Italian PM upbeat on EU deal prospects ahead of budget votes

By Gavin Jones and Giuseppe Fonte

ROME (Reuters) - The Italian parliament begins voting this week on the government's contested 2019 budget, with Prime Minister Giuseppe Conte optimistic that a deal can be agreed with the European Commission.

Italy says the expansionary draft budget - in which the deficit is forecast to rise to 2.4 percent of GDP in 2019 from 1.8 percent this year - is needed to prevent a chronically sluggish economy from tipping into another recession.

Brussels has rejected the budget, saying the plans will not lower Italy's large public debt as European Union rules require, and has called on Rome to make revisions to prevent a disciplinary procedure that could eventually lead to fines.

In recent days both sides have softened previously hardline rhetoric, reassuring financial markets and leading to a fall in Italy's borrowing costs. On Saturday Conte said a compromise was in everyone's interests.

"We make more progress at every meeting we have," he told reporters at the G20 summit in Buenos Aires, where he and Economy Minister Giovanni Tria discussed the budget with top European Commission officials including President Jean-Claude Juncker.

"We are looking at points that could be the basis for a possible solution."

Conte gave no details but said aspects discussed included ways some budget measures could be strengthened to improve Italy's faltering economic growth prospects.

This week, after discussion and votes in parliamentary commissions, the budget reaches the floor of the lower house, the Chamber of Deputies, where political sources say the government is likely to put it to a confidence motion.

This would hasten the passage of the bill by truncating debate on amendments and ensure discipline among sometimes fractious coalition partners, the anti-establishment 5-Star Movement and the right-wing League.

The government must resign if it loses a confidence vote, but such an outcome is not seen as a risk in the Chamber of Deputies, where the coalition of former rivals has an ample majority. The budget must be approved in both houses of parliament by the end of the year.

The prime minister's office has denied the government is ready to make a significant reduction to the 2.4 percent deficit goal, but government and coalition sources have told Reuters it may cut it to as low as 2 percent to reach a deal with Brussels.

The League's economic spokesman Claudio Borghi said on Sunday that money set aside for a measure to reduce the retirement age next year may be more than is actually needed.

"Whether we use these savings to lower the deficit or for other investments is a political decision the government will take with the Commission," he said in a radio interview.

Another prominent League lawmaker, Alberto Bagnai, said the Commission now appears less hostile to Italy and that rioting in Paris over the weekend is also likely encourage it to seek compromise rather than confrontation.

"If we see the discontent that there is in France, these are things that change the climate," he said in a television interview with state broadcaster RAI.

While Italy's deficit goal remains well inside the EU ceiling of 3 percent of GDP, Bagnai forecast that France's deficit will exceed 4 percent next year, partly because the Paris government "will have to do something for these people".

(Editing by David Goodman)