MNI INTERVIEW: Italy Risks Deficit Breach In 2020: Cottarelli

by Silvia Marchetti

     ROME (MNI) - Italy could be back in breach of European deficit rules as

early as 2020 if growth remains stalled and Rome fails to find fresh revenues to

avoid a pledged increase in value-added tax, the director of the Public Accounts

Observatory at Milan's Catholic University told MNI.

     With Italy technically in recession, continued stagnation could see the

deficit-to-GDP ratio spike to 3.5% next year, well above the 3% laid out in

Europe's Stability and Growth Pact and even further adrift of the 2.04% agreed

with Brussels for 2019, according to Carlo Cottarelli, a leading economist who

was briefly prime minister designate in 2018.

     Under so-called "safeguard clauses" agreed with the EU in talks which

allowed Italy to avoid an Excessive Deficit Procedure, the government committed

to raising VAT by around E23 billion in 2020 and by almost E29 billion in 2021

in the absence of alternative measures. But Cottarelli saw it as unlikely that

the populist-far-right coalition government would go ahead with the pledged tax

hike.

     "Our forecasts see this year's deficit at 2.3%, but what happens in 2020

remains uncertain. It all depends on how Italy handles the safeguard clauses

worth 1.2% of GDP. If the government fails to find alternative budget measures,

the deficit threshold will be breached well beyond 3%," Cottarelli said.

     Cottarelli, a former International Monetary Fund official who was nominated

as a possible technocrat Prime Minister by President Sergio Mattarella last year

in an attempt to break the post-election government deadlock, sees Italy's

public debt levels rising as growth stalls.

     --RISING TREND

     The latest Observatory forecasts Italy's public debt to increase by one

percentage point this year to 132.7% of GDP. Growth will only recover in Q2, but

will only be around 0.4%, below the latest Bank of Italy forecast for 0.6%.

     "Public debt will keep rising for two reasons. One: it is impossible that

the government's (state companies) privatization plan raises 1% of GDP as hoped,

unless some fiscal trick is performed," Cottarelli said.

     "Two: the government's 1% growth forecast for this year is unrealistic --

it would require a huge GDP acceleration which will never happen also because

its budget measures are not pro-growth but mere welfare assistance," he

explained.

     --NO BRUSSELS RELAXATION

     Cottarelli thinks the Rome Government is misguided if it foresees an easier

budgetary relationship with Brussels after May's European Parliament elections.

     Even if populists sweep to victory across Europe, hopes of a friendlier

European Commission are "unrealistic, as European nationalists would never go

soft on Rome's fiscal woes for fear of bearing the burden of having to pay for

Italian debt," he said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MFIBU$,M$E$$$,M$I$$$,M$X$$$,MC$$$$,MI$$$$,MT$$$$,MX$$$$,MFX$$$,MGX$$$]