September 2, 2019 / 1:01 PM / 2 months ago

UPDATE 1-Italy's PD says new govt needs to try to change EU fiscal rules

(Adds Conte quote, background)

ROME, Sept 2 (Reuters) - A new Italian government should try to obtain changes to the European Union’s budget rules in order to head off a risk of Europe-wide recession, the Lower House leader of the Democratic Party (PD) said on Monday.

“We have always obtained flexibility (in application of the rules), but now we have to modify the rules for everyone,” Graziano Delrio told reporters as he entered a meeting of the centre-left party.

Delrio was speaking as the PD continues talks with the anti-establishment 5-Star Movement over the formation of a coalition led by Giuseppe Conte after the previous administration made up of 5-Star and the eurosceptic League party collapsed last month.

The new government could improve Italy’s fractious relations with the EU and any move to change the budget rules are expected to be taken without unilateral initiatives after agreement with member states.

“I would very much like Italy to make a critical contribution to adapting the stability pact to the new economic climate, to the new economic perspective,” Conte said on Sunday.

Italy must hand in a draft 2020 budget by mid-October and the new government’s first task will be to find 23 billion euros of extra funds to avoid an automatic VAT hike agreed with Brussels to meet EU deficit rules.

Conte has expressed confidence in reaching a government deal by Wednesday.

However his efforts might be still be derailed by an online vote on the potential accord called by the 5-Star for its 100,000 supporters. The ballot will be held on Tuesday between 0700 and 1600 GMT. The outcome is far from certain, given the past rivalry between the two parties.

Nonetheless, Italian bond yields fell towards multi-year lows on Monday in a sign that investors saw the new government close to hand and the prospects of an early election receding.

“It seems like they’ll come up with a coalition agreement treaty so this is good for a slight tightening (in spreads),” said Norbert Wuthe, rates strategist at Bayerische Landesbank. (Reporting by Angelo Amante, writing by Gavin Jones and Giselda Vagnoni; Editing by Crispian Balmer)

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