MNI SOURCES: Italy May Back French ECB Chief, But For A Price

By Silvia Marchetti

     ROME(MNI) - Italy may tie support for a French candidate to head the

European Central Bank to help from Paris in persuading Brussels to grant it more

fiscal leeway, averting an Excessive Deficit Procedure, government sources told

MNI.

     While the European Commission warned earlier in June that Italy is heading

for the procedure, which can ultimately lead to fines, Italian government

officials argue European rules would allow the country to run a higher deficit

if Brussels used a more accurate calculation of the gap between potential and

actual economic output.

     "The EC decided in favour of the EDP because in their view Italy's output

gap is close to zero," said a source from the co-governing 5-Stars Movement,

adding that the Italian government calculated the gap to be closer to 1.6% pf

gross domestic product. "There's a wide difference between real and potential

GDP which, therefore, grants us at least more leeway in the fiscal adjustment

path to reach a balanced structural budget."

     Output gap calculations made by Brussels fail to take sufficient account of

slowdowns in the eurozone economy and global trade, the 5-Stars official said,

adding that they are calculated using different parameters for different

countries.

     An official at the League Party, which shares the coalition government with

5-Stars, called the European Commission's calculations "preposterous."

     "The higher this output gap is, the more fiscal leeway a member state

should be granted," the League source said.

     --POSSIBLE SUPPORT FOR FRANCE AT ECB

     The European Commission is set to take a final decision on whether to open

the Excessive Deficit Procedure by a meeting on finance ministers on July 9, but

government sources said they had no intention of picking a fight with Europe and

were confident an initial agreement could be struck as soon as the next EU

summit on June 20-21.

     Other countries, including France, have objections to the Commission's

output gap calculations, the sources said, adding that help from Paris in

avoiding an EDP could be reciprocated by Italian support for a French successor

to ECB President Mario Draghi.

     A European Commission spokesperson told MNI the output gap calculations had

proven to be robust over the years, and added: "The assessment of Member States'

fiscal situation is never a mechanical extrapolation of one indicator ... The

output gap is thus only one part of the overall framework to determine fiscal

requirements and all relevant factors must be taken into account."

     The Italian government's fiscal stimulus should boost GDP, increasing the

denominator in deficit calculations and reducing the headline percentage, the

League official said.

     "Plus we expect greater VAT revenues this year and have launched an

ambitious infrastructure roadmap, alongside a review of spending and tax

expenditures," he said.

     Sources from both parties said Italy would refuse to "take any step

backward or pass an emergency decree to curb public deficit just because the EC

wants it." Expensive policies championed by the coalition, including a flat tax,

basic income and changes to pension reform, are being worked on by technical

committees, they said.

     The government is also pushing ahead with preparations for so-called

miniBOTs - small denomination government bonds with no maturity or coupon, which

some have said could be the beginnings of a parallel currency. But a final

decision on miniBOTs, which have alarmed ECB and European officials, will not be

taken until September, according to a source close to deputy prime minister

Matteo Salvini.

     (Additional reporting by David Thomas in Brussels)

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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