MNI: Eurogroup Eyes Italy Spending As Inflation Fears Grow

Eurozone finance ministers are set to discuss recent criticism of Italy’s fiscal spending at a meeting in Brussels on Monday, as growing concern over the potential for the current rise in inflation to last longer than initially anticipated outweighs the prospect of a hit to economic activity from new Covid restrictions, EU officials told MNI.

Governments may be sticking to the line that inflation will fall back as pandemic-stricken supply chains recover, but officials said the danger of an extended surge in prices is now the largest concern as ministers prepare for the Eurogroup meeting, in which they will discuss the eurozone’s economic outlook with the International Monetary Fund. The IMF seems to be confident that the Omicron variant of Covid will not derail economy recovery despite continuing high uncertainty, officials who have been preparing the agenda for the Monday meeting said.

“Economic actors have learned new ways to work within a pandemic situation, so effects are unlikely to be as severe as we have seen before,” a senior EU official said.

NO DIRECT CRITICISM OF DRAGHI

Rising concerns regarding inflation and a relatively sanguine view of the impact of the new Covid wave are starting to colour the discussion on fiscal policy, with ministers set to take Italy and other high-debt states to task over high levels of current public spending in their 2022 budget plans.

EU sources insist that the latest critique of Italy’s fiscal policy mix from the European Commission, which will be discussed by ministers on Monday, does not amount to direct criticism of Prime Minister Mario Draghi, who has been working to approve reforms requested by the EU. (See MNI: Draghi To Drive Through Projects For NextGenEU Cash)

But, as one official put it, “the Commission is pointing to an increased necessity to give more weight to considerations of fiscal prudence and the rebalancing of fiscal policy, and gradually reduce the weight on immediate support measures for the economy.”

Officials say the ministers should engage in a constructive discussion on the issue.

“I would expect a discussion on the development of current expenditure in some countries, Italy being one, on whether the underlying fiscal position coming out of the crisis is eventually an appropriate one,” the official said.