FRANKFURT (Reuters) – Italy needs to obey European Union budget rules or face higher borrowing costs that could hurt its economy even more, European Central Bank Vice President Luis de Guindos said on Wednesday.
Italy’s bond yields rose sharply this week as tensions between Rome and the EU Commision resurfaced, with Brussels considering a large fine in response to missed budget targets.
“I think the message is very, very clear: when tensions between the Italian government and (European) Commission come down, spreads narrow,” de Guindos told a news conference on Wednesday. “If you have increasing tensions, you immediately have a widening of the spreads.”
“The lesson is quite evident: it’s very important to respect fiscal rules,” he added.
Sitting on a debt pile equivalent to more than 130 percent of GDP, Italy is one of the euro zone’s most indebted nations but has struggled to cut debt and recently faced conflict with the EU over the government’s plans to increase spending.
De Guindos said Italy had done a good job in generating a primary surplus — a budget surplus before debt payments — and that its main problem was exceptionally low growth.
He also said that any rise in bond spreads would immediately translate into higher costs for the state, which could then erode any benefit of higher spending.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)