MNI EXCLUSIVE: EU-Italy Showdown Most Likely In Autumn

By David Thomas And Silvia Marchetti

     BRUSSELS/ROME(MNI) - European Union member states remain determined to

postpone a fresh confrontation over Italy's fiscal performance until the autumn,

eurozone officials said, even as sources close to the Italian Economy Ministry

warned that upcoming elections could further embolden the right-wing League

Party to push for big-spending plans such as a flat tax.

     Italy's deputy prime minister, League leader Matteo Salvini, on Tuesday

said Italy's budget deficit could if necessary rise above 3% of gross domestic

product, well in excess of the 2.1% for 2019 pledged with the European

Commission in December. A big win for the League in European parliamentary

elections May 26 could strengthen its hand as it tries to persuade its populist

coalition partners from the Five-Stars Movement to back its favoured policies,

which include a flat tax, the sources close to Italy's Economy Ministry said.

     If Five-Stars, whose plans, including a "citizens' income", would also be

expensive, is uncooperative, then the League could consider its future in the

governing coalition, a source at the right-wing party said. A big European

parliamentary win could leave the party well placed to seek other partners in

Italy's parliament, or ahead of possible fresh Italian elections.

     Meanwhile, Thursday's meeting of eurozone finance ministers will likely

glide over the matter of whether Italy will comply with its budget promises,

even as the country's bonds sell off in reaction to Salvini's comments.

     "People will just not want to talk about this," one senior European

official said, when asked what would happen if the subject of Italy was broached

at the Eurogroup meeting.

     Other officials agreed, noting that Commission President Jean-Claude

Juncker wishes to avoid any public showdown with Italy which might give an

electoral boost to the parties of the governing coalition. Instead such a

confrontation, which could lead to the implementation of an Excessive Deficit

Procedure, may not take place until Italy's 2020 Draft Budget Plan is presented

in October.

     "No one wants to discuss the issue at all before the European elections -

not the Commission, not the Council, not any of the EU institutions," another

source said.

     --"PULLED PUNCHES"

     Two European Union sources noted that the European Commission's recent

Spring economic projections, which only downgraded the forecast for Italian

growth to 0.1% this year, from 0.2% in the Winter forecasts, added little to the

pressure to tackle Rome soon. Italy's budget deficit was seen at 2.5% of gross

domestic product this year.

     One Eurogroup source contacted by MNI took the view that the Commission

"pulled its punches" against Italy in the forecasts, which seem to have pushed

back the crystallisation of major downside risks to growth until later in the

year.

     "That is my reading of it, and I don't think it is over-interpreting it,"

said one official.

     Another source agreed, saying: "Certainly, the Commission did want to keen

to keep the forecasts as undramatic as it could, given the elections."

     Eurogroup sources indicated that Italy would be unlikely to benefit from

any flexible interpretation of EU fiscal rules because of its current weak

economic activity, with the Commission and many members of the Eurogroup taking

the view that the blame for this lies with the Italian government itself.

     Italy's fiscal misbehaviour is being used by the Hanseatic group of finance

ministers to argue against further political integration of the euro zone. Dutch

Finance Minister Wopka Hoekstra has become the voluble self-assigned leader of

the fiscal hawks.

     "He has made it a personal issue to be the bad cop (in Eurogroup

discussions on Italy and eurozone governance)," said another EU official, who

added: "I guess someone has to play that role, it used to (ex-German Finance

Minister Wolfgang) Schaeuble."

     "He uses Italy as an example as to why no further integration should be on

the table," the source added.

     Any earlier negotiations with Italy would also be hampered by the fact that

the new Commission, including a successor to Economic Affairs Commissioner

Pierre Moscovici, will not be in place until the start of November.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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