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New EU Commission’s estimates correct Italy’s forecast, 2017 growth seen at 0.9% with deficit set at 2.4% of GDP

by Beda Romano

The European Commission confirmed yesterday that its hotly awaited opinion on Italy’s 2017 budget plan is due to be published on November 16. Today the EU executive will publish new estimates for the Italian economy, which are expected to have worsened since the last forecasts in the spring. They will provide a first indication of the verdict Brussels is preparing on Italy’s budget plan, often in question at the European level.

Speaking in Brussels during a news conference on the sidelines of a monthly meeting of EU finance ministers, Italian Economy Minister Pier Carlo Padoan explained that he expected the EU figures to be roughly in line with the Italian government’s estimates. He spoke of the possibility of “slight deviations” rather than “significant differences”. He said there are no “observers that have thrown into doubt… the plausibility of our estimates.”

According to information gathered in Brussels, to verify today, the new EU estimates should point to slower growth than previously expected in 2017 (the forecast is seen at 0.9% compared to the 1.3% estimated by the Commission in the spring). Meanwhile Brussels is expected to increase its forecast for Italy’s deficit in 2017 (to 2.4% of gross domestic product, GDP, from 1.9%) and for its public debt (to 133.1% of GDP from a previous forecast of 131.8%). If these figures are confirmed, it is easier to understand why the Commission is worried about the trend in Italy’s public finances.

In comparison, the Italian government is targeting economic growth of 1.0% in 2017, a deficit of 2.3% of GDP and a public debt of 132.6% of GDP. Padoan wished to confirm yesterday that the debt should stabilize in 2016 and start to fall in 2017. Barclays investment bank expects the public debt to amount to 134.2% of GDP in 2016 and 135.2% of GDP in 2017, compared to 132.8% in 2015.

The political mood at the moment is characterized by a succession of criticism, taunts and spiteful remarks between Italian Prime Minister Matteo Renzi and Commission President Jean-Claude Juncker. The former is in the middle of campaigning ahead of the December 4 referendum on constitutional reform and he is tempted to criticize Brussels to reassure the Italian public that he is the right person to defend national interests. The latter can be short-tempered and is reluctant to accept the role of punching bag.

Italy’s budget plan is the subject of complicated negotiations, especially since the Commission expects Italian public finances to deteriorate in 2017. Renzi’s government had committed itself to a reduction of the structural deficit equal to 0.6% of GDP, but the text sent to Brussels forecasts an increase in this parameter equivalent to 0.4% of GDP. At the same time, the government has asked for budget flexibility worth 0.4% of GDP to face the spending needed for the refugee emergency and for recent earthquakes.

Yesterday Commission Vice-President Valdis Dombrovskis explained: “The budget rules foresee that spending for exceptional events, such as earthquakes, is a one-off,” he said, adding that this aspect of Italy’s budget would be closely assessed. It is clear that an agreement is needed on the total amount. Even Slovakian finance minister Peter Kazimir said that flexibility needs to be agreed according to the rules.

The aim of the Italian government is to get passed the December 4 referendum date unscathed. The Commission understands Italy’s reasons and does not want to whip up emotions ahead of the vote. But it cannot completely ignore the rules and above all it wants Italy to recognize the budget flexibility it has already enjoyed. Italy is hoping to get a judgment from Brussels by mid-month that is not too negative and above all, presents a wait-and-see approach.