Italy's Debt Cut Not Needed If Full Flexibility Granted, EU Says

  • Wider margin on deficit correction possible under EU clauses
  • If clauses granted only in part, extra measures may be needed

Italy needs to convince the European Commission to grant it full budget flexibility to prevent its debt-reduction goal from becoming a binding condition, Vice President Valdis Dombrovskis said.

“It depends on whether we grant flexibility clauses,” Dombrovskis said in an interview in Brussels on Tuesday, in response to a question whether cutting the debt in 2016 is an absolute requirement for Italy. “If clauses are granted only partially, then of course they also need to do something on their budgetary side,” the commission vice president said, commenting on the country’s request to scale back on its budgetary correction under clauses on reform and investment.

Last month Prime Minister Matteo Renzi presented a budget plan that boosted growth projections for post-recession Italy as he prepared to seek a wider margin from the European Union on next year’s deficit-reduction goal. The government revised growth forecasts for this year and next upward while targeting the deficit to gross domestic product ratio to 2.6 percent in 2015 and 2.2 percent in 2016. The previous deficit goal for next year was 1.8 percent.

Italy also committed to reduce the country’s debt to 131.4 percent of GDP next year, down from 132.8 percent in 2015. That would be the first debt cut since 2007. In order to meet that target, the government said it will also sell stakes in the state railroads and air-traffic controller.

Additional Investment

“To get flexibility, a country needs to be eligible in terms of its economic cycle and so on,” Dombrovskis said, after presenting the Brussels-based EU executive’s report on the member countries’ budget plans. It also “needs to present structural reforms for which it wants to use a structural reform clause and it needs to present investment, additional investment, which is EU co-financed investment.”

With the government needing to fund tax cuts of 35 billion euros ($37.3 billion) over three years aimed at boosting the economy, Renzi expects budget flexibility under clauses on reform and investment. The premier also said Italy might obtain like other member nations further leeway for the costs sustained to face the migration crisis.

“We will be evaluating those reforms -- also on how Italy intends to adjust, or to speed up, its adjustment path towards medium-term objective in the coming years, because what flexibility clauses grant is a temporary diversion from adjustment path,” Dombrovskis said.

Separately, the Commission vice president said that the EU will assess the requests for flexibility under the “unusual event” clause put forward by some member countries, including Italy, that invoked the extra spending due to the arrivals of migrants.

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