MNI SOURCES: Italy Aims To Shift EU Focus To Debt, Not Deficit

--Rome Government Looks For Support To Shift Targets, But Says SGP 3% Sacrosanct

By Silvia Marchetti

     ROME (MNI) - Italy will look to shift Europe's austerity and fiscal focus

away from deficits and on to debt targets if the Democrat's wins a second term

next month, senior party officials told Market News.

     "Europe's tight fiscal adjustment requests stem from a complex measurement

of the output gap to determine structural deficit targets to set, while we want

to shift that focus to the achievement of nominal public debt reduction in a

longer time-frame, more easy to track and objectively evident," said a

government source in charge of budgetary matters.

     Rome argues that the different methods of output gap evaluation used by the

European Commission and member states to determine the difference between real

and potential GDP leads to different deficit targets that are raising tensions

across the bloc.

     "Our method of output gap evaluation clashes with the one adopted by

Brussels, so unless we're able to harmonise the various approaches to avoid

constant fiscal clashes and finger-wagging, it would be more appropriate and

productive if Europe's watchdogs focus on public debt dynamics," the official

explained.

     The possibility of somehow revisiting the Stability and Growth Pact (SGP)

to give it a different interpretation, the source underlined, would not in any

way entail breaching the 3% deficit-to-GDP threshold, even if the debt target

became predominant in budget assessments.

     --EUCO PUSH

     Rome will likely push its case at the next European Council meeting in

March, confident of rallying cross-bloc support. 

     "We've spearheaded greater flexibility across the bloc and have opened the

debate on the need of implementing growth-friendly fiscal policies. Other

countries have expressed confidence in our strategy, not just the southern

periphery but also Germany and France," noted the source.

     Much will depend on the election outcome in Italy and whether the Democrats

can secure a victory and have a new cabinet in place by end of March, when the

next EU Council will be held. However, incumbent premier Paolo Gentiloni will

stay in office until his successor takes over and no matter the winner, all

parties contesting the election agree on the need to revise the SGP.

     "We've been taking enormous steps forward in curbing our public debt, which

is finally on a downward trend thanks to a stronger growth. This progress is

being acknowledged by the EC, whose trust in our action is increasing," said the

official. 

     --GROWTH FORECASTS UPPED

     On Wednesday Brussels upped Italy's GDP forecast for this year from 1.2% to

1.5%, in line with those of the government who recently also revised its fiscal

targets.

     However, the medium-term objective (MTO) of a structural balance has been

more than once delayed and it is now forecast to be reached only in 2020, while

deficit targets have been raised modestly as a buffer against any impact from

the eventual ending of the European Central Bank's asset purchase program (APP).

     "Being given greater leeway by Brussels in our fiscal adjustment path is

possible if the hawks look more at our debt reduction curve than drastic,

immediate deficit cuts," argued the source, stressing that increasing public

spending within set limits remains key to fund pro-growth measures and

consolidate Italy's recovery. 

     By extension, the fiscal compact rule needs a thorough makeover as well,

added the source. 

     "It forces member states to cut a significant percentage of debt each year

to reach the MTO of a structural balance, but this is far too stringent and must

be revised. On this issue, even Berlin and Paris agree we need a softer, slower

approach," he said.

     The eurozone governance reform should aim to substitute the MTO target with

"a multi-annual debt-curbing plan, spread across a longer-term period but with

clear and achievable targets, net though of public investments", explained the

official. 

     In its manifesto, the Democrat party has pledged to cut public debt to 100%

of GDP from the current 132%, but over the next 10 years. 

     However, another source close to the government expressed scepticism that

overcoming the MTO rule was feasible, given the goal of achieving a structural

balance has been framed in 2012 within the Italian constitution and is therefore

law.

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

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