MNI SOURCES: Italy Confident EC To Approve '18 Budget: Offic'l

--No Additional Fiscal Adjustment Seen Needed 

--EU-Wide Consensus Grows To Revise How Fiscal Targets Are Set

By Silvia Marchetti

     ROME (MNI) - Italy's government is confident that the European Commission

will ultimately give the green light to its 2018 budget law with no further

requests of additional fiscal adjustment, a senior government official told

Market News.

     "I do not see any risk that come May, Brussels may open an infraction

procedure against Rome for excessive deficit, so there will be no need for extra

budgetary tightening," said an economic adviser to premier Paolo Gentiloni.

     Rome's optimism stems from a sustained growth pick-up that could seen

year-on-year GDP growth at over 1.5% this year, boosted by stabilising public

debt and pursuing ambitious reforms that are boosting the country's credibility

and helping keep financing costs lower than in the past, stressed the source.

     There have been growing differences between Italy and the Commission over

the impact of the fiscal adjustments needed to reach the medium-term objective

(MTO) of a structural balanced budget, with Brussels pushing for greater efforts

from Rome.

     Italy's government has more than once delayed the MTO, which is now

forecast to be reached only in 2020, advocating greater timing leeway to enable

tightening public finances "gradually and in a sustained way" that doesn't risk

the economic recovery. "It's all a matter of contrasting calculations based on

different evaluation methods," argued the source.

     "Brussels says our budget law envisages just a 0.1% of structural deficit

adjustment instead of a requested 0.3%, stressing that the missing 0.2% could

push it to open an infraction procedure against us," the source noted. "But the

whole point is: what's the exact benchmark of that missing 0.2%?"

     --CALCULATION CHANGE

     Rome is pushing to scrap the so-called 'output gap' calculation method to

determine the exact difference between potential and real GDP, which is used to

set fiscal targets across the EU.

     "This (output gap) parameter is relative, it is not objectively

identifiable in reality and impossible to set. It's like an invisible bar. Plus,

each member state has its own method that clashes with the one used by the

commission," complained the official.

     Given the opposing viewpoints across the union, it is therefore now a

"favourable moment" to review certain complex budget calculation methods, he

argued.

     Rome has launched an EU-level debate questioning the validity of the output

gap parameter and there appears to be a growing consensus amongst peers to

revisit how to best determine fiscal targets.

     "In any way, even if we would ever be short of 0.2% as Brussels says, we'll

fill that gap with higher than expected growth. The first quarter of this year

already sees a consolidated 0.5% rise in GDP, a positive sign that 2018 will

turn out to be very rosy, even if inflation will also play a major role," the

source said.

     --DOMESTIC CONCERNS

     Last week, Italy's Parliamentary Budget Office (PBO) -- an independent

organism set-up in 2014 to monitor the balanced budget MTO -- issued an alarming

report in which it warned that Rome will likely deviate from set targets and

face additional fiscal requests from Brussels this spring, when the Commission

will give its final verdict on the '18 Budget.

     The source brushed away all concerns, assuring that "no extra budgetary

manoeuvre will be adopted by Italy, no matter who wins the March 4 vote".

     "Brussels will ultimately come to terms with the reality, which is that our

public debt is finally stabilising at sustainable levels after seven years of

consecutive rises and will soon start to decline. It's crucial that sovereign

investors, who each year lend us roughly E400 billion, see our efforts and trust

us," he added.

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

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