ROME, Oct. 4 (Xinhua) -- Italy and the European Union (EU) are headed for a collision over debt and deficit levels, and analysts said there is no clear sign which side will blink first.
Relations between Rome and Brussels continue to deteriorate as the four-month-old Italian government flouts the EU target for Italy's budget deficit to remain within 0.8 percent of the country's gross domestic product (GDP) in 2019. Instead, the government last week unveiled a budget outline that predicted the deficit would be 2.4 percent of GDP next year.
The EU is calling for Italy to keep its budget deficit in check so that it can pay down public debt, which totals more than 130-percent of the country's GDP. That is the second highest level in the EU in terms of GDP, and the highest in absolute terms.
Last week's budget outline rattled financial markets, sending the yield on Italian government bonds to a nearly five-year high, though they retreated slightly this week. Shares in Italian banks also suffered, pushing stock market indexes lower.
Giovanni Tria, the minister of finance who days ago promised EU officials the 2019 deficit would stay within 1.6 percent of GDP, is working to calm fears that Italy could be inching closer to a debt default.
On Sunday, Tria said that the higher spending would spark new economic growth, increase tax revenue and make it easier to pay down debt. He also said the government's deficit targets would be reduced in 2020 and 2021, to 2.1 percent and 1.8 percent, respectively.
Italy says it must run a higher deficit in order to establish a basic income for all Italian citizens, reduce the retirement age, invest in updating the country's infrastructure, and establish a flat tax for corporations. The country is set to present its detailed 2019 budget on Oct. 20.
"The next two or three months are going to be very difficult," Lorenzo Codogno, founder and chief economist of LC Macro Advisors, a financial consultancy, and a professor at the London School of Economics, told Xinhua. "Italy is headed for an institutional clash [with the EU] and I don't see Italy changing its course."
Codogno said that if European officials allow Italy to go forward with the high deficit levels, it would send ripples through financial markets. "Stay tuned," he said. "There's going to be a lot of noise going forward."
According to Giandomenico Piluso, a professor of economic history at the University of Siena, investors have probably already taken the latest news into account, saying the actual budget presented on Oct. 20 was unlikely to have another major impact on markets "unless there is some kind of surprise one way or the other."
Piluso, in an interview, said there are two separate aspects to the situation with the 2019 budget.
"There's the side of public finance, which can be negotiated one way or another," he said. "The other side is the political, regarding the disagreement with the European Union. That is more of a problem because it is easy to think the government wants to test the European Union's resolve."
There is also some level of disagreement on budget priorities between anti-establishment Five-Star Movement and the rightwing, anti-migrant League, the two parties supporting the government of Prime Minister Giuseppe Conte. But Codogno and Piluso both said it was the standoff with the EU that is the biggest risk to the government's medium-term stability.
"The best bet is that the government manages to stay on its feet until May 2019," Codogno said, referring to the date of the next round of voting for the European Parliament. "After that I think everything will depend on the results of that vote."