Italy Leads Eight-Nation Push for EU to Change Budget Analysis

  • Letter to EU commission seeks review of `output gap' estimates
  • Change could make it easier for nations to counter downturns

Italy, Spain and six other euro-area nations want the European Commission to change its methods for analyzing budgets so that countries can spend more in a downturn, according to a March 18 letter seen by Bloomberg News.

Finance ministers from the eight countries said the EU should rethink how it calculates the “output gap” -- the difference between a country’s actual and potential economic growth -- which helps determine how much of a country’s budget deficit is considered structural and subject to euro-area limits. At the moment, nations commonly calculate the gap over four years, while the EU uses a two-year horizon.

The difference “produces relevant discrepancies in structural balances, generating confusion in the evaluation of key public finance variables," the nations said in their letter to Valdis Dombrovskis and Pierre Moscovici, the commission’s vice president for the euro and economic affairs chief respectively. The nations called on the EU to eliminate the differences and also consider “more substantial doubts” about the budget methodology.

The European Commission acknowledged receipt of the letter, signed by finance ministers from Italy, Spain, Portugal, Slovakia, Slovenia, Luxembourg, Latvia and Lithuania and first reported earlier Thursday by Spanish media. The EU’s next round of budget recommendations are due in May.

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