EU warns Italy on budget but walks a fine line

The European Union handed Italy a stinging letter Thursday warning that the nation's significantly higher deficit targets represented a deviation "unprecedented in the history" of EU budget rules — but still offered reassurances that the bloc was "not an adversary of Italy."

The dual message underlines the EU's balancing act as it tries to prod Italy's new populist government back into compliance with EU financial standards without enflaming the anti-Europe rhetoric that is coursing inside Italy.

Italy has until Monday to respond to the letter, which is likely to set off a back-and-forth that will go on for weeks, if not months. Italy is one of the 19 nations using the shared euro currency, so its financial decisions and actions can affect the fortunes of the euro and subsequently the finances of other EU nations.

Speaking to reporters in Rome, EU budget chief Pierre Moscovici said the EU Commission and many other EU nations are worried by Italy's spending plans, which will see the country's budget deficit rise to 2.4 percent of GDP, three times higher than agreed upon by the previous government.

Moscovici called the difference "unprecedented."

But he also said the commission would not interfere with Italy's choices, saying its role was one of "a referee, not an adversary, of Italy."

"I cannot imagine a Europe without Italy or Italy without Europe," Moscovici said. "Nor a euro without Italy or Italy without the euro."

Italian Economics Minister Giovanni Tria emphasized that the government's draft budget, sent to Brussels on Monday, was aimed at increasing growth. He said he hoped that when Italy explained the structural reforms included in the bill that would bring the two sides' positions closer together.

EU Commission chief Jean-Claude Juncker said the EU has always been generous with Italy when it comes to assessing its budget, and that EU leaders had already approached him to make sure not to be too flexible on strict deficit and debt levels when combing through the details of Italy's spending plans.

"I had some colleagues on the phone say they don't want us to add flexibility to already existing flexibility," he said, adding that the EU has no intention of doing so.

In a press conference in Brussels, Italian Premier Giuseppe Conte denied that the spending deviation was "unprecedented," but noted that Italy had several days to offer a formal response to the commission's concerns.

Political analyst Wolfango Piccoli of Teneo Intelligence said the commission is facing a tough dilemma and must walk a fine line with Italy's budget.

"A harsh rebuke and the threat of further measures would likely boost the popularity of the populist coalition government," giving Italy's governing parties "an invaluable narrative to use during the campaign for the European elections in May," Piccoli said. "In contrast, a more lenient approach would further undermine the credibility of the EC's tortuous fiscal rules and irritate some member states from Northern Europe."

Conte will fly home to another controversy. The head of one of Italy's two ruling populist parties says unauthorized changes were made to the draft budget, suggesting a possible rift in the coalition government.

Luigi Di Maio, the head of the 5-Star Movement, on Thursday threatened to lodge a formal criminal complaint. He told a late-night talk show that the draft budget presented to President Sergio Mattarella's office contained a proposal to extend a tax amnesty on money held abroad and brought back to Italy. The 5-Star Movement opposes such a move, as it risks laundering "corrupt or mafia capital."

Matteo Salvini, the leader of the League party, called the accusation "surreal."

Conte said he would review the draft budget line by line when he returns to Rome.

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Barry reported from Milan.