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EU raises serious concerns with Italian debt

Rome will not gain access to European 'investment clause'

03 December, 17:58
EU raises serious concerns with Italian debt (By Sandra Cordon) (ANSA) - Rome, December 3 - Italy is failing to respect debt-reduction targets mandated by the European Union although it is making the grade on annual deficits, a senior EU economic official said Tuesday.

As a result, Italy will not gain access to the EU's so-called "investment clause" that offers more leeway in debt calculations, said Olli Rehn, European economic and monetary affairs commissioner. "Italy must respect a certain debt-reduction pace, and it's not doing that," Rehn said in an interview with Italian daily La Repubblica. To meet debt-reduction targets, the country must make significant efforts annually, something Italy is very slow to accept, he explained.

"In order to do that, the effort of structural adjustment should have been equal to half a percentage point of gross domestic product (GDP)," said Rehn. "Instead, it's only 0.1%," he added.

"For this reason, Italy has no room to manoeuvre and can't invoke the flexibility clause for investments". Italy has been struggling to gain approval to use a clause in EU regulations that allows for greater flexibility in how certain stimulative spending measures are counted in budget deficit calculations.

To be eligible for this investment clause, the country must come up with a debt-payment plan judged sufficient to put Italy on a declining debt-to-GDP ratio.

At more than two trillion euros, a figure exceeding 130% of GDP, Italy's public debt is second in the eurozone only to that of Greece.

Rehn said the EU will assess Italy's fiscal progress and make a final decision on the investment clause in February 2014.

Italy's fiscal accounts are not only in order, but its deficit is one of the healthiest in the European Union, responded Premier Enrico Letta. "I say to the commissioner that our accounts are in order and only Italy and Germany have (a deficit) below 3% of GDP," said Letta. "Our commitment should be rewarded, not whipped".

Rehn's critique comes as Letta's highly criticized 2014 budget package continues to work its way through government approvals. Critics say the package is too timid in tax cuts and does not do enough to stoke growth, as the country seeks to emerge from its longest recession in over two decades.

Letta has said the package should be praised for cutting taxes, rather than raising them, while keeping the country on course to stay within the EU's 3% deficit-to-GDP-ratio limit.

While observers praise the efforts to keep the deficit under control, similar complaints to what Rehn expressed about long-term debt have been raised in recent months.

The European Commission (EC) warned in October that with its massive public debt, Italy is in danger of not respecting the rules contained in the European Union's Stability and Growth Pact (SGP). The government responded that the EC had failed to properly account for the government's plans for a round of spending cuts and for divestments expected to raise 10 to 12 billion euros, as well as longer term spending cuts.

Similar concerns were raised in November by the Organization for Economic Cooperation and Development (OECD) which also noted that Italy was successful in tackling its annual budget deficit but had failed to seriously cut down its public debt.

The OECD forecast Italy's deficit-to-GDP ratio at 3% for 2013, 2.8% for 2014 and 2% in 2015.

Rehn said he accepted those figures, adding that he could "recognize the good intentions of the government".

"As far as the deficit is concerned, Italy is on the right path".

Rehn said he also recognized Italy has a strong growth potential if only it could reform economic structures.

But the European Commission is not convinced that Italy genuinely intends to tackle its massive debt, he added.

Measures that Italy has promised to date, such as the spending cuts and sales of some government assets included in the 2014 budget plan, have not yet come to fruition, he noted. "I have the precise duty to remain skeptical until there is proof of the contrary, especially regarding revenue from privatization". That irked Letta, who said Rehn was unfair in his skepticism.

Letta said that Rehn's job is to be a "guarantor of European treaties" and contribute to stability rather than feeding skepticism.