EU may send Italy a warning on draft budget, but no decision yet

October 19, 2016 11:42 AM EDT

Pencils in the colours of the Italian flag with the head of Pinocchio are displayed for sale in Rome July 23, 2010. REUTERS/Alessandro Bianchi


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By Francesco Guarascio

BRUSSELS (Reuters) - The European Commission is considering sending Italy a warning about its draft budget for next year, European Union officials said on Wednesday, because Rome's planned budget gap is much higher than previously promised.

Last week, Italian Prime Minister Matteo Renzi announced an expansionary budget for 2017 before a constitutional referendum in December that may decide his political future.

In the draft budget, instead of a deficit of 1.8 percent of GDP next year that Italy itself pledged in a letter to the Commission in May, Renzi now expects a shortfall of 2.3 percent, against 2.4 percent in 2016.

"That is a big difference. Everybody was really surprised that Renzi decided to be so bold," one EU official involved in the process said.

DEBT TO RISE

EU rules also require governments to reduce their structural deficit, which strips off the effects of the business cycle and one-offs, by 0.5 percent of GDP a year until the books are in balance or in surplus.

But rather than reduce its structural deficit, Italy plans to increase it to 1.6 percent of GDP from 1.2 percent in 2016.

To make matters worse, Italy's debt, which at 133 percent of GDP is the second largest in the EU after Greece, is to keep rising next year, rather than fall around 3.7 percent a year on average, as it should in Italy under EU rules.

European Commissioner for Economic and Financial Affairs Pierre Moscovici told Reuters on Oct 8 in Washington that Italy would have to find a 2017 deficit number that would allow debt to fall.

The Commission, the EU's executive arm, is now evaluating the Italian draft, as it does each year for all EU countries to determine if they comply with the rules.

It may send a warning letter within a week of getting a draft if it risks breaching EU rules. If the concerns are not addressed, the Commission can reject the draft altogether and ask for a new one, although this has never happened yet.

"We are still assessing the Italian budget," a second EU official said, adding the Commission was considering whether to send a letter to Italy, but has not made a decision yet.

"We are assessing whether we can agree with the Italian macro-economic assumptions," the official said.

In the draft, Italy forecasts that the economy will grow 1 percent next year - more than most economists expect. The Commission will issue its new economic forecasts for all EU countries in the first half of November.

The Commission is also assessing if Italy can get the planned tax revenues and what leeway can be granted for spending on immigrants and on reconstruction after an earthquake in central Italy in August.

In 2014, the Commission sent a warning letter to Italy but ultimately did not reject its draft budget.

A spokeswoman said the Commission would not comment on countries' draft budgets at this stage.

"Any exchanges, whatever form they may take, or indeed opinions of the Commission are meant to inform national decision-making processes over the budgets before they enter into force," she said.

The Commission's assessment comes as the Italian government campaigns for a constitutional referendum on Dec. 4 that may determine whether Renzi stays in office. EU diplomats believe the Commission will do what it can to avoid damaging Renzi.

Commission President Jean-Claude Juncker has been making clear to officials he shares that view, telling one internal meeting: "If we give up on Renzi, we give up on Europe"

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($1 = 0.9098 euros)

(Additional reporting by Jan Strupczewski; editing by Larry King)



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