Italy asked to cut debt, Germany to increase spending

But the commission will wait until after April before taking a decision.

In a report on the European Semester - the EU economic oversight mechanism - published on Wednesday, the EU executive said that Italy's economy was marked by high government debt, weak productivity and competitiveness, as well as high non-performing loans (NPL) and unemployment.

"After positive reforms of the budgetary process, labour market, banking sector, insolvency procedures, judiciary system and public administration, the reform momentum has weakened since mid-2016," the commission noted.

It added that Italy should do more "with regard to competition, taxation, fight against corruption and the reform of the framework for collective bargaining."

In a specific report on Italy, the commission also pointed to "the possible cost borne by the government for the recapitalisation of weak Italian banks", only two months after the Italian government said it would tap into a €20-billion fund in an attempt to save the Monte de Paschi bank.

Continent of debt

The commission also found that as well as Italy, five other countries are "experiencing excessive economic imbalances" because of large debts or a high level of NPL. These countries are: France, Portugal, Bulgaria, Croatia and Cyprus.

Economy commissioner Pierre Moscovici said that France "must continue its reforms and do more" after the new government is announced following the upcoming presidential and legislative elections.

The commission said that France suffered from "low productivity growth, high public debt and weak competitiveness" as well as growing debt and low efficiency in public spending and taxation. It insisted that reforms are still needed in the labour market, education system and business environment.

Moscovici, a former French finance minister, said that the commission "could consider revising the classification from excessive imbalances to imbalances" if efforts were made, adding that this was a "message of encouragement" for the future government.

The commission also found that five other countries - Ireland, Spain, the Netherlands, Slovenia and Sweden - are experiencing economic imbalances for reasons such as a high level of debt or increasing house prices.

German surplus dilemma

A sixth country was included - Germany - for its current account surplus, which reached a record €270 billion last year. The surplus, mainly due to Germany's positive trade balances, represented 8.6 percent of GDP, well beyond the 6 percent threshold authorised by the EU.

Moscovici said that this was "not healthy" for Germany and "creates significant economical and political distortion for the whole of the eurozone".

The commission did not consider Germany's imbalance excessive - which would oblige it to take measures - as the surplus is partly due to external factors and because Germany had started to increase public investment last year, at the request of the commission.

But Moscovici insisted that "more has to be done" and that the commission would make recommendations in spring that it expects the next German government to follow.

Overall, the commission said the economic situation in the EU was slowly improving, but warned against persistent weaknesses and risks.

Dombrovskis underlined "persistent economic and social challenges" such as high unemployment, poverty or income disparities. He noted that "labour market development and efficiency of social systems vary considerably from country to country".

He also pointed out "pockets of weaknesses in the banking sector, including a high volume of non-performing loans in several member states". He said that over €1 trillion in NPLs were a threat to the funding of business activities in Europe.