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EU Commission: Italy’s deficit breach ‘unprecedented’ in eurozone

Rome - Italy is planning an "unprecedented" breach of eurozone rules, the European Commission warned Thursday, as risk indicators on Italian government bonds soared to a five-year high.

Rome's plans for a deficit hike in 2019, in defiance of EU budget rules, have raised eyebrows in Brussels and among investors because the country already has one of the world's highest debt levels.

A clear "disagreement" with Italy

The planned deviation is "unprecedented in the history of the Stability and Growth Pact," EU Commissioners Pierre Moscovici and Valdis Dombrovksis wrote to Italian Economy Minister Giovanni Tria.

The Stability and Growth Pact is the eurozone's budget discipline rulebook.

In their letter, Moscovici and Dombrovskis asked Tria to respond in writing by noon (1000 GMT) on Monday, well before an October 31 deadline for a final EU Commission assessment on Italy's budget.

Moscovici, who is EU Economy Commissioner, said in a press conference with Tria in Rome that his office would be "extremely precise, meticulous, objective, totally neutral" in its assessment.

He said there a clear "disagreement" with Italy, but this had to be managed "with intelligence, sangfroid and staying within the common framework of eurozone and EU rules."

In Brussels, European Commission President Jean-Claude Juncker told reporters he had no bias against Italy, but also said the country could not expect more leniency from Brussels.

"I know from the past that the [EU] Commission has always been accused of being too generous when it came to Italy’s budgets," Juncker said.

Noting that Italy was granted "flexibility" over budget discipline targets "over the last few years," Juncker said other EU leaders "don't want us to add flexibility to existing flexibility."

Italy defends its budget

The EU commission is facing a political conundrum: on one hand, it is under pressure to respond to Italy's deficit breach, to uphold the credibility of eurozone rules.

On the other, going down too hard on Italy might backfire as the country's ruling populist parties would likely respond by turning up their eurosceptic rhetoric, further estranging Rome from Brussels.

Earlier Thursday, Prime Minister Giuseppe Conte said that EU criticism "should not worry us," because Italy is ready to defend a "well-thought, well-structured and well-executed budget."

Taking part in an EU summit in Brussels, Conte defended the budget in bilateral meetings with German Chancellor Angela Merkel, French President Emmanuel Macron and Dutch Prime Minister Mark Rutte.

Italy is seeking to stimulate a stagnant economy with a spending hike of 36.7 billion euros (42.35 billion dollars) in 2019, almost two-thirds of which would be funded by a higher deficit.

The government has projected a deficit of 2.4 per cent of gross domestic product (GDP) for next year, three times higher than the 0.8 per cent agreed by the previous government.

This profligacy is scaring off investors.

The spread, a country risk indicator measuring the yield differential between Italian and benchmark German 10-year bonds - rose above 320 basis points, the highest since March 2013.

Market jitters could get worse towards the end of the month, when Italy risks being downgraded by the Standard and Poor's and Moody's credit rating agencies.