Deficit too high, the EU opens infringement proceedings for Italy and five other countries


By John

The EU Commission opens an excessive deficit procedure for Italy, France and five other countries: Belgium, Hungary, Malta, Poland and Slovakia. After the planned steps, he explains, he will propose recommendations to the Council on reducing the deficit in the autumn package of the European semester. The community executive then assessed that Romania had not taken effective action to correct the deficit requested by the Council.

In the assessment of macroeconomic imbalances for twelve EU states, already in the 2024 alert mechanism, the EU Commission assessed that Italy is now in a situation of ‘imbalance’, improving the judgment from the ‘excessive macroeconomic imbalance’ of last year. Like Italy, Greece. France and Portugal are no longer in imbalance. Slovakia instead enters among the countries in imbalance, where Germany, Cyprus, Hungary, the Netherlands and Sweden are confirmed. Only Romania has an excessive imbalance. This monitoring is one of the surveillance tools for the coordination of economic policies.

In Italy, the Commission states, “vulnerabilities remain linked to high public debt and weak productivity growth in a context of fragility of the labor market and some residual weaknesses in the financial sector, which have cross-border relevance”. The public debt/GDP ratio “significantly decreased” since the peak of Covid “is still high, equal to over 137% of GDP in 2023, and the downward trend is expected to reverse this year and next. This reversal is attributed to a large stock-flow adjustment that increases debt, still large, if decreasing, public deficits, as well as lower nominal GDP growth.”

For Italy “overall, the analysis of debt sustainability indicates high risks in the medium term. According to basic ten-year projections, the public debt/GDP ratio increases steadily to around 168% of GDP in 2034. The trajectory of debt is sensitive to macroeconomic shocks. According to stochastic projections, which simulate a wide range of possible temporary shocks to macroeconomic variables, there is a high probability that the debt-to-GDP ratio will be higher in 2028 than in 2023”.

Furthermore, in Italy, according to the EU Commission, “productivity growth was overall and on average positive but limited, which confirms the need for reforms and investments to overcome structural deficiencies and promote conditions favorable to productivity growth”. The European Commission states this as part of the spring package of the European Semester.

“Labour market conditions have improved in recent years and have not translated into wage pressures”, the EU Commission states again regarding Italy. “Labour participation rates have risen to record levels, although they are still relatively low. The financial sector has strengthened further with improvements in bank asset quality and profitability, while Italian banks are still considerably exposed on their balance sheets to loans sovereign and guaranteed by the State. Political action has been favorable to addressing vulnerabilities, including through the implementation of the Pnrr, which among other things promotes productivity and potential GDP growth to help reduce the public debt ratio in the long term. period”.

“For Italy the game is played on two fronts, on one side prudent budget policies, indispensable“with this debt and deficit,” on the other continue with public investments“,he has declared the EU economic commissioner Paolo Gentiloni in a video message, explaining that “the new EU rules will help achieve a better balance between these objectives and for Italy they are improvements compared to the existing ones”.

We must not confuse caution in spending with austerity – Gentiloni further explained – Caution in spending is necessary in countries with high debt and very high deficits. Italy has a deficit above 7% and a debt above 135% and therefore caution is a must and it seems to me that the Italian government is aware. At the same time, the Italian country has a possible volume of unprecedented investment” with the Pnrr. It would be a “paradox” to struggle to “put down the huge EU resources”. “On the one hand, caution is needed in spending and on the other, we need to multiply the Pnrr’s investment efforts”.

For Gentiloni “our economies have shown extraordinary resilience in recent years, also thanks to our collective political response. Looking to the future, we must continue to address the structural challenges that slow down our competitiveness, starting with the determined implementation of recovery plans and resilience. I am confident that the European Semester, together with the new economic governance framework, will continue to help us achieve our common goals.”

“If the theory were ‘less spending, stronger extremism’: well, we are not coming from a period of less expansion, the theory is not proven”, continued the EU commissioner when asked at a press conference on the fear that public spending will fall for respecting the return of the Stability Pact could lead to an increase in extremist political forces.

“The infringement procedure is not news, it was widely expected, we already said it a year ago. On the other hand, with the deficit boom induced by the exceptional measures we certainly couldn’t think of staying below 3%”, he commented the Minister of Economy Giancarlo Giorgetti underlining that “we have a path, started from the beginning of the government, of responsibility for sustainable public finance, which is appreciated by the markets and the EU institutions, we will continue like this, so it is nothing surprising, on the contrary to the application of the old rules of the Covenant”.

“We have estimated what we think we will receive from Gentiloni, but Gentiloni has not come because he is obviously sending the emails,” he said, smiling. “Let’s see when it arrives, but we have made different hypotheses. Let’s see the more favorable ones and the less favorable ones.” In view of the maneuver instead, he added, “it will have to be
very selective, favor the most useful policies and evaluate those that are less useful. It’s a great job that we will have to do in the coming months.”

The government is well aware of the need for a responsible approach to fiscal policy“, Giorgetti then assured, also speaking of the need to be “selective” -litalia-e-altri-cinque-paesi-1253aa34-4a16-47ea-a873-abf79c5e6348/.”The time for non-repayable financing is over”, he said, also explaining that each measure will have to be carefully “weighted” and evaluated in its effects.

“The available resources must inevitably be allocated to mitigating the impact of any shocks on the most exposed subjects. I believe it is necessary that the adjustment path that will be defined in the Structural Budget Plan on which we are working must allow us to provide the necessary support for growth and to support income from work”, continued the minister.

Giorgetti then reiterated his commitment to cutting the wedge: “Among all the measures being discussed, this is a must. It is an absolutely mandatory commitment, the first thing we must ensure and we will confirm it”. This was said by the Minister of Economy Giancarlo Giorgetti when asked about cutting the wedge on the sidelines of the presentation of the PBO Report. To those who asked him if it will also be done in deficit, he replied: “The deficits are those that we have indicated in our path, in the Nadef and in the Def, and which we absolutely intend to respect. Therefore not in deficit”, he added.