By Eric J. Lyman
ROME, Nov. 27 (Xinhua) -- Italy has agreed to compromise, just slightly, in its budget standoff with the European Commission, setting off a sigh of relief on financial markets and making analysts wonder if a government that had repeatedly bragged about resisting orders from Brussels would pay a political price for changing tack.
For more than a month, the Italian government under Prime Minister Giuseppe Conte locked horns with the European Commission over a 2019 draft budget plan that would include a deficit equivalent to 2.4 percent of gross domestic product. The Conte government said it needed the high deficit to keep electoral promises aimed at sparking economic growth, while commissioners said Italy needed to pay down the country's massive public deficit.
On Monday, a spokesman for the Conte government said it "would not focus on decimal points" in the budget plan, while the Italian media reported Tuesday a revised plan which would include 3.6 billion euros (4.1 billion U.S. dollars) less in spending, reducing the deficit to 2.2 percent of gross domestic product.
The difference is relatively small. Before the installation of the Conte government, Italy had planned on a 0.8 percent budget deficit for next year, just a third of the actual 2019 budget draft.
But Italy's apparent willingness to compromise boosted markets Tuesday. The yield on Italy's ten-year government bonds, for example, pulled back to 3.29 percent, their lowest level in a month and the biggest one-day drop in nearly three months. Lower bond yields reflect increased investor confidence, while also lowering the government's cost for borrowing money.
What is unclear is what the political implications of the latest moves.
"From the start, the government said it would not bow to European Union bureaucrats and now they seem to have agreed to do just that," said Alessandro Franzi, author of a book on Matteo Salvini, deputy prime minister and head of the League, one of the two political parties supporting the Conte government.
Franzi told Xinhua he believed government officials would manage to turn the developments into an advantage ahead of elections for the European Parliament in May 2019.
"The League and the Five-Star Movement (the other party supporting Conte) can say, 'We tried to keep our promises but the European Union wouldn't let us: give us support in May and we can be stronger,'" Franzi explained.
The long-term problem, Franzi said, would come if the government failed to deliver concrete results next year.
Alessandro Amadori, vice-president and head of qualitative research for think tank Piepoli Institute, told Xinhua that he thought the Conte government's feud with the European Commission was a big factor behind the recent drop in support for government policies.
"Up to a certain point, Italians like their government to stand up to commissioners in Europe," Amadori said. "But opinions start to change once it has an impact on people's wallets."
Amadori noted that private savings among Italians is six times larger than the country's gross domestic product, and that much of that savings is in the form of government bonds.
"As bond yields rose it started to erode the value of private savings," he said.
But Amadori agreed with Franzi that it was too early to determine the political fallout from the latest moves.
"I don't think there will be a political problem because of this on its own," Amadori said. "But if the economy remains weak and employment levels continue to suffer, that could cause problems," he added.
