Rome

ECB issues Italy stiff warning on deficit

Bank concerned about 'macroeconomic developments'

ECB issues Italy stiff warning on deficit

(By Paul Virgo) Rome, June 13 - The European Central Bank gave Premier Enrico Letta's government a stiff warning on Thursday when it said that recession-hit Italy's efforts to cut its deficit were in danger. Last month the European Commission recommended that an excessive-deficit procedure opened in 2009 against Italy be closed. Rome has forecast that Italy's budget-gross domestic product (GDP) ratio will be under the 3% threshold allowed by the European Union this year, at 2.9%. It was 3% last year. But with fears that tax revenues will fall if Italy fails to emerge from its longest recession in over 20 years before the end of 2013, the ECB said there is a danger of Rome going back over the 3% mark. "Risks surrounding the deficit reduction path relate mainly to worse than expected macroeconomic developments, as well as to weaker than assumed revenue dynamics and higher expenditures," the ECB said in its monthly bulletin. The central bank said that Italy's "fiscal targets have been considerably relaxed compared with last year's stability programme update, foreseeing a more gradual consolidation path". Italy emerged from the deficit procedure after former premier Mario Monti's technocrat government passed big tax increases and spending cuts. But these austerity measures deepened the recession and did not stop the country's public debt-to-GDP ratio climbing and it forecast to hit 132% this year. Letta, whose left-right government was sworn in late in April, is increasingly turning his attention to the country's jobs crisis, with unemployment at a record high of 12% and around four in 10 Italians aged 15-to-24 out of work. The premier is facing calls to avert a 1% rise in value added tax scheduled for July and to scrap an unpopular property tax, and the ECB seems worried Rome's focus on slashing the deficit is slipping. "The deficit reduction path spelled out in the 2013 stability programme update must be strictly adhered to so as to minimise the risk of again breaching the 3% of GDP reference value in the near future," read the bulletin. "This will be a key policy challenge for the new government which was sworn in on 28 April 2013," it added, referring to Letta's administration, which is supported by an unprecedented alliance of his centre-left Democratic Party (PD) and ex-premier Silvio Berlusconi's centre-right People of Freedom (PdL) party. Economy Minister Fabrizio Saccomanni said he had reassured the ECB about Rome's commitment to cutting the deficit and said it will hit its budget target for this year. He added that he expected the "recovery" from Italy's longest recession in over 20 years to start in the third quarter of this year, with the help of the effects of a plan to pay around 40 billion euros that the public sector owes private-sector firms over the next year. He also said that Italy was not asking for Europe to make "exemptions" in its budget rules as "we know you cannot create growth without debt". But he also stressed that the EU needed to adopt "common action to revive growth" ahead of an EU summit later this month at which unemployment will be top of the agenda following a request from Letta. The premier recently suggested that the EU should grant governments more room to maneuver within its budget rules in order to encourage investments that would create jobs. But German Finance Minister Wolfgang Schaeuble told ANSA on Thursday that he did not think this was a good idea. "I think having investment calculations outside the national budget is the wrong road," Schaeuble said.

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