EU rejects Italy's budget in bloc first

Rome vows to stick to spending plan to jump-start growth after malaise

BRUSSELS - The European Union set up a high-stakes battle with Italy, one of the bloc's biggest economies, over who has final control over a member state's budget after the executive Commission took the unprecedented step of ordering the country to revise its public spending plans.

In a move that escalates a monthlong standoff, the EU said the populist government's budget for next year is out of line and breaks earlier promises to lower public debt.

Italy's debt load is the second-highest in Europe, after Greece, and there are worries that losing control of spending could rekindle financial turmoil in Europe. The Italian government said the sharp increase in spending is needed to jump-start growth after years of malaise.

"We see no alternative but to request the Italian government to revise its draft budgetary plan," EU Commission Vice-President Valdis Dombrovskis said.

Italian Deputy Prime Minister Matteo Salvini was quick to warn the EU to keep its hands off. "No one will take one euro from this budget."

Tuesday's developments sent markets reeling.

The MIB-30 blue-chip index on Milan's Italian Stock Exchange fell nearly 1 percent on Tuesday even though the EU declaration came near the end of the day.

The confrontation laid bare the fundamental problem within the eurozone where 19 EU member states share the same currency, yet governments maintain autonomy over spending priorities and the EU has been reluctant to enforce spending limits.

Since the euro economy can be destabilized when one member state loses control of its finances, like Greece did a decade ago, the other nations want to have some say over excessive spending, especially when it concerns the region's third-biggest economy.

The EU Commission said it had no choice after Italy proposed a deficit of 2.4 percent of GDP for next year - three times more than what it had previously targeted. The higher deficit means Italy would not fulfill its promise to lower its debt, which is more than 130 percent of GDP and more than twice the EU limit of 60 percent.

Without a tough stance on the issue, the EU could see its credibility erode and markets could lose confidence in its ability to keep public spending in check.

The commission said: "Given the size of the Italian economy within the euro area, the choice of the government to increase the budget deficit ... creates risks of negative spillovers for the other euro area member states".

EU Financial Affairs Commissioner Pierre Moscovici highlighted how Italy's budget would hurt its own people by saddling the young with higher debt payments. The cost of servicing Italian public debt is already equal to the country's entire spending on education - 65 billion euros a year.

"Italy must continue its effort to lower its debt because it is the enemy of the economy," he said.

The EU said it had already been lenient enough with Italy in recent years, giving it $34 billion worth of wiggle room in its spending plans, as well as investment funds.

The EU's executive wants the Italian government to produce a new budget proposal within three weeks.

Italy argues the spending increase is needed to get growth going and fulfill electoral promises. The extra money will be spent on restoring pensions to as many as 400,000 people whose retirement age had been pushed back and on a basic income for some job-seekers.

AP - XINHUA - AFP