Italy should re­spect EU bud­get rules and build buf­fer, says IMF

Gulf Times Business - - BUSINESS -

Italy must re­spect Euro­pean Union bud­get rules with its 2019 bud­get and im­prove pub­lic fi­nances if it wants to cre­ate head­room to loosen fis­cal pol­icy dur­ing the next eco­nomic down­turn, a top In­ter­na­tional Mon­e­tary Fund of­fi­cial said.

Poul Thom­sen, the head of the IMF’s Euro­pean de­part­ment, told a news con­fer­ence yes­ter­day that Rome was wrong to target an in­crease in its head­line and struc­tural bud­get deficit next year in breach of EU bud­get rules.

“We still project rel­a­tively strong growth in Italy next year. This is not the time to re­lax fis­cal pol­icy, this is the time to have some fis­cal struc­tural ad­just­ment,” Thom­sen said at the IMF’s an­nual meet­ing on the In­done­sian re- sort is­land of Bali. The pop­ulist govern­ment in Rome plans a head­line gap of 2.4% of GDP next year, triple the pre­vi­ous ad­min­is­tra­tion’s target.

EU of­fi­cials es­ti­mate this would trans­late in to a rise in the struc­tural deficit of 0.8% of GDP, while EU rules ask for a 0.6% cut, rather than an in­crease.

“A fis­cal re­lax­ation of that mag­ni­tude... is not cor­rect. The mar­ket re­ac­tion has been quite un­favourable and that il­lus­trates the point about fis­cal space,” Thom­sen said.

In­vestors have been sell­ing Ital­ian bonds in re­ac­tion to the higher bor­row­ing plan with yields of the three year pa­per hit­ting 5-year highs at an auc­tion on Thurs­day and 10-year bench­mark pa­per trad­ing at 4.5 year highs.

The Euro­pean Com­mis­sion, which is the guardian of EU rules, and eu­ro­zone fi­nance min­is­ters have said the planned deficit most likely meant a rise in Italy’s pub­lic debt which is al­ready the sec­ond big­gest in Europe at 133% of GDP.

Italy’s Econ­omy Min­is­ter Gio­vanni Tria raised many eye­brows ear­lier this month at a meet­ing of eu­ro­zone fi­nance min­is­ters when he said in an ad hoc pre­sen­ta­tion of the draft that de­spite the deficit in­crease, debt would fall.

EU of­fi­cials at the Bali meet­ing said this would only be pos­si­ble if eco­nomic growth gen­er­ated by the higher deficit was very high.

But the 1.4% eco­nomic growth fore­cast by the Ital­ian govern­ment for next year and 1.5 seen in 2020 has al­ready been de­clared as too op­ti­mistic by the Ital­ian Fis­cal Board – an in­de­pen­dent body set up to check bud­get as­sump­tions.

EU of­fi­cials also note that higher bor­row­ing costs for Italy, trig­gered by the an­nounce­ment of the higher deficit plans al­ready off­set much of the ex­pected higher growth.

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