MNI SOURCE: Italy Recovering, Need Less Expansionary Policy

--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 source at the Bank of Italy 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".

     --NO MORE BRUSSELS LEEWAY

     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 BOI official 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".

     --CURB DEBT LEVELS

     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: les.commons@marketnews.com

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