EU to take first step to disciplining Italy over 2019 budget

By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission will on Wednesday take the first step towards disciplining Italy over its draft 2019 budget, backed by euro zone governments worried that Rome's borrow-and-spend plans could trigger another debt crisis that would hurt them all.

As the guardian of EU laws, the Commission checks that draft budgets comply with EU limits on deficit and debt before they are voted on by parliaments.

Around noon (1100 GMT), it will publish its opinions on the drafts of all the 19 countries sharing the euro, including that of Italy's eurosceptic government, which has been revised only slightly from the version the EU executive rejected in October.

The Commission will therefore also publish a report that Italy is in breach of the EU law that says public debt cannot be higher than 60 percent of GDP, or, if it is, has to be falling towards 60 percent at a satisfactory pace.

Italy says expansionary measures are needed to head off an economic slowdown affecting the whole of Europe.

Economy Minister Giovanni Tria says France has been given greater leeway than Italy on its budget in recent years, and has pointed out that Italy's "primary balance", excluding debt-servicing costs, has been in surplus for almost 20 years.

But at 131 percent, Italy's debt is proportionally the second highest in the euro zone after Greece's. The Commission forecasts that it will remain at that level through 2020.

Italy has offered to bring down the debt by speeding up privatisations, but EU officials say the value of privatisation revenues in any given year is outside government control.

"BOOSTING GROWTH"

Rome says the higher 2019 deficit, which at 2.4 percent of GDP is three times that of the previous government, will boost growth and so help to bring down the debt ratio.

Mario Centeno, the chairman of euro zone finance ministers, who last week backed the Commission's view on Italy, saying its growth plans could be achieved without extra borrowing.

Memories are still fresh of the 2010-15 sovereign debt crisis that nearly destroyed the euro.

Centeno said adhering to the fiscal rules was "not only in each country's individual interest, but also in our collective interest".

"The crisis has taught us that, in an economic and monetary union, the responsibility to conduct sound and responsible policy does not stop at national borders," he said.

The plan to raise borrowing hit demand for Italy's benchmark 10-year bond on Tuesday, boosting the yield to 3.60 percent -- a whole 335 basis points above that of THE equivalent German bond .

The Commission report is just the first step in the EU's excessive deficit procedure, which could, eventually, result in fines for Italy equal to 0.2 percent of its GDP, although that would take months.

Before that happens, the Commission needs to get backing for its view from the EU's deputy finance ministers in the next two weeks, and then from the finance ministers, probably at their next meeting in January.

Italy would then get recommendations to bring down the debt and a deadline to take action within three to six months. Only if it then fails to comply would financial sanctions kick in.

(Reporting By Jan Strupczewski; Editing by Kevin Liffey)

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