Italy's Di Maio Sticks to Target,  Predicts EU Rule Change

(Bloomberg) -- Deputy Prime Minister Luigi Di Maio shrugged off the European Commission’s rebuff of Italy’s fiscal plans, saying his government will stick to its deficit targets before next year’s EU Parliament elections usher in lawmakers fed up with austerity and ready to relax budget rules.

“There will be such an earthquake in all countries against the austerity that the rules will change the day after the elections,” Di Maio, who’s also the head of the Five Star Movement, said in an interview with Corriere della Sera published on Sunday. He was referring to the need for the EU countries to reduce deficits under existing regulations.

Last week the EU’s Brussels-based executive arm rejected Italy’s plans for a wider budget deficit next year, raising the risk of an escalation in the conflict with Rome that has already taken a toll on the country’s bond and equity markets.

“Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path” commonly agreed by EU governments, Commissioners Valdis Dombrovskis and Pierre Moscovici wrote on Friday in a letter to Italian Finance Minister Giovanni Tria.

Read more: Italy’s full macroeconomic forecasts, targets 2019-2021

Commission President Jean-Claude Juncker called on Italy to redouble its fiscal efforts to avoid deviating from budget-correction commitments, saying in an interview with Austrian media that, in the past, Rome was “allowed to make expenses that it wouldn’t have been allowed to make” had Brussels applied the rules “in a strict but not intelligent manner.”

Di Maio said that the criticism from senior members of the EU executive influenced financial markets favoring the rise of government-bond yields and that their remarks are mainly due to their posturing ahead of the 2019 vote for the European Parliament.

Not ‘From Mars’

The commission president and the commissioners “do not come from Mars, they are all involved in an election campaign and they represent parties in enormous difficulty,” Di Maio told Corriere. “They made up their minds on the need to form an anti-populist axis.”

Di Maio’s party emerged with the most votes in Italy’s national elections in March with almost 33 percent. It has lost support since also due to the government contract it signed with the League to form the current administration.

The League, which obtained 17.4 percent of the vote, had benefited from his anti-immigration rhetoric and the government policy to limit arrivals from Africa, almost doubling its backing in the most recent voting-intention polls. A survey conducted by Ipsos in early October showed the Five Star backing falling to 28.5 percent, with the support for the League at a high of 33.8 percent.

Click here for a summary of Italian voter intentions, according to pollsters

Di Maio said his fellow deputy premier and League leader Matteo Salvini agrees with him on the need to keep the deficit goal for 2019 at 2.4 percent of gross domestic product despite the EU pressure.

But he said he wasn’t sure whether Cabinet Undersecretary Giancarlo Giorgetti, who is also from the League, had been considering a downward revision of the target in order to reach a compromise with Brussels.

Draghi’s Meetings

“I don’t know whether Giorgetti has changed his mind,” the Five Star leader told Corriere. “I am interested in Salvini’s opinion and we said to each other that we won’t backtrack -- if we get to the parliament debate with an idea to revise the 2.4 percent deficit, the sharks will smell the blood and will attack,” he said without elaborating.

Giorgetti was reported to have discussed on Wednesday the prospect for Italy’s 2019 budget with European Central Bank President Mario Draghi. The influential politician heard from Draghi concerns over the risk that the government is undervaluing the impact of the budget on the state coffers, the Messaggero reported without saying where it got the information.

Earlier last week Corriere said Draghi had held a similar meeting with the President of the Republic Sergio Mattarella.

“I know that Draghi’s visit has been scheduled for some time and I do not think the president will send messages of concern using the meeting with the ECB head,” Di Maio told Corriere. “I do not say this in contrast to Mattarella, but the government must maintain the promises."

The Rome-based parliament will start debating the government’s budget outline on Tuesday morning with finance chief Tria holding the first of a series of hearings by the country’s main institutions before the Lower House and Senate joint budget committees. The government is expected to submit a draft budgetary plan to the Commission by Oct. 15. The parliament has to approve the budget law by year-end.

©2018 Bloomberg L.P.