EU to ask Italy to explain deterioration of public finances

Credit: REUTERS/YVES HERMAN

The European Commission will ask Italy on Wednesday to explain what factors contributed to the deterioration of its public finances as the EU executive prepares a report that is likely to be the basis of disciplinary action against Rome.

By Jan Strupczewski

BRUSSELS, May 29 (Reuters) - The European Commission will ask Italy on Wednesday to explain what factors contributed to the deterioration of its public finances as the EU executive prepares a report that is likely to be the basis of disciplinary action against Rome.

The Commission's request, in the form of a letter to Italy's finance minister Giovanni Tria, is a legal obligation under EU law when a country has a public debt above the EU ceiling of 60% of gross domestic product and is not reducing it as required.

Italy's debt rose from 131.4% of GDP in 2017 to 132.2% in 2018 and will go up to 133.7% this year and to 135.2% in 2020, according to Commission forecasts.

To make matters worse, Italy's structural deficit, which under EU law should shrink by 0.6% of GDP a year until it is in balance, has instead been rising every year since 2015.

The structural deficit, which excludes one-off revenue and spending and the effects of the business cycle, is set to reach 2.4% of GDP this year and 3.6% in 2020 unless policies change.

"The letter to Italy will be sent in the afternoon after the meeting of the college of commissioners," one EU official said.

Italy will have to reply by Friday. Three other EU states will receive similar letters.

Under a compromise struck with Rome late last year, which the Commission then called "borderline", Italy was allowed to keep its structural deficit unchanged with a marginal easing in debt in 2019, based on an optimistic economic growth assumption.

The idea was to allow the economic policies of the new eurosceptic ruling coalition to take effect and boost growth as Rome claimed they would.

But Italy's economy is now forecast to grow this year by only a small fraction of the 1% assumed in late 2018. With debt and the structural deficit rising and Italy's Deputy Prime Minister Matteo Salvini pushing for tax cuts next year, the Commission will reassess Rome's fiscal stance on June 5.

The report, to include "relevant factors" that may have contributed to the deterioration according to Italy, is likely to conclude that the EU should open a disciplinary procedure against Rome on the basis of the rising debt, officials have told Reuters.

Such disciplinary action could end in a fine of 0.2 percent of Italy's GDP, or around 3.5 billion euros ($3.9 billion), if Rome repeatedly ignores EU calls to put its finances on a sustainable track. But this would take a long time and is now politically unlikely.

The decision to start the disciplinary steps would ultimately taken by European Union finance ministers, on the basis of the Commission report, which must first get the backing of deputy finance ministers from the 28-country bloc.

Italy's public finances are on the draft agenda for EU ministers meetings on July 8-9.

European Central Bank Vice President Luis de Guindos warned on Wednesday that Italy risked higher borrowing costs that would damage the economy and outweigh any benefits from higher spending if it did not respect EU budget rules.

($1 = 0.8966 euros)

(Reporting By Jan Strupczewski; Additional reporting by Francesco Guarascio; Editing by Catherine Evans)

((jan.strupczewski@thomsonreuters.com; +32 2 287 68 37; Reuters Messaging: jan.strupczewski.reuters.com@reuters.net))

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