European Commission expresses 'serious concern' over Italy budget: report
The European Commission said Italyâs budget targets are a âsource of serious concern,â in a letter sent to the countryâs economy minister on Friday, news reports said.
The missive is part of a battle between Rome and the European Union over the Italian governmentâs budget plans. Italy this week unveiled a target for its 2019 budget deficit of 2.4% of gross domesict product, three times the target set by the previous government.
Fears of a budget clash between Rome and Brussels, a rise in Italian debt and potential credit downgrades sent Italian bond yields soaring and helped renew worries about the potential for Italy to trigger a new chapter in the eurozoneâs long-running debt crisis.
The yield on Italyâs 10-year government bond TMBMKIT-10Y, +2.02% rose 7 basis points to 3.40% on Friday, leaving it near a 4 1/2-year high.
âWe call on the Italian authorities to ensure that the [budget] will be in compliance with the common fiscal rules and look forward to seeing the details of the measures,â said the letter, signed by European Commission Vice President Valdis Dombrovskis and European Union Economic Affairs Commisioner Pierre Moscovici, Reuters reported, citing excerpts published by Italian daily la Repubblica late Friday. The letter was sent to Italian Economy Minister Giovanni Tria, la Repubblica reported.
Detailed targets released by the government on Thursday showed it expects the deficit to declin e to 2.1% of GDP in 2020 and 1.8% in 2021 with gross government debt set to decline from 130.9% of GDP this year to 126.7% in 2021.
Economists at Daiwa, in a Friday note, laid out the objections:
|But that improvement is predicated on an unrealistic forecast of an acceleration in GDP, with growth predicted to pick up from 1.2%Y/Y this year to an average of 1.5%Y/Y in the coming three years (versus average growth of close to 1.0%Y/Y assuming unchanged policy and probably at least double Italyâs potential rate), overlooking the adverse impact on demand of the higher yield environment that will result from the governmentâs largess. Given that the fiscal numbers are flattered by the stronger GDP growth assumption, the planned deterioration in the underlying health of the public finances is significant: the structural deficit is forecast to rise from 0.9% of GDP this year to 1.7% of GDP in each of the coming three years, having been projected to decline close to zero by 2021 on unchanged policy. And so, if and when (as we fully expect) economic growth would fall some way short of the governmentâs plans, the headline budget deficit would likely trouble the Stability and Growth Pactâs key 3% of GDP threshold. Certainly, the governmentâs plans are not what the doctor ordered.|
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