Euro. Commission targets Italy for discipline over deficit

[HenryTo]

This is not technically a news item regarding Central or Eastern Europe but it is definitely of interest to the region:
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European Commission targets Italy for discipline over deficit

STRASBOURG (AFP) - The European Commission agreed to launch disciplinary action against Italy for flouting European Union budget rules, the first such move since they were overhauled earlier this year.

In a move that risked setting it on a collision course with Italian Prime Minister Silvio Berlusconi, the EU's executive arm noted that Italy's public deficit has exceeded the EU ceiling in both 2003 and 2004.

It said the excessive deficit, well beyond the limit of 3.0 percent of gross domestic product (GDP) set out in the EU's Stability and Growth Pact which underpins the euro, could not be blamed on unusual circumstances.

"The excess of the deficit over the reference value is not exceptional, as defined by the Pact ... nor is it the result of a severe economic downturn," conditions which may have won Rome a reprieve, the commission said in a report.

Italy is currently in a mild recession and its public deficit is the largest in the 12-nation eurozone. The Italian government has acknowledged that it will exceed the EU's ceiling again this year.

The commission said Italy's deficit "has been above the reference value for two years and, according to the Commission's spring forecast, it will be well above 3.0 percent in 2005 and 2006, even if economic growth returned to its potential rate."

"Recent government announcements reinforce this projection," it said.

The commission's excessive deficit action and any recommendations will be examined by EU finance ministers at their next meeting on July 11 and 12.

Italian Finance Minister Domenico Siniscalco immediately issued a call for reason and said he hoped that his EU partners would give Rome at least two years, until 2007, to bring the deficit back into line.

"I am fighting for a reasonable solution," he said in Luxembourg. "This is not an examination but an attempt between partners to find a solution that is in everybody's interest."

The move came as the Italian government has been multiplying its criticism of the EU, itself in a malaise after seeing its draft constitution rejected last week by two founding members, France and the Netherlands.

Berlusconi, under pressure and with little economic room to manouevre ahead of legislative elections next year, said last week that the EU needed to be reviewed, laws should be trimmed and red tape cut.

His deputy, and the country's foreign minister, Gianfranco Fini said Tuesday that Italy would be prepared to veto the controversial EU budget it its funds were reduced.

Fini also warned of serious political divisions among the EU's 25 leaders when they meet at their summit in Brussels at the end of next week.

Two Italian government ministers, both from the far-right Northern League, have also sparked an uproar by suggesting that Italy refloat its old lira currency in parallel with the euro.

The bloc agreed revisions to its budget pact in March, nearly 18 months after the rules were effectively suspended despite repeated violations of the 3.0 percent rule by EU heavyweights France and Germany.

The commission is also expected to launch disciplinary action against Portugal with a similar report on June 22, according to economy and monetary affairs commissioner Joaquin Almunia.

The Portuguese government is predicting a deficit of 6.2 percent of GDP this year, more than twice the ceiling, and does not believe it will get its books in order before 2008.

Almunia also said he was preoccupied by the budgets of the bigger EU members, notably Germany, France and Italy. He suggested it was illusory to "establish a direct link between growth and deficits."

"If you look at the countries which have the highest growth rates in the eurozone, you will find mainly countries which have a balance in their public finances, even a surplus in some cases," he said.