Trial now

Needle Still Points South


Yields Bounce as Equities Make New Monthly Highs


Heading North


Bull Rally Accelerates


Economists Survey Raises 2021 CPI Forecast To 4.9%

MNI (London)
--Time For Fiscal Leeway Over, EC Unlikely To Extend Latitude: BOI Source
--Italy Growth Consolidation Should Reduce Budget Flexibility
By Silvia Marchetti
     ROME (MNI) - Italy's brighter growth prospects will mark the end of both
additional fiscal leeway from Brussels and of greater budget flexibility at
home, a Bank of Italy source told MNI in exclusive comments.  
     The source also noted that the time has come for Italy to significantly
curb its public debt
     "The good news is that growth is moving from cyclical to structural (also)
means that budget flexibility is no longer needed to support the recovery. While
anti-cyclical pro-growth policies are crucial in hard times of cyclical
downturn, in the long run these can be counter-productive and impossible to
sustain," said the source.
     If on one side excessive austerity in hard times can be harmful, on the
other, excessive deficit spending when the economy is growing can lead to
macroeconomic imbalances, argued the official. "It is not true that an expansive
economic policy helps boost growth rates in the long-run if the outlook is
brighter, nor can a rise in GDP be funded through greater deficit spending".
     In consideration of the rosier scenario that sees Italy's economy
performing above earlier expectations over the next two years, it will be less
likely that the European Commission will grant Rome any further fiscal leeway. 
     The Bank of Italy recently upped their domestic GDP forecasts to 1.4% this
year from a previous 1.3%, and to 1.2% in 2019 and 2020. The European
Commission, even more confident, raised its forecast to 1.5% for 2018.
     Time has thus come for Italy to "do its homework" and boost fiscal
adjustment efforts once and for all, now that it is in a healthier and stronger
position to do so, the source argues. 
     "Flexibility granted by Brussels has been helpful when it was needed, but
things have luckily changed. Now Italy is in a shape better shape than it was
before, it has the potential to move on. All economic indicators -including a
slight rise in core inflation - point to a general improvement of the economic
outlook so it's a good moment to secure public finances," the source said.
     It's a matter of changing perspective and looking at the new scenario with
optimism after a triple-dip recession, he argued. "Reducing the degree of
expansive economic policies must be seen as a positive sign that the negative
downward trend has been finally inverted and that growth is consolidating".
     The timing is perfect, also, to avoid wasting "the window of opportunity"
offered by the European Central Bank's accommodative monetary policy, despite it
moving towards an inevitable "normalisation".
     According to the source, the opportunity offered by the ongoing recovery
must be seized to significantly curb public debt, possibly by speeding-up the
fiscal adjustment timing. "Neither the eventual end of the ECB's asset purchase
program, nor a potential rate hike, would have negative repercussions on the
Italian economy. Growth consolidation solely depends on how credible and
effective fiscal targets were met". 
     The official acknowledged, however, that the debt-to-GDP ratio, currently
at 132%, cannot be reduced overnight but needed a "gradual yet steadfast
reduction plan to be implemented with determination and discipline". Significant
progress has already been made on the debt front, which is finally stabilising.
     According to recent Bank of Italy data, after increasing by more than 30%
since the beginning of the financial crisis, the debt-to-GDP ratio has remained
broadly stable over the last three years thanks to the pick-up in growth and
persistent primary surpluses. Last year, the ratio even managed to fall,
declining by roughly 0.5% of GDP.  
     Pursuing structural reforms will also play a crucial role in boosting
growth without the need to resort to budget flexibility, said the source. 
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: MFIBU$,M$E$$$,M$I$$$,M$X$$$,MC$$$$,MI$$$$,M$$EC$,MFX$$$,MGX$$$]
MNI London Bureau | +44 203-865-3812 |