’s estimates of how to contain its spending may also be too optimistic. The headline deficit of 2.4 per cent was calculate by the economy ministry on the basis of an estimated economic growth of 1.6 for 2019. However, Italy grew at a rate of 1 per cent in the first half of 2018.

If Italy’s economic growth will settle at 1.1 per cent – as estimated by the European Commission –the deficit level could reach 3 per cent, in breach of EU rules.

Italian president Sergio Mattarella said over the weekend that the country must adopt a balanced spending plan. While he has the constitutional power to reject the finance bill, it is not clear he would use this authority and risk plunging the country into a crisis.

Once the draft budget is submitted in mid-October, the European Commission will have one week to request consultations with Rome if it fears the plan violates EU rule and two weeks to adopt a “negative opinion” and rejecting the draft. The commission has never rejected a draft national budget.