Prodi government told to correct budget overshoot

Date: 16/05/1996

By Ivo Ilic Gabara

THE EU's influential monetary committee will send an early warning to the incoming Italian government of Romano Prodi.

Weaker-than-expected economic growth means that the government's 1996 budget will overshoot by 6-7 billion ecu and needs urgent corrective action, according to a letter due to be sent to Rome by committee president Sir Nigel Wicks.

Prodi is certain to pay heed to the committee's recommendations as he prepares to launch his bid to bring the lira back into the Exchange Rate Mechanism it left in September 1992.

Formally speaking, the toughness of the Italian mini-budget will not be a procondition for ERM re-entry. But Prodi is well aware that without a credible budgetary policy, Italy's major trading partners will not welcome the currency back into the fold.

After examining Italy's convergence programme late last month, the monetary committee found that the budgetary overrun was putting its government's budget deficit target of 56 billion ecu, or 5.9&percent; of national income, in jeopardy.

In the letter addressed to Mario Draghi, the director-general of the Italian Treasury and one of its monetary committee members, Wicks will urge early measures to address the problem.

The outgoing government of Lamberto Dini was already aware that the public finances were off track and had started work on a corrective mini-budget or manovrina as Italians belittlingly call it.

But Dini had identified the budget overrun at 5 billion ecu, on the assumption that Italy's growth rate would be 2.4&percent; in 1996.

Forecasts from the European Commission used by the monetary committee suggest, however, that growth will be less than 2&percent; and, as a result, tax revenues will be lower than expected.

While it was Dini who first identified the overrun, it will in all likelihood be Prodi's government which will actually approve the corrective budget.

The monetary committee is mandated to assess the performance of Italy's public finances under the terms of an 8-billion-ecu balance of payments loan approved in 1993.

Whether the Italian government choses to apply for loan finance or not, its progress in reducing its budget deficit and stabilising its public debt levels must be scrutinised by the EU institutions every year.

So far, Italy has only drawn half of the loan in instalments.

After the last monetary committee meeting, Draghi stressed that the overall assessment of Italy's convergence programme was positive and stated that the government had received praise for progress achieved in 1995.

At the same time, however, he acknowledged a “small divergence” with the monetary committee over the size of the funding gap for 1996.