Italy strikes deal with EU commission over budget - ministry spokeswoman

By Giuseppe Fonte and Crispian Balmer

ROME (Reuters) - Italy has done a deal with the European Commission over its contested 2019 budget, a spokeswoman at the Economy Ministry said on Tuesday, signalling an end to weeks of wrangling that had shaken financial markets.

"Great satisfaction for the result achieved," Deputy Prime Minister Matteo Salvini said in a brief statement, without mentioning the Commission or giving any details of the accord.

A source in Prime Minister Giuseppe Conte's office urged caution, saying Rome had only received verbal assurances from Brussels. He added that a deal was not expected to be formalised until a meeting of EU commissioners on Wednesday.

"There is reasonable expectation that the budget proposal will be brought to the Commission's attention tomorrow and that this will be positive for Italy," said the source. "But it is necessary to wait for the procedure to be completed in order to consider the negotiation definitively concluded."

A Commission spokesman confirmed that the Italian budget would be discussed on Wednesday, but declined further comment. The Economy Ministry also declined to give further details.

Conte, who has led the talks with Brussels, will address parliament at midday on Wednesday, his office said.

The leaders of Italy's populist government originally presented a budget for the euro zone's third largest economy that envisaged a deficit equal to 2.4 percent of gross domestic product (GDP) in 2019, up from 1.8 percent this year.

They argued that Italy needed expansionary measures to lift lagging economic growth. The Commission swiftly rejected the plan, saying it would not lower Italy's large debt and declaring it in clear breach of EU fiscal rules.

After initially refusing to budge and launching fierce verbal assaults on EU commissioners, the Italian government finally relented last week and submitted a revised plan, including a deficit target of 2.04 percent.

CALMER MARKETS

EU sources said earlier this week that the Commission wanted the target to be trimmed further, but two government sources in Rome, who declined to be named, said on Tuesday that commissioners had finally agreed to Rome's revised figure.

The clash with the EU, whose fiscal rules are designed to protect the euro zone from a debt crisis, has worried investors, pushing up Italy's borrowing costs and depressing bank stocks.

But bond yields have fallen back since the end of November as expectations of a compromise deal grew.

As part of the new plan, Rome has agreed to lower its forecast for growth next year to 1 percent from 1.5 percent -- a figure which had been widely criticised as unrealistic -- a government source and a Commission source said on Monday.

Italy's ruling parties, the rightist League and anti-establishment 5-Star Movement, insist that any deal must not prevent the launch next year of their two flagship reforms -- income support for the poor and a lower retirement age.

However, League leader Salvini and 5-Star chief Luigi Di Maio have said savings will come from revisions to both measures, mainly by launching them no earlier than March, instead of from the start of 2019.

Time is running out fast to finalise the budget law, which must clear both houses of the Italian parliament by the end of the year.

Looking to dispel fears of a budget crunch, Salvini told reporters the package would be approved in time. "We are ready to work even on the night of New Year's Eve," he said.

(Additional reporting by Francesco Guarascio in Brussels; editing by Gareth Jones)