ROME – Italy’s Finance Ministry said it has agreed on a compromise with European Union authorities over the country’s budget deficit, resolving a dispute between Rome’s populist government and EU fiscal enforcers that has vexed financial markets for months.
The agreement, which wasn’t confirmed on Tuesday night by the EU executive, the European Commission, would allow Italy to avoid an EU disciplinary procedure for now.
If confirmed, the deal could help restore investors’ confidence in Italian bonds, reducing the Rome government’s borrowing costs and limiting the losses Italy’s banks suffered since this summer on their large holdings of national debt.
The financial-market stress triggered by the argument between Rome and Brussels has helped push Italy’s economy to the brink of recession. Both sides have lately sought to defuse the confrontation, after earlier taking a hard line in a dispute that revived fears of a financial crisis in the eurozone.
A spokeswoman for Italy’s finance ministry said the agreement with the Commission is “informal” and could be completed only on Wednesday. A Commission spokeswoman said the institution’s top officials would discuss the matter on Wednesday morning.
The Commission rejected Italy’s draft budget in October, calling it an “unprecedented” breach of EU fiscal rules and warning that Rome’s spending plans would lead to a lasting fiscal deterioration in coming years.
Italy in recent days has offered to target a budget deficit of 2 percent of gross domestic product next year. It had previously targeted a deficit of 2.4 percent, a figure the Commission viewed as overly optimistic, saying Italy’s budget plans would lead to a deficit of nearly 3 percent, the ceiling set by EU treaties.
The Commission in recent days has pressed Italy to show how it would achieve its new target of 2 percent. Italy has been forced to reduce the cost of two of its flagship policies – introducing a basic income for the poor and unemployed, and reducing the pension age from around 67 to as low as 62 – as well as identify other savings. The Commission, too, has softened its stance, after initially demanding bigger corrections.
The new government, a coalition of the anti-establishment 5 Star Movement and the Nativist League, swept parliamentary elections last spring after promising more generous welfare and pension policies, as well as tax cuts. The two parties for months attacked the Commission and the EU’s political establishment and vowed to put promises they made to Italian voters ahead of EU rules.
Rome, however, has grown increasingly concerned about the gathering signs of an economic downturn. Meanwhile the Commission, encouraged by France and Germany, has sought a compromise to avoid a damaging political split with Italy, one of the founders of the EU project.
France’s decision this month to run a deficit of over 3 percent of GDP next year, to accommodate President Emmanuel Macron’s fiscal concessions to the “yellow vests” street protesters, has also weakened the EU’s appetite for confronting Italy. Rome politicians have accused Brussels of hypocrisy for tolerating France’s deficits while seeking to block Italy’s budget.
The dispute has revived criticism of the EU’s fiscal rules among some European policy makers and economists. Some critics say the rules force governments to slash spending in an economic slowdown, exacerbating downturns. Other critics, especially in fiscally conservative Germany, say the Commission has repeatedly failed to enforce the rules on eurozone countries such as France and Italy, thereby encouraging overreliance on public debt to prop up economic growth.