Italy is seeking to block rules to penalize high-debt countries that miss numerical reduction targets, countering a German-led bid for tougher measures to prevent future debt shocks.
Italy is spearheading opposition to a proposal to force countries with debt above the European Union ceiling of 60 percent of gross domestic product to make annual cuts equal to 1/20th of the excess, according to draft legislation to be considered by euro-area finance ministers next week.
Germany is tying support for an upgraded 750 billion-euro ($1 trillion) safety net for debt-hit states to a toughening of fiscal rules, which have gone unenforced since the euro’s birth in 1999. Germany and France last week called for a special summit in March to hammer out a “comprehensive” solution to the sovereign debt woes that threaten the euro.
“What kind of signal would it send that you’re trying to fight the debt crisis, and then you give a clear sign that you don’t take debt reduction seriously,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “If you don’t want to make yourself ridiculous to the outside world, you need to come up with a numerical target.”
Markets have been buoyed by European pledges to clean up the fiscal mess. The extra yield on 10-year Italian bonds over German bunds has slid to 146 basis points from a euro-era high of 212 basis points on Nov. 30, two days after European governments bailed out Ireland.
While debate rages over the details, all 17 euro governments have backed in principle beefing up sanctions on high-deficit states and closing a loophole by extending them to countries with excessive debt.
Debt penalties would cost Italy “a significant sum,” EU Economic and Monetary Commissioner Olli Rehn told Sky Tg24 after proposing them on Sept. 29.
Italy is leading the push for escape clauses built into the legislation, including a broadly sketched requirement to take “other relevant factors” into account when considering sanctions for debt overruns, according to the draft legislation prepared by national representatives in Brussels.
The key issue for Italy is private debt. When household and corporate debt are added to the equation, Italy’s aggregate debt was 240.8 percent of GDP in 2009, close to France’s 232.9 percent and below the Netherlands’ 271.7 percent, the Italian Finance Ministry said in a September estimate.
“It’s important to assess all the relevant factors which make the situation of a country, not just public deficit and debt,” Italian Finance Minister Giulio Tremonti said after the last European finance meeting on Jan. 18. A ministry spokeswoman declined to comment today.
Italy had Europe’s highest government debt until 2007, when it was overtaken by Greece. Italian debt equaled 118.9 percent of GDP last year, according to European Commission estimates. The Italian debt load remains Europe’s largest in nominal terms, at 1.8 trillion euros.
Silvio Berlusconi’s government is threatening to veto a clause at the heart of the new rules that, for the first time, sets quantitative targets for annual debt reduction.
“Italy has a reservation on the numerical benchmark,” reads a footnote to draft.
Italy’s objections carry weight because the debt standard is in part of the six-law package that requires a unanimous vote by European governments.
“It’s normal that Italy is worried about that,” Diogo Feio of Portugal, in charge of the European Parliament’s non- binding opinion on the debt law, said in a telephone interview. He said he will propose compromise language next week.
Italy would have missed the proposed debt-reduction target had it been in effect in the euro’s early days. Italy cut its debt by an average 1.5 percentage points a year between 1995 and 2007, half what the target would have been.
By contrast, Belgium, now Europe’s third-most-indebted state, pared its debt by an average 3.9 percentage points over the period, more than its implied target of 3.5 points. Belgium backs the stiffening of the rules.
“It will be important to have some quantitative rule in place, but I don’t think any of those governance issues are going to be decisive in terms of the current crisis,” said Alessandro Leipold, a former International Monetary Fund official.
Other parts of the package, such as the sanctions procedure and new surveillance of macroeconomic imbalances, are subject to majority vote and the parliament’s assent. European finance ministers will discuss the legislation Feb. 14-15.
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