The European Commission confirms in a statement today the “existence of a particularly serious case of non-compliance” with EU’s recommendation in Italy’s Draft Budget Plan. The Commission has “carried out a new assessment of the prima facie lack of compliance with the debt criterion The new assessment was necessary because “Italy’s fiscal plans for 2019 represent a material change in the relevant factors analysed by the Commission last May.”

The Commission also noted that (i) the fact that macroeconomic conditions, despite recently intensified downside risks, cannot be argued to explain Italy’s large gaps to compliance with the debt reduction benchmark, given nominal GDP growth above 2% since 2016; (ii) the fact that the government plans imply a marked backtracking on past growth-enhancing structural reforms, in particular the past pension reforms; and above all (iii) the identified risk of significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2018 and the particularly serious non-compliance for 2019 with the recommendation addressed to Italy by the Council on 13 July 2018, based on both the government plans and the Commission 2018 autumn forecast.

European Commission’s statement here.

European Commission Vice President Valdis Dombrovskis confirmed debt criterion should be considered as not complied and a “debt-based Excessive Deficit Procedure is thus warranted” for Italy. He emphasized that “Euro area countries are in the same team and should be playing by the same rules.” And, “these rules are there to protect us. They provide certainty, stability and mutual trust.”

Economics commissioner Pierre Moscovici tweeted that “Today is not yet the opening of an EDP. First the Member States must give their views within two weeks, then the @EU_Commission will have to prepare the procedure, including a new recommendation for Italy to correct its deficit and debt trajectory.” Also, “Our door remains open to dialogue with Italy. As we move closer to opening an Excessive Deficit Procedure, it is even more essential that the Italian authorities engage constructively with the @EU_Commission.”

Italy’s Istat, National Institute of Statistics, revised down both 2018 and 2019 GDP growth forecasts. For 2018, growth is projected to be at 1.1%, down from May’s forecast of 1.4%. For 2019, growth is projected to be at 1.3%. Istat noted that “this projections take into account the less favourable international framework and the expansionary fiscal policies implemented in the 2018 Budget Law.”

Istat’s forecast for 2019 is notably lower than the coalition government’s overly optimistic 1.5%. But it’s higher than European Commission’s 1.2% and IMF’s 1.0%. GDP forecast is a key figure in Italy’s draft budget plan. European Commission is expected to publish a report formally starting the so called Excessive Deficit Procedure against Italy today.

Ahead of that Euro is lifted mildly while Italian yield dips on news that Deputy Prime Minister Matteo Salvini may be open to reviewing its 2019 budget. The La Stampa daily said he’s ready to lower planned spending on a citizens’ income and the unwinding of a previous pension reform. But it also be noted that League, which Salvini heads, is just part of the coalition. Five Star Movement Luigi Di Maio has to agree to Salvini’s idea, if the plan is to be revised.

Quite update on this: Reuters then reported, quoting an unnamed governmetn source that “The League rules out revising the fiscal plan.”

Italian 10 year yield is currently down -0.087 at 3.530. German 10 year yield is up 0.016 at 0.371 at the time of writing. That, is, German-Italian Spread is still above 300 at 315. Not much to cheer yet.

The European Commission will publish its views on the draft budget plan of all 19 Eurozone states today, at around 1100GMT. And without a doubt, Italy’s DBP will be included. It’s generally expected that the Commission will, at the same time, publish a report regarding Italy’s breach of EU rules. That will be the first step in the so called Excess Deficit Procedure, which could eventually lead to fines for Italy up to 0.2% of its GDP.

Reactions in the bond markets will be closely watched today. For now, German 10 year yield stands at 0.354. Italian 10 year yield stands at 3.618. That is, German-Italian spread is now at 326. It’s generally agreed that 300 is an alarming level while 400 is definitely unsustainable. Many of the smaller, regional Italian banks will have capitalization problems at 400.

Talking about Italy, Eurogroup President Mario Centeno expressed his empathy and said “I understand and share Italy’s concerns about sluggish growth and complex social issues”. However, he also emphasized that “this can be achieved without placing a trajectory of fiscal consolidation at risk.”

He also emphasized that adhering to fiscal rules is “not only in each country’s individual interest, but also in our collective interest”. He pointed to the Eurozone debt crisis and said it “has taught us that in an economic and monetary union, the responsibility to conduct sound and responsible policy does not stop at national borders.”

Regarding the Franco-German proposal of Eurozone budget, he said “a common fiscal capacity should not discharge countries from their obligation to conduct sound fiscal policies and respect the fiscal rules.” On the other hand, Eurozone statement would be better on reacting to asymmetric shocks, without overburdening the ECB.

Separately, ECB Governing council member Ewald Nowotny said Italy is not “an immediate threat” but rather a “political problem”. However, “in the longer term there is the question of whether I have enough trust on the capital markets.”