UPDATE 1-Italy PM says deficit back on track for 2.04%, should please EU

Prime Minister Giuseppe Conte said on Tuesday Italy's 2019 budget deficit looked set to hit its target of 2.04% of gross domestic product, meaning the country was compliant with European Union finance rules. The European Commission has threatened to launch disciplinary procedures against Rome because it failed to reduce its large public debt in 2018 as promised, and has urged Rome to bolster state finances.

But with the EU preoccupied with a stalemate over the allocation of the bloc's top jobs, the Commission on Tuesday called off a meeting that was due to decide on whether to recommend disciplinary action, easing the pressure somewhat. Rome has ruled out any belt-tightening, but the government said on Monday it would be able to cut this year's official deficit forecast of 2.4%, which was set in April, thanks to lower-than-expected spending and higher revenues.

The target has bounced up and down since autumn when the anti-austerity government infuriated Brussels by raising it to 2.4% from the 0.8% set by the previous, centre-left administration. After a drawn-out tussle in which the Commission threatened Rome with a disciplinary procedure that could lead to fines, the sides agreed in December on a 2.04% target, which is unusual because deficits are usually rounded to one decimal point.

After a slump in growth, the government raised the target back to 2.4% in April, and the Commission again threatened disciplinary action. Conte, a former academic picked as prime minister by the coalition of the anti-establishment 5-Star Movement and the right-wing League, said he was ready to send Brussels the latest public accounts data, showing savings of some 7 billion euros compared with the April target.

He said this "allows us to say that we are in line with the forecast of the famous 2.04% of GDP". Italian government bond yields dropped sharply across the curve to the lowest levels in at least a year on Tuesday, boosted by the lower deficit target and hopes for a detente in a budget row with Brussels.

Although the pressure from Brussels appears to be easing, the Commission could still decide that a procedure against Rome is warranted. Italian government officials said on Monday the deficit target for 2020 remained at 2.1%, as set in April.

That may not please the Commission because it would show no reduction from this year, in defiance of EU rules, which require steady deficit reduction towards a balanced budget. However, Deputy Economy Minister Laura Castelli, from the 5-Star Movement, said that the situation was improving and the government was focused on preparing next year's budget.

"Our accounts are in order, the data is fine and revenues are flowing in," she said in a radio interview. "People expect a lot of us and we don't want to disappoint them."