EU Commission worries about Italy’s budget deficit

Italy, which is embroiled in a bitter budget row with the European Union that is set to come to a head next week, is expected to be the slowest-growing eurozone economy through 2020, according to new forecasts from the bloc’s executive branch.

The European Commission said Thursday that growth across the 19-country eurozone is expected to moderate to 2.1 percent this year from a decade-high rate of 2.4 percent in 2017. It expects a further easing to 1.9 percent in 2019 and 1.7 percent in 2020.

Italy, whose new populist coalition government is in dispute with the Commission over its budget plan, lags all other eurozone countries throughout the forecast horizon.

The Commission expects the Italian economy, the eurozone’s third-largest, to grow by only 1.2 percent in 2019, below the 1.5 percent projected by the government. And in 2020, the Commission forecasts Italian growth of only 1.3 percent, again 0.3 percentage point-lower than the projection from Rome.

As a result, the Commission expects higher budget deficits for Italy, notably for next year. Rather than the 2.4 percent shortfall predicted by Italy, the Commission expects the Italian budget deficit to be 2.9 percent.

The Commission said in its autumn forecasts that Italy’s public debt would “remain stable around 131% (of GDP) throughout all the period of the forecasts, that is from 2018 to 2020. This was due, it said, to the “deterioration of the deficit, united with the risks of lower growth”.
European Commission Vice President for the Euro Valdis Dombrovskis said “uncertainty and risks, both internal and external, are on the rise and are beginning to weigh on the pace of economic activity”.
Italy’s planned efforts to boost growth could “prove to be less effective” than hoped, the EC said.

The Commission has chastised Italy for a spending plan that will raise its deficit next year to three times what had been previously agreed on. Italy must submit a revised budget by Nov. 13, but Rome appears to be standing firm, raising the prospect of sanctions by the Commission.

“There cannot be a sort of negotiation on this,” said Pierre Moscovici, the commissioner responsible for economic matters.

The worry in Brussels is that the Italian budget plans could re-ignite concerns about Italy’s debt burden and raise renewed questions about the future of the euro. Italy’s debt burden stands at around 130 percent of the country’s annual GDP, second in the eurozone behind Greece, which only emerged from its eight-year bailout era in the summer.

Bond market investors are already fretting, having marked up interest rates on Italian debt significantly over the past few months.

The Italian government argues the economy needs a stimulus so it can turn around after stagnating for years. Boosting growth, it argues, will help control debt levels and solidify its place within the single currency bloc.

Economics Minister Giovanni Tria took issue with the Commission forecasts, saying they gave “a partial and not attentive reading” of Italy’s budget plans “despite clarifications supplied by Italy.”

Across the eurozone as a whole, the Commission expects economic growth to be slowed by global uncertainties, trade tensions, and higher oil prices. It expects the economy to become increasingly reliant on domestic factors like consumer spending.

One of the main reasons why the eurozone economy has been buoyant over the past two years has been a pick-up in global trade. That helped many of the bloc’s export-oriented economies, such as Germany, but trade growth appears to be waning, partly due to more protectionist policies around the world, notably between the United States and China. “Trade tensions have not quietened down yet,” Moscovici said.