Tuesday 23 October 2018 3:05 pm

Brussels rejects Italy's budget, sending it back to the drawing board

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Politicians in Brussels sent shockwaves through Europe this evening after rejecting Italy’s increased spending plans in a stinging and unprecedented display of authority.

In its first ever rejection of a member state’s draft budget proposals, the European Commission today demanded that Italy’s populist government must rein in its fiscal ambitions or potentially face heavy fines.

Investors reacted immediately to the news, with the Italy-Germany 10-year bond yield spread – a benchmark of Italy's position on the markets – widening to 318 basis points, before nudging slightly back down.

The commission’s vice-president Valdis Dombrovskis yesterday said that Brussels had “no alternative” than to request changes to the Italian budget, which is proposing a deficit that is three times higher than the EU's mandated target.

However, Italy’s deputy prime minister Matteo Salvini swiftly reiterated his administration’s defiant tone in the wake of the comments, saying: “We won’t subtract one single euro form the budget…I personally am available to go even tomorrow to meet the president of the European commission to explain how Italy’s economy will grow thanks to this manoeuvre.”

Today's war of words comes after several days of disputes, which were ignited last week when Italy became the first member of the common currency to ignore a formal reprimand from Brussels since EU rules were changed during the Eurozone crisis.

Officials in Brussels hit back this evening by announcing that there would be a three-week deadline in which Italy can respond to the demands.

If Rome does not respond, the EU has said it will launch an “excessive deficit procedure” which could result in sanctions being imposed on Italy.

The Italian anti-establishment coalition, made up of Five Star Movement and the League party, has hiked its deficit plans as it looks to fulfil a series of campaign pledges, including tax cuts and a minimum income for the unemployed.

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