Italy defies EU budget demands

The Italian government has decided not to change its budgetary targets despite the possibility of European Commission sanctions action against it.

Deputy Prime Minister Matteo Salvini said a deficit target of 2.4 percent and a growth forecast of 1.5 percent were unchanged.

"If Brussels like our plan we're happy; if not, we press forward," said Salvini, late on Tuesday.

The Commission last month rejected Italy's plan for a big increase in the deficit and described its growth forecast for 2019 as overly optimistic. It set Tuesday as a deadline for Rome to respond to its objections.

In response to Rome's defiant stance, the Commission could launch the so-called "excessive deficit procedure" (or EDP) against Italy as early as Nov 21.

An EDP could result in strict economic demands on Italy to bring its budget deficit and national debt back in line with EU standards.

If ignored, the Commission can consider financial penalties of up to 0.5 percent of GDP — or about 9 billion euros ($10 billion) in Italy's case.

The Commission's warning to Italy, the eurozone's third-biggest economy, is an unprecedented move with regard to a European Union member state.

The International Monetary Fund said earlier that Italy's fiscal stimulus plans would leave the country vulnerable to higher interest rates that could ultimately plunge it into recession, recommending instead a "modest" fiscal consolidation to reduce financing costs.

The IMF said after an annual staff review of Italy's economic policies that any temporary, near-term growth gains from the stimulus is likely to be outweighed by the "substantial risk" of a rapid deterioration.

Italy's government, made up of the populist Five Star Movement and right-wing populist League, came to power vowing to "end poverty" with a minimum income for the unemployed, along with promises of tax cuts and scrapping extensions to the retirement age.

To fulfill its promises it trebled the previous government's deficit target of 0.8 percent of Italy's economic output.

In its letter of response to the Commission, Italy reaffirmed its commitment to maintain public finances.

Luigi Di Maio of Five Star said: "We are convinced that this is the budget that will restart the country."

Analysts suspect the defiance of Europe is part of a strategy, particularly by Salvini, to whip up anti-EU anger among voters ahead of the European elections. However, it is also likely the government will make some budget changes behind the scenes.

Mattia Diletti, a politics professor at Sapienza University in Rome told the Guardian: "It is more about communication than politics — they will try to defy, but they will make some small changes to the budget. It is a typical Italian way to say one thing and then do something else."

EC Vice-President for the euro, Valdis Dombrovskis, said last month that Italian taxpayers were having to spend as much servicing the national debt as on education.

"For the first time the Commission is obliged to request a euro area country to revise its draft budgetary plan, but we see no alternative than to request the Italian authorities to do so," he said.

"Breaking rules can appear tempting at the first look — it can provide the illusion of breaking free.

"It is tempting to try and cure debt with more debt. At some point, the debt weighs too heavy, ... you end up having no freedom at all."