Friday, 4 June 2010

EU: Stability programme Italy

Start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the stability programme of Italy, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Italy, 2009-2012; OJEU 1.6.2010 C 142/13

Economic background

The Council of the European Union started its 26 April 2010 assessment of the updated stability programme of the eurozone country Italy, which covers the period 2009 to 2012, with the following observations about the economic situation:

While the low indebtedness of the household sector and a relatively solid financial sector have provided some shelter from the global financial crisis, deep-seated structural weaknesses giving rise to unsatisfactory productivity growth had weakened the Italian economy long before the global downturn. After having contracted for five quarters, GDP rebounded in the third quarter of 2009, but declined again slightly in the fourth quarter. The recession has taken its toll on the labour market with a lag: in 2009, its impact materialised more in terms of hours worked than of headcount employment, with many workers, in particular in the hardest hit manufacturing sector, accessing the wage supplementation fund to complement their salary for the fewer hours worked. The government's policy response to the crisis was adequate in view of the very high government debt, in a context of increased risk aversion. Since the last quarter of 2008, the government approved several measures to shore up the stability of the financial sector, restore confidence and offer relief to distressed firms and households. According to the government's estimates, the recovery measures were fully financed by redeploying existing funds and increasing revenues, with no effect on the deficit. Notwithstanding the government's prudent fiscal stance, the impact of the economic downturn on the Italian public finances has been significant. The government deficit ratio doubled between 2008 and 2009, to 5,3 % of GDP (confirmed in the statistical office's estimate released on 1 March 2010). This, in conjunction with the very high government debt ratio, led to the Council deciding that Italy was in excessive deficit on 2 December 2009, with a deadline for the correction of this situation by 2012. Besides fiscal consolidation, which is a condition to keep public finances on a sustainable path, the key challenge for Italy's economic policy in the coming years will be to foster a swift and durable recovery in productivity growth so as to restore competitiveness and raise the country's low potential GDP growth. Far-reaching structural reforms are key to addressing the productivity challenge. In addition, restoring competitiveness in the short term also requires ensuring that wage developments are better aligned with productivity developments.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126(7) TFEU of 2 December 2009, the EU Council invited Italy to:

(i) rigorously implement the planned budgetary adjustment, in particular carry out the fiscal consolidation in 2010 as planned and back up the planned consolidation for 2011 and 2012 with concrete measures, standing ready to adopt the required consolidation measures in case the macroeconomic scenario underpinning the Article 126(7) Recommendation materialises; seize, as prescribed in the EDP recommendation, any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) ensure that the implementation of the reform of the budgetary process improves the conditions for expenditure control and helps sustain the objective of sound public finances and that the rules governing fiscal federalism improve the accountability of local governments and foster efficiency.

Italy is also invited to improve compliance with the data requirements of the code of conduct in view of the indicative nature of revenue and expenditure projections in the outer years and to provide more information on the broad measures underpinning the envisaged consolidation in these years in the EDP [excessive deficit procedure] chapter of the forthcoming updates of the stability programme.

These assessments and Council opinions are hardly “media sexy”, but they are important. Should you take an interest?

Ralf Grahn