Italian budget impasse shakes European markets

Matteo Salvini says his party's surge in the polls was due to economic policies

The euro plummeted 0.2 percent to $1.1465, approximately to a seven-week low of $1.146 extended during the former session. However, he said the government would act if the spread between its benchmark 10-year bond yield and the equivalent German bund balloons. The BTP yield is now 3,03%, up from 2,85% October 5.

Underscoring the anxiety in Europe, European Commission Vice President Jyrki Katainen told reporters on Tuesday that Italy was highly vulnerable.

Rome is defying Brussels and has resolved to maintain a 2,4% budget deficit, which is three times higher than the commitment taken by the previous government.

The markets have been shaken by a row between Brussels and Rome, which are at loggerheads after Italy's populist government passed a purse-busting budget last week to the annoyance of the EU. Italy is the third biggest economy in the Eurozone with an industrial base second only to Germany.

However, once the Commission receives a draft budget plan in a little under a week's time, it could force an European Union member nation to make revisions - for the first time in the bloc's history.

The single currency has been relatively impervious to such spikes in recent weeks as concern over Italy's budget has dominated headlines.

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The original promise to triple the previous government's deficit target for the next three years to 2.4 per cent of GDP each year would have made it very hard for Rome to reduce its 130 per cent debt/GDP ratio each year, as required under the EU's budget rules.

Salvini also said that he shares the view with the leader of the Europe of the Nation's group at the European Parliament, Marine Le Pen, that the real enemy of Europe is the European Commission.

Speaking with right-wing Italian Interior Minister Matteo Salvini by her side, Le Pen said Bannon is not European, but rather an American who wants to create a think tank to offer research to nationalist parties in Europe.

"We are fighting not against Europe, but against the European Union, which became a totalitarian system", she said.

Some European finance ministers and EU officials I talked to beforehand suggested that they expected exactly this kind of climbdown, and said that they saw it as the natural outcome of a market keen to enforce disciplinary limits on Italy's most expansionist spending plans in a generation.

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