The EU Commission opens a procedure for excessive deficit for Italy, France, and five other countries: Belgium, Hungary, Malta, Poland, and Slovakia. Following the expected steps, it explains, it will propose recommendations to the Council on deficit reduction in the autumn package of the European Semester. The European executive also assessed that Romania has not taken effective actions to correct the deficit requested by the Council.
In the assessment of macroeconomic imbalances for twelve EU countries, already in the 2024 alert mechanism, the EU Commission assessed that Italy is now in a ‘imbalance’ situation, improving the judgment from last year’s ‘excessive macroeconomic imbalance’. Greece is also no longer in imbalance, nor France and Portugal. Slovakia, on the other hand, enters the list of imbalanced countries, alongside Germany, Cyprus, Hungary, the Netherlands, and Sweden. Only Romania has an excessive imbalance. This monitoring is one of the surveillance tools for coordinating economic policies.
In Italy, the Commission states that “vulnerabilities related to high public debt and weak productivity growth persist in a context of labor market fragility and some residual weaknesses in the financial sector, which have cross-border relevance.” The public debt/GDP ratio “has significantly decreased” from the peak of Covid but “remains high, at over 137% of GDP in 2023, with an expected reversal of the downward trend this year and the next. This reversal is attributed to a broad stock-flow adjustment that increases debt, still substantial, though decreasing, public deficits, and lower nominal GDP growth.”
For Italy, “the overall analysis of debt sustainability indicates high risks in the medium term. According to basic decade-long projections, the public debt/GDP ratio steadily increases to around 168% of GDP by 2034. The debt trajectory is sensitive to macroeconomic shocks. According to stochastic projections, which simulate a wide range of possible temporary shocks to macroeconomic variables, there is a high probability that the debt/GDP ratio will be higher in 2028 than in 2023.”
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In Italy, according to the EU Commission, “productivity growth has been overall and on average positive but limited, confirming the need for reforms and investments to overcome structural shortcomings and promote favorable conditions for productivity growth.” This is stated by the European Commission within the spring package of the European Semester.
“Labor market conditions have improved in recent years and have not translated into wage pressures,” the EU Commission further states regarding Italy. “Labor participation rates have reached record levels, although they are still relatively low. The financial sector has further strengthened with improvements in the quality of bank assets and profitability, while Italian banks are still considerably exposed in their balance sheets to sovereign and state-guaranteed loans. Policy action has been favorable in addressing vulnerabilities, including through the implementation of the PNRR, which, among other things, promotes productivity and potential GDP growth to help reduce the public debt ratio in the long run.”
In Italy, “maintaining the pace of PNRR implementation remains essential, and additional policy efforts would be useful,” the European Commission states in the spring package of the European Semester, adding that “further actions are clearly needed to reduce the high public debt ratio.” “The reformed Stability and Growth Pact, including the application of the excessive deficit procedure, provides an adequate and strong surveillance mechanism to address fiscal sustainability risks and integrate surveillance.”
“For Italy, the game is played on two fronts, on the one hand prudent budget policies are indispensable with this debt and deficit, and on the other, continuing with public investments,” said EU Economy Commissioner Paolo Gentiloni in a video message, explaining that “the new EU rules” will help achieve a better balance between these objectives and are an improvement for Italy compared to the existing ones.
“We must not confuse spending caution with austerity,” Gentiloni further explained. “Caution in spending is necessary in high-debt and very high deficit countries. Italy has a deficit above 7% and a debt above 135%, so caution is mandatory, and it seems that the Italian government is aware of this. At the same time, Italy has an unprecedented investment firepower with the PNRR. It would be a ‘paradox’ to struggle to implement the huge EU resources. It requires caution in spending on the one hand and multiplying efforts for PNRR investments on the other.”
For Gentiloni, “our economies have shown extraordinary resilience in recent years, thanks in part to our collective policy response. Looking to the future, we must continue to address the structural challenges that hinder our competitiveness, starting with the determined implementation of recovery and resilience plans. I am confident that the European Semester, along with the new economic governance framework, will continue to help us achieve our common goals.”
“If the theory were ‘less spending, stronger extremism’: well, we are not coming from a period of lower expansion, the theory is unproven,” continued the EU Commissioner when asked in a press conference about the fear that cuts in public spending to comply with the return of the Stability Pact could lead to an increase in extremist political forces.
“The infringement procedure is not news; it was widely expected,” commented Italian Economy Minister Giancarlo Giorgetti emphasizing that “we have a path, started from the beginning of the government, of sustainable public finance responsibility, appreciated by markets and EU institutions, and we will continue like this, so it is not surprising, but rather the application of the old Stability Pact rules.”
“We have estimated what we expect to receive from Gentiloni, but Gentiloni has not come because evidently he is sending emails,” said smiling. “Let’s see when we receive it, but we have made different assumptions. Let’s see the most favorable and the least favorable ones.” Looking ahead to the budget, he added, “we will need to be very selective, prioritize the most useful policies, and evaluate those that are less useful. It’s a great job that we will have to do in the coming months.”
“The government is well aware of the need for a responsible approach to budget policy,” Giorgetti assured, also speaking of the need to be “selective.” “The time of non-repayable funding has ended,” he said, explaining that every measure must be carefully “weighed” and evaluated for its effects.
“The available resources must inevitably be allocated to mitigate the impact of any shocks on the most exposed subjects. I consider it necessary for the adjustment path that will be defined in the Structural Budget Plan we are working on to provide the necessary support for growth and income support,” continued the minister.
Giorgetti then reiterated the commitment to reducing the tax burden: “Among all the measures under discussion, this is a must. It is an absolutely non-negotiable commitment, the first thing we must ensure and we will confirm it,” said Economy Minister Giancarlo Giorgetti when asked about the tax cut on the margins of the Upb Report presentation. When asked if it will also be done in deficit, he replied, “The deficits are those we have indicated in our path, in the Nadef and in the Def, and that we absolutely intend to respect. So not in deficit,” he added.
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