EU rejects Italy's budget in eurozone first

The European Commission on Tuesday rejected Italy's draft 2019 budget, the first time the EU executive has ever sent a member state back to the drawing board over spending plans. Charging Rome with "openly and consciously" flouting pledges made, the Commission gave Italy's populist government three weeks to present a new plan to curb spending in line with the rules. "Today for the first time the commission is required to ask a euro area country to revise its draft budgetary plan," Commission Vice President Valdis Dombrovskis told reporters. Despite its "regret", he said, the executive arm of the 28-nation European Union saw "no alternative" than to ask Rome for a new draft, as clarifications sent Monday had failed to dissipate concerns raised by member countries in July. "The Italian government is openly and consciously going against commitments made," Dombrovskis said. "Europe is built on cooperation," he said. "If trust is eroded all member states take damage. Our union takes damage." Italy's far-right Deputy Prime Minister Matteo Salvini insisted Italy stood by its budget. Brussels was only angering Italians even more and eroding faith in the bloc, he warned. Sitting next to Dombrovskis, European Economics Commissioner Pierre Moscovici said the "ball is not touching the line, it is far from the line". If Italy fails to comply with the Commission's request, he warned, it could face disciplinary action. This could lead to fines of 0.2 percent of its GDP, or 3.4 billion euros, based on 2017 figures. Italy's government says it will stick to a deficit of 2.4 percent of annual economic output next year, which would be triple the amount forecast by the previous government and approach the EU limit of 3.0 percent. In turn, it would aggravate Italy's already huge debt mountain, at some 130 percent of gross domestic product (GDP), way above the EU's 60-percent ceiling and second only to Greece's in Europe. - 'Not get into a panic' - Dombrovskis said last year Italy's debt represented an average burden of 37,000 euros per inhabitant and the country spent about the same amount to service its debt as it did on education. "Experience has shown ...that higher fiscal deficits and debt do not bring lasting growth," he said. "Excessive debt makes your economy more vulnerable to future crisis." But the coalition government of the anti-establishment Five Star Movement (M5S) and anti-immigrant League has said it will reduce total debt to 126.5 percent in 2021. Italian Prime Minister Giuseppe Conte, speaking to reporters as he arrived in Moscow for talks with President Vladimir Putin, said they were ready to argue their case before the Commission. "It's not an improvised budget, it's a budget that we have considered, elaborated, we have thought about it a long time," he said. "So saying today or tomorrow morning that we are looking at it again would make no sense." In its four-page letter to the Commission, Italy's government acknowledged its budget was "not in line with the norms of the stability and growth pact" governing EU member state public finances. "It was a difficult decision but necessary given the delay in achieving pre-crisis GDP levels and the dramatic economic situation of the most disadvantaged in Italian society," the letter said. The eurozone's bailout fund director, Klaus Regling, said shortly before the announcement there was no need to panic over Italy's high-spending plans. Their proposals do not comply with the legal framework, "but Italy is not the next Greece," said the German head of the European Stability Mechanism. "One should not get into a panic," Regling said. Italy had not lost its ability to compete, and a large part of its debt is financed internally. There is "very, very limited risk" of contagion to other countries, he argued. Moody's ratings agency meanwhile, revised its ratings of 12 Italian financial institutions, having downgraded Italy's standing by one notch on Friday over concerns about its budget. But this time around it was a mixed bag, with some being revised downwards and others up. When the euro area was formed in 1999 and the euro currency introduced in 2002, Italy was among the 11 original members -- of the 15 EU member states at the time. In the years following the 2007-2008 financial crisis, the EU Commission has set stricter limits on spending and gained more power to enforce them.