MNI SOURCES: Italy-Germany Tensions Rise On EU Surplus Rules

--High Trade Surpluses Seen As Bad As High Debt Levels

--German/Italian Industrial Groups Team Up To Push EU Progress

By Silvia Marchetti

     ROME (MNI) - Tensions between Germany and Italy are on the rise again over

thorny European budget rules that require countries to stick not only to deficit

and debt thresholds but also have their trade surpluses under control, Market

News understands. 

     Several top government officials and business sources told Market News that

Berlin's elevated trade surplus is just as "harmful" and "negative" as Rome's

high public debt, having the same potential in triggering risks of

macro-economic imbalances and should therefore be appropriately sanctioned by

Brussels.

     "You can't have asymmetric EU rules, be tough on one country because of its

unstable budget and fiscal targets, and lenient towards another 'virtuous' one

who isn't transferring export benefits onto the real economy," said a government

source. 

     "A high trade surplus is just as bad as outstanding public debt or a wobbly

deficit," the source argued, adding that Germany's austere, restrictive fiscal

policies that have been keeping wage policies low in the country stood as one of

the main reasons why inflation in the euro-zone is still below 2%. 

     Berlin's trade surplus is close to 9% of GDP, bigger in volume than the

Chinese one, despite China's economy being three times bigger. EU rules limit

surpluses to 6% of GDP. 

     Italy's Treasury has been pushing the European Commission to adopt a

tougher stance against Germany's excessive trade surplus, which, according to

Rome, is damaging the global and European economies, primarily Italian exports.

Brussels is seen as far too lenient when it comes to evaluating Europe's

"economic engine" compared to its southern, indebted periphery. 

     Italy's patience over several hot European Union issues, including

excessive trade surpluses, is waning. 

     Matteo Renzi, former premier and now front-runner ahead of the general

elections expected next year, has made it a cornerstone of his agenda to change

Europe and be stricter on Germany's accounts. 

     A group of Italian analysts and economists recently launched a manifesto

against the reluctance of both Germany and France in pursuing the banking

union's envisaged greater burden-sharing approach, urging the two countries to

overcome national interests and move on for the good of Europe. 

     Confindustria, Italy's leading trade lobby, representing some 150,000

firms, has complained about the negative impact of Germany's surplus on Italian

exports and has called for a united action at EU level to off-set damage to the

European economy. But open dialogue is key to cooperation. Confindustria and

Germany's BDI are meeting on Thursday for a 2-day Business Forum in Bolzano,

north Italy, to address common EU challenges and discuss thorny issues. 

     A member of Confindustria's research unit told MNI that the link between

the German surplus and Italian exports could put at stake many 'Made-in-Italy'

goods.

     The direct impact involved lower imports of Italian key mechanical

components for Germany's automotive industry, which relies heavily on car breaks

and other interior design hardware made in Italy. 

     While the indirect impact would lead to lower purchases of Italian goods by

German consumers.    

     "The trouble is that Berlin's high trade surplus has brought money just to

German firms and to the federal government, but not to German savers and

consumers who buy our products," said the Confindustria expert. 

     "The benefits of the surplus have not been transferred to incomes, so

compared to competitiveness growth, salaries have remained frozen and the

Germans' purchasing power hasn't grown".

     Germany's trade surplus has been steadily growing in the past three years

and Rome fears it will continue to do so in the long-run if Europe fails to

adopt a stricter approach. 

     "Europe's budget rules aren't really mandatory, so when they are infringed,

the scrutiny process takes years and no sanction actually ensues at the end,"

argued another government source. 

     Berlin's government should use the surplus to implement a more

inflationary, accommodative economic policy to fund strategic public

investments, raise salaries and, by extension, internal consumption levels, said

the Confindustria researcher. 

     "Our German colleagues also need to invest more in their businesses and

activities, and increase their own imports of key components," said Paolo

Bastianello, head of Confindustria's 'Made In' technical committee set-up to

safeguard Italian products. 

     "German firms have so far benefitted from a competitive advantage due to

low wage  policies established years ago and to several controversial business

strategies recently adopted to boost low-cost production, such as relocation to

less-developed East European countries and to Asia," said Bastianello.

     Bastianello recalled how Italy opposed Germany's recognition of China as a

market economy in the past, noting that the growth of the German industry output

in China could "kill Italian firms in the long-run in terms of competition, but

above all quality standards".  

     There is a growing belief in Italy that rules must be equal for all

countries, both in terms of budget convergence and industrial practices. 

     "In one word, Germany needs to spend more, and given it is Europe's largest

economy, by spending more it will automatically contribute in adjusting

inflation to the required levels," explained an Italian Treasury official.

     Germany's industrial lobby BDI, reached by MNI, declined to comment on what

could be done to adjust Berlin's trade surplus and if despite favouring their

interests, was in fact bad for Europe or not. 

     But Bastianello is confident that being Europe's two leading manufacturing

countries, Germany and Italy will come to terms with the situation and boost

cooperation for the good of the union. 

     At a Bolzano's summit this week, Confindustria and Germany's BDI will

foster ties to define a common platform to reform the EU, searching for ways to

overcome obstacles and cooperate in pursuing European progress, said

Bastianello. 

     "We will talk about surplus, economic policies and many other key issues,

including our banking priorities and what needs be done to strengthen Europe's

financial sector. Firms of all sizes, especially small ones, need to access

credit and banks are not helping at this stage," he added. 

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

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