A growing confrontation between Italy and the European Commission over Italy's debt burden is hitting its stock market hard, although the country's Government bonds, or BTPs, are weathering the storm.
The Italian government's borrowing costs in bond markets rose this week - a sign of investor concern - as Deputy Premier Matteo Salvini repeated his opposition to the rules after his League party came in first in elections to the European Parliament.
The message in an European Central Bank report released Wednesday comes as Italy's populist government is challenging the debt rules, intensifying conflict with the EU's executive commission.
If Rome does not provide by Friday sufficient explanation for its growing debt or accepts that it must limit its spending plans this year, the Commission is likely to formally launch disciplinary steps next week, European Union officials said.
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The 5-Star Movement, Salvini's government partner and the victor of last year's domestic elections, slumped to a weak 17.1%, behind the 22.7% obtained by the opposition Democratic Party.
Salvini insists that Italy should cut taxes to boost growth, rather than abide by fiscal rules that could hamper activity. A commission spokesperson confirmed that Wednesday's letter asks for a response by the close of business Friday.
Italy's situation appears the most complicated.
But new figures released in April showed the country's structural gap had worsened a year ago and will continue deteriorating in 2019 as the government pursues free-spending policies which have so far had little impact on growth.
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Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. The global economy is also evolving as expected, it said. -With assistance from Erik Hertzberg.
In its conclusions, Brussels will take into consideration "relevant factors" that Italy deems may have contributed to the deterioration.
Next week the commission is expected to recommend the opening of something called an excessive deficit procedure against Italy, due to its colossal public debt that stood at 132.2 percent of GDP in 2018, well above the 60 percent threshold set by European rules.
Earlier on Wednesday, the European Central Bank said countries like Italy were exposing themselves to the risk of problems further down the line by reversing and delaying economic reforms.
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