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EU fires budget warning shots to Italy, France

The European Commission on Tuesday demanded urgent clarifications from Italy and France on their budget plans for next year, worried they veer widely from spending cut commitments made to Brussels.

The letters from the EU’s executive arm requested a response by Wednesday and could be the first step before the commission rejects a budget outright and demands a new draft.

Portugal, Spain, Belgium and Finland were also contacted with concerns.

“Italy’s plan does not comply with the debt reduction benchmark in 2020,” said a letter signed by EU economics affairs commissioner Pierre Moscovici and commission vice president Valdis Dombrovskis.

Rome hopes to get Brussels to agree to a deficit of 2.2 percent of GDP.

But the EU said that risked delaying the reduction of Italy’s massive debt mountain, which is the second highest in the euro zone behind Greece at 180 percent of national output.

The spending plans were the product of fraught negotiations between the new coalition in Italy, an unlikely partnership between the anti-establishment Five Star Movement and the centre-left Democratic Party.

“We will provide all clarifications to the EU, we are not concerned,” said Italian Prime Minister Giuseppe Conte.

“It is a necessary dialogue with Brussels from which we will not escape.”

– French tax cuts –

France’s government unveiled a draft 2020 budget last month with more than nine billion euros ($10 billion) in tax cuts for households in its bid to move on from “yellow vest” protests while still cutting the deficit.

But the EU warned that these plans were “not in line” with commitments made to Brussels, and risked a “significant deviation” from the European rulebook on budgets.

Crucially, the commission criticised Rome and Paris for under-delivering on so-called structural reforms, changes to long-term costs such as pensions, hiring and firing laws and other politically difficult reforms.

Both the French and Italy budgets however promise deficits that meet EU rules that demand a deficit under three percent of annual GDP.

High debt is increasingly the endemic problem in the eurozone, where ultra low inflation and slow growth makes it very difficult to dig into the problem.

The European Commission a year ago for the first time rejected a national budget when it turned down Italy’s 2019 spending plans that were submitted by the populist far right coalition.

After loudly refusing to cave to Europe’s demand, Rome later acquiesced and accepted the tighter spending and debt reduction demanded by Brussels.