EU leaders worried about Italy's budget

Italian prime minister Giuseppe Conte held bilateral meetings with the Dutch, German and French leaders.

Rutte, who has been increasingly leading a group of fiscally-conservative eurozone countries, said that the expected higher deficit was "not helpful" in the context of the debate about the future of the euro.

"[This debate] does not become any easier when such a large member state appears not to stick to the agreements from the stability and growth pact," the Dutch leader warned.

During the meeting with EU leaders, Conte focused his speech on Italian reforms.

German chancellor Angela Merkel told reporters after the meeting that Conte briefed her on reforms, from the fight against corruption to the transparent digital structure of public administration, but that on the budget, Italy needs to engage in a "positive dialogue" with the EU commission.

Echoing Merkel, Rutte said reforms were "always good", but that implementing them did not give a state an excuse to increase its deficit beyond what was agreed in the stability and growth pact.

Dangerous debt

EU officials have already been warning Italy over its planned 2019 budget, which is expected to increase the country's debt, which currently stands at 133 percent of its GDP and which is the second biggest in the eurozone after Greece. The EU ceiling is 60 percent.

The EU criticism came after Italy's populist government, a coalition of the Five Star Movement and League parties, set the 2019 deficit target at 2.4 percent, which spooked investors. The previous government promised to keep the deficit at 0.8 percent next year.

"All over-indebtedness is dangerous in my opinion," Austrian prime minister Sebastian Kurz said at the EU summit.

The EU commission has the task of checking if budget plans stick to EU rules.

Conte said on arrival at the EU summit that the budget plans boost welfare spending, cut the retirement age and hike the deficit, and acknowledged they were unlikely to please the commission.

Euro commissioner Pierre Moscovici was in Rome on Thursday to hand a letter raising concerns over the draft budget to Italian finance minister Giovanni Tria.

Reviewing the Italian budget plans, the commission could decide to send warnings or to send the budget back to Rome for changes by 29 October.

EU commission president Jean-Claude Juncker said the EU executive has "no negative prejudice against the Italian budget," and will analyse with the same rigour as other budgets.

The EU commission chief said Italy have used all the elements of flexibility of EU rules, and that leaders don't want to add more room for manoeuvre for Italy.

"We [the commission] were very kind, gentle, and positive, when it came to Italy, because Italy is Italy," Juncker said, adding that in the last three years Rome was able to €30bn more without sanctions by the EU's stability rules.

EU leaders are however also eager to avoid a full-on conflict with Rome's populists before the European elections next May.

Reform drive

The leaders also discussed planned reforms to the eurozone to make the bloc more resilient to future crises.

France's president Emmanuel Macron has been pushing for reforms, including a eurozone budget, that irked Germany and the Netherlands among other fiscal hawks that are worried that rich member states would have to hand out more poorer, less competitive EU countries.

Rutte's warning exposes that Italy's planned budget underlines those fears, and could halt the reform process.

The reforms under consideration are partly to ensure that the eurozone would have enough money in case of a major banking crisis to resolve failing banks and to prevent bank runs with the help of a deposit guarantee scheme - completing the EU's banking union.

The European Stability Fund (ESM) could get new powers of regularly monitoring economies and could step in as European monetary fund. It could lend to governments that have been conducting sound economic policy, but were hit by external crises.

EU leaders want decisions to be taken at the December summit on these instruments.

EU leaders also talked about a budget designed for the eurozone, an idea pushed by Macron. Some countries would like to discuss the issue already as part of the EU's long-term budget kicking off in 2021, an idea supported by Germany.