[WATCH] EU rejects Italy's budget and gives three week deadline for review

The European Commission has rejected Italy's budget for 2019, the first time Brussels has taken such a decision but Italian Prime Minister Giuseppe Conte insists there is no Plan B

Valdis Dombrovskis, the European Commission’s vice president
Valdis Dombrovskis, the European Commission’s vice president

The European Commission has strongly rejected Italy's budget proposals for next year as rancour between the Eurozone's third largest economy and Brussels continues.

Valdis Dombrovskis, the European Commission’s vice president, told Italian authorities to come up with a serious revision to their proposals in three weeks. Italy risks punitive action if it fails to present a changed budget.

But in an interview with Bloomberg, Italian Prime Minister Giuseppe Conte insisted there was no Plan B. He said the government was willing to tweak certain aspects but was sticking to a deficit ceiling of 2.4%.

If Italy refuses to comply, the European Commission may even issue an Excessive Deficit Procedure (EDP). This would require the country to provide a plan of corrective action as well as deadlines for their achievement. Barring that, Italy will be fined.

The tussle with Brussels has created jitters in the market. The cost of debt for Italy increased after the EU's rejection.

Italy may be Europe's fourth largest economy and the eurozone's third biggest but it is saddled by €2.3 trillion of debt. Italy's debt-to-GDP ratio is at a whopping 130%. The deficit-proposing budget will derail plans to reduce the country's debt pile.

This is the first ever decision taken by Brussels to reject a budget proposal by a member state.

Analysts see little chance that Italy's coalition government made up of Lega and Cinque Stelle will change course given its pledges to voters to up welfare spending.

The current euroskeptic coalition has pledged to cut taxes, roll back on pension reforms, introduce a universal income and introduce a tax amnesty to combat tax evasion.

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