European Commission calls on Italy to reduce budget deficit by €3.4bn

19 Jan 17

The European Commission has called on Italy to reduce its 2017 deficit by around €3.4bn ($3.64bn) to avoid potential sanctions for breaking European Union spending rules.


In a letter addressed to Italian finance minister Carlo Padoan, the European Commission warned that Italy’s budget risks significantly deviating from European Union debt reduction.

It advised Italy to cut its deficit by “at least” 0.2% of GDP to avoid the opening of non-compliance procedures, which could include fines.

The letter was signed by European Commission vice-president Valdis Dombrovskis and commissioner for economic and financial affairs, Pierre Moscovici.

They noted that Italy had been granted some “flexibility” in its debt and deficit reduction efforts last year, in order to take into account a weak economy, and that “compliance... in 2017 was a precondition” for this.

The commission had previously warned Rome in November that its €27bn ($28.8bn) budget for 2017 risked violating EU spending rules, and urged Rome to ensure that it met its debt reduction targets.

Italy’s 2017 budget included a higher-than-expected deficit target of 2.3% of gross domestic product, needed to take into account extra spending related to the earthquake in its central region last summer and the migrant crisis.

EU spending rules define any deficit above 3% of GDP as unsafe. While Italy’s deficit remains well within this limit, it has exceeded it in the past.

Between 2005 and 2013, Italy was subject to the EU’s excessive deficit procedure, which is the process triggered when a country’s deficit rises above this level.

While no longer in these special measures, Italy remains subject to a three-year ‘transition period’ where it must make sufficient progress in reducing its public debt. This is what Italy risks falling foul of now.

The country has the second-highest public debt in Europe, at 132.7% of GDP or more than €2.2tn. It would need to reduce this by 0.75% of GDP this year to comply.

MarketWatch reported that Padoan has not ruled out taking additional measures to comply with the commission’s request. He attributed Italy’s difficulty in cutting its debt to deflation and bad market conditions.

A statement on the Italian treasury website said that the economic arguments used by the government in the past “are at least as valid today” and in some ways more so, considering “heightened uncertainty” at both the European and international level, and inflation that has been “too low” for “too long”.

The commission can issue fines for eurozone countries that repeatedly disregard their budgetary recommendations up to the equivalent of 0.2% of GDP.

It has recently threatened to fine Spain and Portugal, but in the end opted not to do so.

In a note, analysts Stratfor said that considering the strength of eurosceptic opposition in Italy and the fragility of the country’s banking sector, it is unlikely EU leaders will be particularly hostile towards the country.

“With that in mind, a compromise in which Rome reduces cosmetic spending cuts and EU officials look the other way seems probable,” it added.

Earlier this week, the commission also deemed Lithuania’s draft budget at risk of violating a different set of EU rules related to its medium-term budget aims.

The government deficit for 2017 is expected to be 0.8%, which would mean a significant risk of deviation from the medium term objective, the commission said.

However, Lithuania has requested some additional flexibility in order to implement major labour market and pension reforms. The commission said it appears this can be accommodated, but a full assessment will take place in May.

In the meantime, it “invites” the authorities to take the necessary measures to ensure its budget complies with EU rules. 

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