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Italy’s populists seem intent to defy Europe with budget proposal

The European Union issued a warning to Italy after the new government announced a 2019 budget deficit three times as big as that of the last administration. (Video: Reuters)

ROME — Since Italy’s coalition came to power four months ago, a nervous Europe has wondered whether the realities of governing would prompt Italian leaders to pull back on some of their most expensive populist promises.

For lawmakers and traders from Brussels to Berlin, the clearest answer to date has now arrived in the form of a number: 2.4 percent.

That is the announced target for Italy’s 2019 budget deficit as a percentage of gross domestic product — and it suggests the new Italian coalition will spend far more aggressively than its center-left predecessor. It also indicates the government’s leaders are willing to unnerve markets and even defy European Union fiscal rules for the sake of attempting to do what they said on the campaign trail: upend the norms in a nation whose economy has flatlined for two decades.

It was partly the frustration over that stagnation that helped drive Italy away from mainstream politics — and toward a coalition of two parties that have offered to crack down on immigrants and generously expand the welfare state. Some in Europe had held out hope that more cautious voices inside the Italian government, including the country’s economic minister, would win debates over such expansions. But the opposite happened in deliberations that ended Thursday night.

The new budget-deficit target would break a European Union requirement that deeply indebted countries work to reduce their burden. Other countries, including France, have run afoul of the fiscal rules and paid no major consequences.

But economists and analysts on Friday said Italy presented a novel case, in large part because its challenge to Europe seemed more intentional and politically calculated. Italy’s politicians have bashed Brussels bureaucrats and said their restrictions are counterproductive.

“If there’s one thing this coalition seems to be hellbent on, it is spend more and defy Brussels,” said Hosuk Lee-Makiyama, director of European Centre for International Political Economy.

How Europe approaches Italy’s budget plans — which have not been finalized — will depend on the attitude of other leaders, particularly in Germany. The European Union could push Italy to make changes, or even, in a much more dramatic move, press for financial sanctions. But Italy could argue other countries have done worse, and that new spending is the way to spur growth and jump-start its economy.

“This will become something of a showdown,” said Fabian Zuleeg, the chief executive of the European Policy Centre.

Fears have eased from earlier this year that Italy might exit the euro zone altogether. But investors have remained anxious about the management of Europe’s fourth-largest economy. On Friday shares of Italy’s major stock index tumbled 3.7 percent, its worst day in more than two years, according to MarketWatch. Investors worried Italy could be in store for credit ratings downgrades. In the worst scenario, Italy could push Europe into another perilous phase in which it is dealing with the teetering banks of a country with a high public-debt load.

The problem for Italy’s populists is the country is not growing fast enough to pay for everything they want — at least not without borrowing. The International Monetary Fund expects the Italian economy to grow 1.1 percent in 2019, at half the pace of that of other advanced economies. Italy’s debt is about 130 percent of its gross domestic product, a ratio that is second in Europe only to Greece.

But Thursday night, Italy’s government leaders said their planned budget target would allow for many of their political goals, including tax cuts, a lowering of the retirement age, and a basic income for the poor — one of the flagship proposals of the Five Star Movement. Luigi Di Maio, Italy’s deputy prime minister and leader of the Five Star Movement, fired jubilant Facebook posts Thursday night and said Italy was “erasing poverty” and “giving back dignity” to retirees.

“Tomorrow,” he then wrote, “we will wake up in a new Italy.”

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