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Right on the heels of Matteo Salvini's Lega party winning over 30% in the European elections sources say the European Commission is considering proposing a 3.5 billion-euro ($4 billion) penalty on Italy over its failure to reduce debt per EU budget rules.

Italy Tax Cuts

Italians are voting for tax cuts - EU is wanting faster debt reduction

The news has seen the Euro and Italian bonds weaken. Italian bonds fell with the yield on benchmark 10-year notes climbing 6 basis points to 2.61 percent. The euro fell 0.1 percent to $1.1190.

At this point it is but a Bloomberg soure story and not officially decided. Further Italy's failure is well known by markets. Such a move would be part of the European Union’s regular budget monitoring process and would likely on June 5. The last show down between Italy and the EU roiled markets at the end of 2018. An Italian finance ministry spokeswoman declined to comment to Bloomberg.

“I’m told a letter from the European Commission on the Italian economy is on its way,” Salvini said in Milan. “I think Italians gave me and the government a mandate to completely, calmly and constructively re-discuss the parameters that led to unprecedented job instability, unemployment and anxiety.”

The process, if implemented is drawn out process, with plenty of outs. The final decision on penalties will be months with Italy given time to correct its budget woes. Though with Lega winning such a large percentage and Italain voters wanting tax cuts a move to suit the Commisiosn is not likely, at least officially. Italian Deputy Prime Minister Matteo Salvini on Monday indicated he’ll push back against EU demands when crafting his next budget. It should be noted that the EU has never fined a country over its budget.

EU finance ministers would have to sign off on a so-called excessive deficit procedure recommendation. If they do then “non-interest bearing deposit” of up to 0.2% of gross domestic product, around 3.5 billion euros could be demanded. The next EU Finance ministers meeting is in early July. If Italy doesn’t agree to the deposit request, it would be a breach of EU law.

Under EU fiscal rules, the bloc’s members are expected to to keep their deficit below 3% of GDP and debt under 60% of GDP. Countries with debt that exceeds that level need to be reducing it at a satisfactory pace. Itay's debt is 132% of output, more than twice the EU limit. The question for the EU's executive arm is, is it being reduced fast enough. It was only a few months after the commission decided against launching a so-called excessive deficit procedure against Italy after the country’s populist government pledged to rein in some of its spending.

From The Traders Community News Desk

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