MNI INTERVIEW: Lower Primary Surplus Exposes Italy To Markets

By Silvia Marchetti

     ROME(MNI) - The fall in Italy primary budget surplus over the last two

years together with an "uncertain" debt path expose the country to the risk of

market volatility and rising interest rates, Carlo Cottarelli, director of the

Public Accounts Observatory at Milan's Catholic University, told MNI.

     The government's fiscal plans, which foresee a deficit of 2.2% of gross

domestic product next year, put Italian public debt on course to return to its

historic high of 135% of GDP, Cottarelli, who was premier designate in 2018,

said in an interview. Italy's primary surplus, which has acted as a buffer, is

pencilled in at 1.1% of GDP in 2020, down from 2.3% in 2012 during the

technocratic government of former premier Mario Monti.

     Falling estimates for interest expenditure, thanks to a global bond rally,

could easily be reversed, Cottarelli said, triggering a "flight to safety by

investors."

     "The new fiscal plan doesn't really change the overall fiscal outlook,

there are just some minor improvements," he said, adding that he expected the

European Commission to question the budget plans, which assume a trend shortfall

of 1.4% of GDP in 2020, based on unchanged legislation, about 0.6% of GDP higher

than Brussels had previously stipulated. The Italians hope that Brussels will

allow them about E14.4 billion in fiscal leeway, Italian governing party

officials have told MNI, but Cottarelli said he thought the Commission would

grant no more than E4 billion, even despite the improved relations between Rome

and its EU partners since the creation of a new pro-European coalition in Rome.

     The government's fiscal plan does not foresee a E23 billion increase in

value-added tax which was previously promised to the EU in the absence of other

measures.

     "The EC might ask for more fiscal efforts and ask in its evaluation report

for further details from Italy on how it plans to curb its public debt, in order

to weigh whether there could be grounds for an excessive deficit procedure, but

I don't think we would ever get that far. An EDP was averted just a few month

ago and the scenario back then was much, much gloomier", he said.

     "It's more likely that Rome will get some E4 billion (0.2% of GDP) in terms

of extra flexibility for hydrological disaster" and infrastructure upgrading, he

added, although he was confident that the climate of renewed cooperation between

Rome and Brussels would avert any significant confrontation over the upcoming

budget law, expected by mid-October. Relations improved after the departure from

government in August of the far-right League, led by eurosceptic firebrand

Matteo Salvini.

     "If Salvini had stayed in power, Italy's primary surplus would have been

obliterated, but the fact that it is lower today than in the past, together with

the fact that public debt will rise next year, will expose Italy to increased

market speculation and to the risk of a new rise in debt interest rates", argued

Cottarelli.

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

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