Euro zone asks Italy to change budget, Rome digs in heels

By Francesco Guarascio and Jan Strupczewski

BRUSSELS (Reuters) - Euro zone finance ministers called on Italy on Monday to change its 2019 budget before a deadline set for next week to conform with European Union rules, but Rome dug in its heels saying its disputed deficit plan would not change.

Italy went for an unprecedented clash with the EU last month when it presented a draft 2019 budget that envisages an increase in the structural deficit by 0.8 percent of GDP next year rather than the 0.6 percent of GDP decrease required by EU rules.

The draft was rejected by the European Commission and a meeting of euro zone finance ministers showed Rome isolated on the issue, with ministers worried that the higher borrowing and spending plan threatened the single currency itself as well as deeper euro zone integration.

"We agree with the Commission assessment," the ministers said in a statement after a discussion on the Italian budget.

"We recall the importance of sound public finances ... as a prerequisite for durable and sustainable economic growth and a smooth functioning of Economic and Monetary Union," they said.

"We look forward for Italy and the Commission to engage in an open and constructive dialogue and for Italy to cooperate closely with the Commission in the preparation of a revised budgetary plan which is in line with the SGP (EU budget rules)."

Italy has until Nov. 13 to send in a revised draft 2019 budget to Brussels. But its ruling coalition leaders repeatedly excluded any possibility of changes to the budget, saying higher borrowing was needed to kick-start growth.

ITALY STANDS FIRM

Italian Economy Minister Giovanni Tria made clear, however, that the main assumptions of the budget would not change though he stressed that Italy expected its public debt, at above 130 percent of GDP, to fall thanks to the growth stimulus of the budget.

An Italian official said Rome was working for a compromise, meant mostly to reduce market pressure on Italian bonds, but did not clarify how differences could be narrowed.

The Commission is to issue an opinion on all of the euro zone's draft budgets, including the revised one from Italy, on Nov. 21. If Rome does not amend the budget to match EU rules, the Commission is likely to launch a disciplinary procedure which could lead to fines and suspension of EU funds.

Euro zone ministers said before the meeting that the fiscal plans of Italy, the euro zone's third biggest economy, affected the common currency shared by 19 countries as well as their plans for deeper economic integration.

"What is at stake now is our common currency," French Finance Minister Bruno Le Maire said.

To better prepare for a potential next crisis, euro zone countries want to integrate their economies more closely, setting up a deposit guarantee scheme, a euro zone budget, rules for debt restructuring and through beefing up its bank resolution fund.

They want to give their bailout fund new powers to closely monitor economies and provide new lending instruments that could be used even before a country is cut off from the markets.

But "Italy's behaviour puts our plans at risk," Slovak Finance Minister Peter Kazimir said.

(Additional Reporting By Daphne Psaledakis; Editing by Philip Blenkinsop and Mark Heinrich)