Italy borrowing rates could rise further, EU officials warn

Tony Gentile | Reuters

DATE IMPORTED:June 02, 2018An Italian Army parachutist hoists the Italian flag during the Republic Day military parade in Rome, Italy, June 2, 2018.

The worst could be yet to come for Italy if its coalition government sticks to plans to increase public spending, according to the vice president of the European Commission.

Italy is due to present its controversial spending plans to the European Commission for approval by midnight Monday, plans which have already caused the government pain in terms of higher borrowing costs.

“At the end of the day it may be counterproductive for Italy’s economy, which may now be confronted with sky-high interest rates,” Valdis Dombrovskis told CNBC’s Geoff Cutmore during a panel at the International Monetary Fund meeting in Bali.

“And the government will be confronted with higher debt servicing costs. So this is certainly a factor which also needs to be taken into account when discussing Italy’s government’s fiscal plans,” he said.

Italy’s 2019 budget keeps promises made to the Italian electorate on increased public spending and reduce taxes. But breaks promises made to Brussels to target lower public spending and debt.

The plans have already caused confrontations with the powerful Brussels-based Commission, which upholds the EU’s spending rules among other things. Although the spending plans envisage Italy’s spending within the rules laid out by the executive body, the government has rowed back on previous promises to lower public spending and to target a more balanced budget.

Dombrovskis said the Commission didn’t want to sanction Italy for reneging on agreed fiscal terms, however.

“We definitely do not desire to sanction anyone. On the contrary, we are still in dialogue with Italian authorities trying to ensure that the Italian authorities are actually correcting their course,” he said.