Italy reaches budget breakthrough after the EU initially rejected its 2019 spending plans - CNBC

Italy and the European Commission, the EU's executive arm, have announced a new budget deal after weeks of wrangling over the country's 2019 spending plans.

Italy's government said last week that it would lower its deficit target for next year to 2.04 percent, down from an original target of 2.4 percent. The target was confirmed by the Commision on Wednesday.

"The Italian government has come a long way, only a few weeks ago there was confrontational rhetoric," the European Commission's Vice President Valdis Dombrovskis said Wednesday, meaning that the Commission can avoid launching disciplinary measures against Italy, he told reporters.

"The solution is not ideal but it allows us to avoid an 'Excessive Deficit Procedure' at this stage … the new budget is based on a plausible economic scenario," he said.

Reports that a deal with the Commission could be imminent gave Italian financial markets a boost Wednesday morning.

The deal comes after an impasse between Italy's coalition government, made up of the right-wing Lega party and anti-establishment Five Star Movement, and the European Commission over the country's controversial 2019 spending plans. Italy got into trouble with the Commission because its 2019 budget had envisaged increased spending and lower taxation in order to fulfill key election promises, including the introduction of a basic income (called a "citizen's income") for the poor, a lower retirement age and a proposed flat tax rate.

These plans would have meant that Italy's budget deficit (the amount by which its spending exceeds its revenues) would have hit 2.4 percent in 2019.

While this is within the official EU limit of 3 percent, Brussels rejected the budget because it goes against EU rules which say that states should work towards lowering their budget deficits (Italy's previous government had already agreed to a lower budget deficit of 0.8 percent) and debt piles (Italy has the second highest debt pile in the euro zone of 133 percent of GDP).

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