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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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