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Still Looking For Weakness

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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