Eurozone ministers prepare for clash on Italian budget

Italy's growth is down, its unemployment up and its debt colossal.

But perhaps the most striking threat is not the grim economic data itself, but Rome's defiant attitude; Italy's populist government doesn't seem to want to play by the rules.

"Everyone is worried," a senior European Union official said, as several sources told AFP most of the 19 ministers would back the European Commission's tough stance.

Members of the single currency bloc have flouted collective budget guidelines before, but none so "openly and consciously" as the unrepentant populist coalition south of the Alps.

And this unprecedented provocation may draw an unprecedented response. If Prime Minister Giuseppe Conte's government doesn't fall into line, it could face huge fines.

"It would be inevitable," a senior European official told AFP.

Italy, and in particular its far-right vice premier Matteo Salvini, is not planning to back down, and seems even to relish the opportunity to thumb its nose at Brussels.

The government -- a coalition of Salvini's League and the anti-establishment Five Star Movement -- plans to run a public deficit of 2.4 percent of GDP -- three times the target of its centre-left predecessor.

On October 23, the EU Commission sent Rome a letter rejecting the budget -- a historic first, even if Italy is far from the first country to break the rules of the eurozone.

Italy has until November 13 to submit a revised budget, and President Sergio Mattarella has promised a "constructive dialogue" with Europe's institutions.

But Salvini's response was stark: "No little letter will make us back down. Italy will never kneel again."

Brussels might have had more sympathy for Rome's decision to increase spending if the underlying economic situation had promised better times ahead.

But Italy's jobless rate is more than 10 percent, way above the eurozone average, and growth in the third quarter of this year ground to a halt at a stagnant zero percent.

The coalition's 2019 budget is based on the country experiencing an annual growth of 1.5 percent -- a figure considered optimistic by the IMF, which has forecast only one percent.

Watching the spread

Conte insists the low growth rate is all the more reason to kickstart the economy through a spending spree, but Brussels fears the rising deficit could lead to a new debt crisis.

Italy already owes 2.3 trillion euros ($2.6 trillion), a sum equivalent to 131 percent of its GDP, and even if Brussels blinks and fails to punish Rome, the markets surely will.

Rating agency Moody's has already downgraded Italian debt, and Standard & Poor's has dropped its outlook from stable to negative.

The governor of the Italian central bank, Ignazio Visco, has expressed concern that borrowing rates will have to rise and political experts warn the coalition could come under pressure from League voters.

The much watched "spread" -- the gap between German and Italian bond yields -- has grown to around 300 basis points, up from around 130 in the first quarter of 2018.

The situation is reminiscent of the Greek debt crisis, except with Italy's much bigger and more central eurozone economy at the heart of the storm, making a bailout difficult.

"Italy could be the next country to need the European Stability Mechanism," a senior EU official told AFP, referring to the eurozone's crisis firewall. "It's hypothetical at this stage, but the risk is real."