Italy’s 2012 Budget Deficit Narrows to EU Limit of 3% of GDP

Italy’s budget deficit narrowed in 2012 to match the European Union limit as the austerity policies passed by outgoing Prime Minister Mario Monti helped shore up public finances.

The budget shortfall declined to 3.0 percent of gross domestic product from a revised 3.8 percent in 2011, Rome-based national statistics office Istat said today. The shortfall matched the average forecast of five economist estimates in a Bloomberg News survey. The economy contracted 2.4 percent, topping a 2.2 percent forecast.

Monti’s spending cuts and tax increases coupled with last year’s pledges by the European Central Bank to save the euro helped reassure investors and push Italian bond yields lower. Still, the austerity deepened the country’s fourth recession since 2011. The policy mix also prompted 25 percent of voters in last month’s inconclusive election to back the anti-austerity stance of comedian-turned-politician Beppe Grillo’s Five Star Movement, now the country’s biggest party.

In addition to the risks of political instability due to the hung parliament produced by the vote, Italy still faces the challenge of taming the euro-region’s second biggest debt. Even though the deficit narrowed, the debt rose to 127 percent of GDP, the highest in more than two decades, from 120.8 percent in 2011, Istat also said today.

Exports Gain

Italian 10-year yield was little changed at 4.728 percent at 11:50 a.m. in Rome compared with more than 7 percent before Monti’s non-elected government took power in November 2011, replacing the administration led by Silvio Berlusconi.

Today’s GDP report also showed that while consumer spending fell 4.3 percent last year, exports rose 2.3 percent. Both the Bank of Italy and the government expect a recovery in the second half of 2013 led by increasing sales abroad.

That will probably not stop unemployment from rising. Joblessness will increase this year and next when it reaches 12 percent, European Commission forecasts released on Feb. 22. The jobless rate rose to 11.7 percent in the first month of 2013, the highest since the series began in 1992, Istat said earlier today.

To stem mounting losses in Italy amid lower sales, Fiat SpA, the country’s largest manufacturer, intends to transform underused factories into export hubs for more expensive vehicles from Jeep, Alfa Romeo and Maserati.