Italy's Interior Minister and Deputy-Premier Matteo Salvini speaks during a press conference on Italy's budget law, at Chigi Palace Premier officr, in Rome,Monday, Oct. 15, 2018. (Giuseppe Lami/ANSA via AP)
Matteo Salvini, Italy's deputy prime minister, said on Tuesday that both sides were 'working in the same direction' © AP

Rome and Brussels are closing in on a deal to end a budget row that has stoked investor doubts about the health of Italy’s finances and threatened its broader relations with the EU.

The European Commission is on Wednesday set to discuss revised proposals from Italy aimed at addressing Brussels’ concerns about spending that would add to Rome’s public debt. This includes delaying the introduction of a new social security programme and scaling back other initiatives.

While a deal has not been reached, people familiar with the plans said that positions were converging after several days of intense talks between the commission and the Italian government.

On Wednesday, Italian stocks and debt rallied on hopes that a deal would be reached. The FTSE MIB, the main index on the Milan-based Italian Stock Exchange, was up 1.55 per cent in morning trading, while government bond yields fell by 9 to 16.6 basis points.

Under the new proposals, Italy’s budget deficit would increase to just over 2 per cent of gross domestic product in 2019, compared with the 2.4 per cent forecast by Rome when it first submitted draft budget plans to Brussels in October.

Matteo Salvini, Italian deputy prime minister and leader of the far-right League, said on Tuesday that both sides were “working in the same direction”.

“We’ve been working for a few weeks so that Italians can finally have a budget law,” he told the Italian state broadcaster Rai.

The urgency in the talks has been driven by warnings from Brussels that it was poised to launch a so-called excessive deficit procedure, or EDP, against Italy over its spending plans on the grounds that they violated previous commitments.

The spat has fed investor unease about Italy’s populist government, driving up borrowing costs just as the country faces large refinancing operations. Barclays Capital has forecast that Italy will have gross bond issuance of €255bn in 2019 and net issuance of €57bn.

Valdis Dombrovskis, vice-president in charge of financial stability, and Pierre Moscovici, who holds the economic and financial affairs portfolio, have led the talks for Brussels. The pair will brief the rest of the commission later on Wednesday.

The people familiar with the talks said the advanced state of negotiations made it very unlikely that the commission would proceed with an EDP on Wednesday. A commission spokesperson said the institution would “see about possible next steps” at the meeting.

Brussels is keen to calm tensions after French president Emmanuel Macron announced increased spending last week to meet the demands of gilets jaunes protesters. While officials in the Belgian capital have stressed that the two cases are different, there are concerns within the commission about accusations of double standards if they move quickly on Italy while saying little about Mr Macron’s plans.

Enzo Moavero Milanese, Italy’s foreign minister, said there was “optimism” that Rome would “avoid an EU infringement procedure for Italy and give the country a budget”.

Brussels’ priority, according to the people familiar with the talks, was for Italy to make “structural effort” to improve its finances, with further steps needed to get a deal over the line.

There are also concerns in the commission that the deal that is emerging would only kick problems up the road by postponing some spending increases, for example by delaying the roll out of a basic citizen’s income programme from January to April.

“The potential deal will not be a good one, but better than an open conflict,” said one person with knowledge of the talks.

Rome aims to have its budget signed off by lawmakers before the end of the year.

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