MNI SOURCES:Italy Budget Deal Chances Rise As Eurozone Weakens

By David Thomas

     BRUSSELS(MNI) - As concerns grow over a eurozone slowdown, European

officials are increasingly hopeful of a deal to avoid placing Italy in the

Excessive Deficit Procedure, despite misgivings among harder-line countries such

as Germany and the Netherlands, according to sources close to the Commission and

Eurogroup.

     One source confirmed to MNI that both the Commission and Council of

Ministers are seeking a "fudge".

     "The fact is [Italian] government spending and revenues have been looking

better in recent months," another EU source said.

     One source close to deliberations in the Eurogroup said Economic Affairs

Commissioner Pierre Moscovici had told eurozone finance ministers at their

mid-June meeting that if Italy came up with the "numbers and the measures" then

a deal was achievable.

     "There is no political appetite [in the Eurogroup] for a collision with

Italy," the contact said.

     That said, harder-line ministers would be concerned about potential damage

to the credibility of the EDP procedure, particularly following the failure of

Italy to live by the terms of the last budget deal it struck with the Commission

in December 2018.

     Some ministers are also concerned that Italy's longer-term plan to reduce

its debt ratio, of 132% of GDP, is overly dependent on a commitment to hike VAT

in 2020, a pledge which is not entirely trusted by EU officials based on their

recent chequered experience with the country's fiscal management.

     "They have committed to do this in the past and it's been ditched at the

first sign of political trouble," one source said.

     Germany and Netherlands may seek to propose instead that Italy be placed in

a "significant deviation" procedure, under which they would have to take

pre-emptive action - structural measures and reforms - to steer the structural

deficit back on track.

     Ministers could discuss next steps at their next Eurogroup meeting on July

8 but others suggest it is entirely possible that a decision could yet be pushed

back to September.

     What has brought on the new, more emollient tone towards Italy is not

completely clear, although one official suggested, "maybe Italy has other,

important political cards to play."

     EU leaders are due to discuss a share-out of top EU jobs on Sunday night,

including the presidency of the Commission, the Council and the ECB and any

final decision could involve opaque political trade-offs between EU countries.

     Another official suggested that growing concern that the current economic

slowdown in the euro zone area could turn into something more serious is the

major root cause of the new pragmatism towards Italy and pointed to ECB

President Mario Draghi's dovish policy signals in his June 18 Sintra speech.

     "The financial stability of the eurozone is becoming more of a factor," one

official said.

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

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