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26th May 2022

Commission warns Italy over high debt level

  • Commisisoners Valdis Dombrovskis, Pierre Moscovici and Marianne Thyssen called for more structural reforms and social policies (Photo: European Commission)

The European Commission sent a warning on Wednesday (22 November) to Italy, France and Romania over their budget plans for next year.

It said that Italy's "persisting high government debt is a reason of concern," and that it could check next year whether the authorities in Rome are doing enough to reduce it.

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  • Italy's 'persisting high government debt is a reason of concern' (Photo: Giampaolo Macorig)

Although Italy's debt is decreasing, it is expected to reach 132.1 percent of GDP this year, 130.8 percent in 2018 and 130.0 percent in 2019, according to the Commission's latest forecasts published early November.

EU rules says that member states' debt should not exceed 60 percent of their GDP.

In a letter sent on Wednesday, EU commissioners Valdis Dombrovskis and Pierre Moscovici asked Italian finance minister Pier Carlo Padoan to provide further information on Italy's strategy and planned "concrete steps" to reduce the debt.

They also asked for clarifications over the "higher deterioration in the structural balance" Italy's budget.

If the Italian government fails to provide answers, the Commission will start to reassess Italy's compliance with the debt reduction benchmark next spring.

France's risk

If the Commission finds that the government has no plan to reduce the deficit at a satisfactory pace, it could launch an excessive deficit procedure on the ground of violation of debt rules.

This procedure, based on complex critieria, has never been used.

"The European Commission is not here to create problems but to find solutions," Moscovici told reporters, while Dombrovskis stressed the importance for Italy to "stick to structural reforms".

The EU executive was presenting its opinion on eurozone countries' draft budgetary plans, as well as its euro area recommendations for 2018.

It warned France that it was "at risk of a non-compliance" with EU requirements over its 2018 budget plan.

It pointed out that its economic forecasts for France show "a significant deviation from the required adjustment path" as well as "non-compliance with the debt reduction benchmark in 2018".

France's debt is expected to remain at 96.9 percent of GDP this year and the next two years.

It said however that France could exit the excessive deficit procedure if it does a "timely and sustainable correction" of its deficit, which is expected to go below the 3-percent of GDP EU limit this year and next, at 2.9 percent.

Romania and Belgium

Earlier this month, Moscovici said that it was "desirable and possible" that France could exit the deficit procedure it has been under since 2009, but that it had only a "small room for manoeuvre".

The Commission stated that Romania has taken "no effective action" to achieve an annual structural adjustment of 0.5 percent of its GDP. It proposed that EU finance ministers send Romania new recommendations for an adjustment of "at least 0.8 percent" in 2018.

"It is reasonable and feasible," said Moscovici, pointing out to Romania's "strong growth" - 5.7 percent expected this year.

In addition to Italy, the Commission said that four countries currently under the so-called preventive arm of the Stability and Growth Pact - a surveillance mechanism intended to avoid member states diverging from common rules and objectives - were at risk of non-compliance: Belgium, Austria, Portugal, and Slovenia.

The Commission singled out Belgium, along Italy, for its high debt, but did not threaten it with further assessment.

"The dialogue with the Belgian government has born fruit and the situation is improving, with a clear-cut reduction of the deficit," Moscovici said.

Belgium's deficit is expected to be at 103.8 percent of GDP this year, 102.5 in 2018 and 101.2 in 2019.

On the day when UK finance minister Philipp Hammond was presenting his budget, Moscovici said he had "good news" for him: the Commission noted the "timely and durable nature of the correction" of UK's deficit and recommended closure of the procedure opened in 2008.

More effort from Spain

The EU executive also said that the budget of Spain, the third country under the deficit procedure, was "broadly compliant".

But as Spain is expected to send shortly an updated version of its budget plan, Moscovici stressed that "the budgetary effort is clearly below the required effort".

Overall, Dombrovskis and Moscovici noted that eurozone's economy is improving - the latest forecasts showed the stronger growth in a decade - but that efforts still need to be made, in particular in continuing structural reforms.

They also insisted that EU countries should accelerate the fight against tax avoidance and tax evasion.

Less than a week after a social summit in Gothenburg, the EU executive also called on member states to put more emphasis on social policies, in particular in increasing wages.

"More policy action is necessary," said social affairs commissioner Marianne Thyssen.

She noted that the European pillar of social rights, which was signed at the summit, is now being put into practice within the European semester - the process to monitor EU economic policies - and that the next recommendations for member states, next year, "will identify the most urgent challenges".

"A common understanding is only effective if we we are fully committed to deliver on it," she insisted.

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'Frugals' renew effort to reduce excessive debt

Finance ministers of eight EU member states released a signed letter calling for a renewed effort to "reduce excessive debt" among member states. It is the starting point for renewed debates on debt and deficits in Europe.

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