EU executive to launch action over Italy budget on Wednesday - sources

By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission will take the first step next week to discipline Italy over its 2019 budget, three officials close to the process said, after Rome defied EU objections to its plans to borrow and spend more next year.

Italy re-submitted its draft budget to the Commission on Tuesday, with the same main assumptions that Brussels rejected in October as contravening EU rules.

Faced with that escalation of the fiscal showdown from the eurosceptic government in Rome, the EU is to take the first step in what is called an excessive deficit procedure (EDP), focussing on Italy's failure to cut debt, on Nov 21, officials said.

"The Commission will launch its report (under treaty article 126.3)... to start the EDP (procedure), on Wednesday," a senior EU official said on Friday.

Once the Commission publishes its report on Italy's finances on Wednesday, EU deputy finance ministers and treasurers grouped in the Economic and Financial Committee (EFC) will have two weeks to review it.

After the EFC delivers its opinion the Commission can move to formally place Italy under the excessive deficit procedure by sending an opinion to Rome and informing EU finance ministers, who have to endorse any decision to launch the procedure.

The Commission said the decision on the exact content of the report under preparation and therefore the potential next steps in the disciplinary procedure has not been taken yet.

"We do not wish to speculate on the launch of an EDP," a Commission spokesperson said.

"The Commission will complete its assessment of Italy's revised draft budgetary plan and publish an opinion based on that assessment on 21 November, along with opinions on the draft budgetary plans of all other euro area member states," he said.

DEBT NOT FALLING AS NEEDED

While such procedures, which can end in fines, have been launched against many countries in the past, Italy will be the first ever to be disciplined over debt.

At 131 percent of GDP, Italy's debt is proportionally the second highest in the EU after Greece. EU rules, which the Commission has to enforce, set the ceiling at 60 percent, and say Italy must cut its debt towards that figure every year.

The rules also require that the structural budget deficit - which excludes one-offs and business cycle swings and which Rome plans to raise - be cut until it reaches balance or surplus.

EU laws were sharpened during the sovereign debt crisis of 2010-2015 - which nearly destroyed the euro - to give numerical targets for annual debt reduction.

Italy sees its debt falling to 127.3 percent of GDP in 2020, mainly thanks to faster economic growth triggered by deficit-financed higher consumption.

But the Commission - which expects Italy's debt to stay around 131 percent of GDP through 2020 - and the International Monetary Fund say the growth assumptions are too optimistic.

Backing from euro zone finance ministers seems certain. Worried about the possibility of another broader debt crisis, they urged Italy this month to heed the Commission's objections.

EU finance ministers are then likely to formally declare Italy in excessive deficit at their meeting on Jan. 21-22 and give Rome between three and six months to take remedial action.

Within 20 days of that, the Commission can then demand that Italy lodge with it a non-interest-bearing deposit amounting to 0.2 percent of its GDP in the preceding year.

EU rules do however allow the Commission, under exceptional circumstances, to recommend that the ministers reduce the amount of the deposit or cancel it.

(Reporting By Jan Strupczewski; editing by Gareth Jones)