Europe’s ‘sick man’ to escape fines

By Aoife White

Date: 09/06/05

Italy is unlikely to face even a slap on the wrist for breaching treaty rules on its budget deficit when national treasury and central bank officials meet in the next two weeks to discuss a European Commission report painting a bleak picture of the country's economy.

The Commission is waiting for an opinion from the Economic and Financial Committee (EFC), to be issued by 21 June, before it asks the Council of Ministers to tell Italy to curb its public debt.

The Commission warned Italy on 7 June that it could face fines for breaking the EU budget deficit limit of 3% of gross domestic product for 2003 and 2004. It said recent revisions of budget data by the EU statistical agency Eurostat showed that Italy's problems "cannot be considered as temporary".

"This situation is not exceptional as it does not result from an unusual event outside the control of the government nor is it the result of a severe recession," the Commission said.

A fine is "very, very unlikely", said Guillaume Durand, an economical policy analyst at the European Policy Centre in Brussels.

"What sense does it make to impose a fine that is an additional burden on a country that has severe fiscal problems? The very logic of it is flawed economically. Politically it is always going to remain very difficult," he said.

Italy's oversized deficit is nothing new but a sluggish economy and the failure of the political establishment to tackle the country's ills single Italy out as a eurozone country in serious trouble.

Business activity is weak and the country's national debt is very high. "It's much more worrying than the French or German experience. If the recession goes on, we could very quickly enter into a negative spiral in Italy," said Durand.

EU warnings are falling on deaf ears in Italy as anti-European feeling rises. "The notion that the euro has caused a very large increase in inflation is very popular even though it is clearly wrong," said Roberto Perrotti, a research assistant at Bocconi University and a research fellow at the Centre for Economic Policy Research (CEPR).

Perrotti said there was a perception that prices have surged and the middle classes have become much poorer - a situation not displayed by the data, he said.

More worrying is the failure of the political establishment to tackle free market economics. He said the election of the country's foremost businessman, Silvio Berlusconi, as prime minister promised to introduce some free-market Anglo-Saxon thinking to Italy. Hopes were quickly dashed. "I don't see anybody on the left or the right who understands how a capitalist market economy really works," he said.

His recommendation is a dramatic cut in government spending by up to 6%, a route taken by Ireland in the late 1980s. "I don't think it will happen this year a few months from the elections," he said.

Article suggests that Italy did not have to fear serious sanctions for breaching the EU's budget deficit rules in spite of a European Commission report painting a bleak picture of the country's economy.