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Italy PM defends plan to ramp up spending despite EU fears over debt

Italy's Prime Minister Giuseppe Conte holds a news conference in Rome
Italy's Prime Minister Giuseppe Conte holds a news conference in Rome   -   Copyright  Reuters
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Italy’s Prime Minister Giuseppe Conte has defended his plan to ramp up public spending, despite the country’s national debt reaching more than twice the European Union limit.

Conte's proposed 2019 budget has caused a stand-off with the EU, which says Italy’s debt - which is currently 130% of its GDP - threatens the financial stability of the Eurozone.

Speaking at a news conference in Rome, Conte defended his government's proposals, predicting that economic growth will "take off" if its fiscal plans are implemented.

Conte said the contested budget would increase Italy’s deficit to 2.4% of GDP next year, but promised it would fall again in subsequent years.

He predicted that it could be reduced to 1.8% by the year 2021.

The PM also maintained that "the fundamentals of the Italian economy are good", and said Europe should give Italy a chance to fully explain their strategy, rather than dismissing it outright.

When asked what he would do if the European Commission rejects the budget at a meeting scheduled for later today, Conte replied: "We will sit at a table and discuss it".

Last Thursday, the European Commission sent Rome a warning letter - the first formal step of a procedure that could lead to Brussels rejecting its budget and imposing fines on Italy.

In the letter, the Commission said Italy’s spending plan was an "unprecedented deviation from EU fiscal rules".

It claimed the budget would see Italy's deficit rise by 1.5%, although Conte disputed this figure, claiming it will only rise by 0.4%.

Last week, ratings agency Moody's downgraded Italy's credit rating to just one level above so-called 'junk' status - although it did say the country’s outlook was stable.

It cited a "material weakening in Italy's fiscal strength, with the government targeting higher budget deficits for the coming years".

In their analysis, Moody’s said: "The economic plans of the government, while supportive of growth in the near term, do not amount to a coherent program of reforms that will lift Italy’s mediocre growth performance on a sustained basis"

Conte's refusal to change his economic plan sets Italy and the EU commission on a collision course that could have serious consequences for the struggling Italian economy.

Italy is the Eurozone’s third largest national economy, but its level of national debt is currently second only to Greece.

When the populist coalition government - comprised of the anti-establishment Five Star Movement and right-wing League - came to power in June, they pledged to cut the country's debt by "reviving internal demand", rather than through continued austerity.

Ahead of today’s meeting, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, said a "constructive dialogue" must be maintained between the EU and Italy.

Moscovici said everything must be done to avoid "a crisis between Brussels and Rome", but that "the ball is now in the Italian authorities' court".

He added: "When you are an EU member and a member of the single currency, of the Eurozone, you must respect a number of joint rules."

At this morning's press conference, Conte firmly dismissed any concerns about Italy's future in the EU, saying: "Read my lips - for Italy there is no chance of Italexit, to get out of Europe or the Eurozone."

The European Commission will meet later today to decide on its next steps in assessing Italy’s 2019 draft budget.

It then has until October 29th to decide whether to formally ask Italy to revise and resubmit the budget - a move it has never implemented before with any other member state.

The uncertainty generated by the long standoff is likely to send shockwaves across the markets, both in Italy and the rest of Europe.