Italy faces higher borrowing costs, sanctions on budget

MILAN (AP) -- Italian borrowing costs nudged higher Wednesday after the populist government resubmitted draft budget proposals without the significant changes sought by the European Commission.

A day after receiving the Italian government's submission, the European Union's executive branch said it would issue its response next week.

Many observers think that Italy faces censure through the EU's excessive deficit procedure, but doubt anything will emerge before next spring's elections to the European Parliament for fear it would further bolster populist parties in Italy.

Austria's Finance Minister, Hartwig Loeger, said the bloc was ready to start a sanctions procedure against Italy and warned that the country had the potential of becoming the "successor" to Greece, which was at the forefront of Europe's debt crisis.

The Commission had asked for revisions to what it had called an "unprecedented" breach of spending rules, because it said Rome's budget plans would prevent Italy's huge debt burden from falling. But the Italian government stuck with its spending plans and refused to budge from its budget deficit forecast for next year of 2.4 percent of annual GDP.

The worry in Brussels and in financial markets, where interest rates on Italian bonds have spiked sharply, is that the budget plans would debt from falling, as promised. The interest rate on Italy's benchmark 10-year bond rose 0.03 percentage point Wednesday to 3.48 percent.

In his letter to the Commission, Economic Minister Giovanni Tria said Italy needs social spending to address growing poverty resulting from earlier austerity measures, and that the rollback on pension reforms would help renew the labor market and get young people working.

Tria said the government's budget plan would help bolster Italy's growth. Italy has stagnated for years and its economy, the third-largest in the eurozone, has lagged its main European partners. He said growth would rise "thanks to the fiscal expansion the new reforms, the relaunch of investments and the reduced fiscal pressure on small businesses."

Wolfango Piccoli of Teneo consultancy said political considerations ahead of European elections would likely mean that sanctions on Italy won't materialize until late spring, "if they materialize at all."

Italy did make some minor changes to its budget in its response to the commission. For example, it said it would sale government property. However, analysts said the sale program was unlikely to deliver the 1 percent of GDP targeted by Italy.

The budget clash and economic uncertainty generated by the populist government have already been costly to the Italian economy. According to calculations by the Turin-based Hume Foundation, Italian government bonds, corporate bonds and the Italian stock exchange have shed 175.5 billion euros ($200 billion) in value since May.