Merkel calls for stable euro zone budgets in warning shot to Italy

Italy's Interior Minister Matteo Salvini gestures during a news conference with Prime Minister Giuseppe Conte after to approve a new decree of the measures on immigration and security at Chigi Palace in Rome Italy

The EU presidency says it "is really, really decisive" for Italy to change its draft budget because otherwise Italy would not only threaten its own financial health for also that of its eurozone partners.

Citing Italy's plans to increase spending and its deficit, and allow its government debt to remain elevated, the European Commission said the country is trying to undertake "a particularly serious" breach of the rules. At 1100 GMT it traded 0.1 percent up on the day at $1.1464.Italy is the third-largest economy of the 19-country euro zone, and a crisis there could unsettle the entire bloc.

The extra yield that investors demand on Italy's 10-year bonds over comparable German notes rose to 327 basis points on Thursday, the highest level in over five years.

"As long as I'm head of this movement and a minister of this government I'll always guarantee that Italy remains within the euro and in Europe", he added.

The Italian government's brash attitude towards public spending has spooked financial markets, with many fearing a re-run of the debt crisis that almost saw Greece kicked out of the eurozone.

In a joint press conference with Tria on Thursday, Moscovici was at pains to stress that "the European Commission is not Italy's enemy" and that its goal is not to criticize the ways in which eurozone members decide to spend money, but rather to make sure that each country plays by the rules that everyone has agreed to. He insisted the increase in the structural deficit is less than the European Union calculates.

Rome's escalating fight with the Commission over the budget is also alarming markets.

Rome's calls for European Union funding to Russian small firms are not expected to be reflected in the joint document that European Union leaders will approve at the end of their meeting this week, diplomats said. And it means Italy's debt load - which at over 130 per cent of GDP is well over the 60 per cent limit - will probably not be lowered as promised.

In the coalition contract drawn up in May, Italy's ruling parties wrote that Russian Federation should not be seen as "a menace but rather an economic and commercial partner, potentially increasingly significant". He told a late-night talk show that the draft budget presented to President Sergio Mattarella's office contained a proposal to extend a tax amnesty on money held overseas and brought back to Italy.

Giancarlo Giorgetti, a cabinet undersecretary and high-ranking League official, told La Repubblica that 5 Star had not told them or Prime Minister Giuseppe Conte of their concerns before going public.

According to the version published by the Ministry of Finance earlier this week, Italy's draft budget introduces a basic income for the poor of 780 euros a month, a "citizens' pension" of 780 euros a month, to be paid for mostly by deficit spending equal to 2.4 percent of gross domestic product (GDP).

Both parties want to maintain their populist government at least until the European Parliament elections in May, the outcome of which could shift the delicate balance in the governing coalition.

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