EU warns Italy over record debt levels; Germany wins reprieve over surplus

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Brussels has urged Italy to press ahead with reducing its record levels of public debt, saying that it should take action by April to avoid being declared in breach of EU budget rules.

In a report published today, the European Commission said Rome’s interim government must follow through with commitments to adopt “additional structural measures” worth 0.2 per cent of GDP by April to avoid falling foul of its budgetary rules.

The Commission forecasts Italy’s debt to GDP will rise from 132.8 per cent to 133.3 per cent this year – its highest in the post-war era and more than double the EU’s 60 per cent ceiling. Debt has been pushed higher by low growth and inflation in the eurozone’s third largest economy for over two decades.

Following the resignation of its prime minister Matteo Renzi in December, the interim Rome government now has a window to “take the necessary measures in 2017 to ensure a sufficient adjustment,” said the Commission.

“As of today there would be a case to open an excessive deficit procedure for Italy”, said Valdis Dombrovskis, vice president of the Commission, who said authorities would be returning to the Italian case in the spring to “verify” Rome’s commitment to belt-tightening.

The report on Italy was part of a broader review of member state public finances published by Brussels on Wednesday.

Other elements included an assessment of whether Germany’s record trade surplus – which has been criticised by senior economic figures in the Trump administration – is a risk to the stability of the eurozone.

While Germany was “identified with imbalances reflected in its large current account surplus,” these do not appear to be “excessive”, said the EU.

Germany’s current account surplus – a measure of its balance of goods and income – is on course to hit a record 8.7 per cent of GDP in 2016 according to Brussels’ forecasts, before gradually towards 8 per cent in 2018.

Driven largely by its export performance, Germany has also helped drive the eurozone’s current account surplus to the highest since the start of the single currency area in 1999.

Pierre Moscovici, the EU’s economics commissioner, said the size of the surplus in Europe’s largest economy was “not healthy” and created “very significant distortions” for the rest of the eurozone. But Germany would avoid sanctions as some of the drivers behind the surplus were outside the control of the Berlin government, he added.

EU officials, along with the European Central Bank and International Monetary Fund have long urged Gemany to spend more to boost growth and inflation in its domestic economy which will spillover into the rest of the continent.

“Last year Germany began to increase its public investment and its government investment which is something we asked them to do and we will continue to make the recommendations necessary for the entire euro area”, said Mr Moscovici, a former French finance minister.

Brussels has also warned that any incoming French government would have to implement immediate belt-tightening measures to stay within its budgetary framework.

Today, the EU added it was “monitoring” developments in the country, including planned reforms, which could force a reassessment of its outlook.

Brussels also highlighted Portugal, Cyprus, Bulgaria and Croatia as experiencing “excessive” macroeconomic imbalances, which can be caused by reasons as varied as low competitiveness, high unemployment, large trade surpluses or booming house prices.

A second group of countries, including Germany but also Ireland, Spain, the Netherlands, Slovenia and Sweden were simply noted as “experiencing imbalances.”

The Commission also gave a general warning that, while key economic data in the EU is improving, large stocks of non-performing loans are still weighing down the banking system.

Mr Moscovici said the findings show that nations “have made further – albeit not yet sufficient – progress in addressing their key economic challenges.”

Eurozone finance ministers in April will discuss the banking system’s problems with non-performing loans.

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