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Italy slams Brussels deficit warning
BRUSSELS, Nov 9, 2018 (BSS/AFP) – Italy on Thursday flatly dismissed the
EU’s more pessimistic outlook for the Italian economy as the IMF warned Rome
should take steps to lower debt.
The populist government in Rome is under massive pressure since the
European Commission on October 23 rejected its 2019 budget, giving the ruling
coalition in Rome until November 13 to make changes.
Failing that, Brussels could put Italy into something called the “excess
deficit procedure”, a complicated process that could eventually lead to fines
and provoke a strong market reaction.
The Italian government — a coalition of the far-right League and anti-
establishment Five Star Movement — plans to run a public deficit of 2.4
percent of GDP, three times the target of its centre-left predecessor.
Scrutinising those plans, the European Commission on Thursday said Italy’s
deficit will reach 2.9 percent of its Gross Domestic Product next year, much
bigger than the 1.7 percent in its previous forecast.
“Our projections differ somewhat from those of the government. This is
largely due our growth projections which have been more conservative,”
European Economics Commissioner Pierre Moscovici said.
The Italian government’s 2019 budget is based on an estimate of annual
growth of 1.5 percent — a figure considered optimistic by the IMF, which has
forecast only one percent, and the Commission, which expects 1.2 percent.
– ‘Technical failure’ –
Crucially, the EU also believes Italy will only grow by 1.2 percent in
2019, whereas Rome’s 2019 budget is based on an estimate of annual growth of
1.5 percent.
“We regret to note the Commission’s technical failure,” Italian Finance
Minister Giovanni Tria said in a statement, slamming “an inadequate and
partial analysis” of his proposed 2019 budget.
“The fact remains that the Italian parliament has authorised a maximum
deficit of 2.4 percent for 2019 that the government, therefore, is committed
to respecting,” Tria said.
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Italian leaders insist the low growth rate is all the more reason to
kickstart the economy through a spending spree, but Brussels fears the rising
deficit could further feed Italy’s exploding debt.
Italy already owes 2.3 trillion euros ($2.6 trillion), a sum equivalent to
131 percent of its GDP.
Even if Brussels fails to punish Rome, many assume the markets will, with
the fallout possibly spreading to other European countries that are only just
recovering from the eurozone debt crisis that peaked early this decade.
In its autumn forecast for Europe, the IMF said Italy — along with Turkey
— “should prioritise measures that reduce fiscal deficits toward their
medium-term targets and lower debt.”
All eyes are on the market’s “spread” — or difference between yields on
10-year Italian government debt compared to those in Germany — which has
more than doubled since mid-May, when negotiations to form the populist
coalition government in Rome began.
– Trade tremors –
The EU’s warning to Italy came as it also warned that growth in the
eurozone would slow in 2019 and beyond, citing global uncertainty and
heightened trade tensions.
Italy’s problems arise as fears of an economic slowdown in Europe have
risen over the possibility of a no-deal Brexit and trade tremors sparked by
US President Donald Trump’s protectionist policies.
In its latest forecasts unveiled Thursday, the European Commission expects
growth in the currency bloc of 2.1 percent this year, followed by 1.9 percent
in 2019, which is lower than the 2.0 percent predicted in its last assessment
in July.
Growth is expected to continue to decline in 2020 to 1.7 percent.
Other indicators are also pointing to weak growth in the coming quarters,
raising doubts about plans by the European Central Bank to wind down its
massive stimulus to the European economy.
But ECB chief Mario Draghi has downplayed risks to the eurozone despite
“weaker momentum” that he said would not undermine his confidence in growth.
Last month, the ECB confirmed plans to end “quantitative easing” (QE) or
mass bond-buying at the end of December, but will keep interest rates at
historic lows until late next year.
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