REPEAT: MNI INTERVIEW: Italy FinMin Aims At Lower Labour Tax

Repeats Story Initially Transmitted at 10:00 GMT Jul 31/06:00 EST Jul 31

--Padoan Plans Labour Tax Cut For Italy's October Budget

--Italy FinMin Also Calls For Quicker Eurozone Fiscal Union  

--Padoan Sees Fiscal Union EMU's Only "Chance to Survive"

--Sees No Further Impact On Italy Public Finances From Bank Interventions

By Silvia Marchetti

     ROME (MNI) - Italy's government is planning to introduce further labour tax

cuts and additional growth-oriented measures in its next budget plan, due to be

approved in October, Italy's Economy Minister Pier Carlo Padoan told Market

News.

     In a wide-ranging and exclusive interview with MNI, Padoan also called for

an acceleration in the European financial integration process, warning that in

the long-run, the eurozone's only "chance of survival" is the creation of a

fiscal and political union to shield the euro against reversibility risks

     "The budget law for 2018 will contribute in reducing indebtedness, but at

the same time it will reinforce incentives for private investment in

technologies enabling innovation. We're also working to selectively decrease the

tax wedge so as to reduce youth unemployment," Padoan said. 

     The first cut in the 'tax wedge' was launched in 2014 by then premier

Matteo Renzi and benefitted some 10 million low earners with a monthly bonus of

80 euros, supporting internal demand and kick-starting the recovery. 

     The Rome government's strategy of balancing growth and fiscal targets has

seen significant results. The Bank of Italy recently raised GDP forecasts for

this year to 1.4% from a previous 0.9% as Italy is finally exiting the crisis

tunnel.

     "The deepest recession since World War II is behind us," said Padoan. "More

than a cyclical improvement, we think that Italy is finally rebuilding its

potential".

     The minister noted how growth turned positive in 2014 and has been

accelerating since then. 

     "We have implemented a strategy to continue with consolidation and support

growth, and the latest encouraging data is an evidence that structural reforms

are starting to pay off and that the business environment is improving," he

said.

     Progress is slowly being made in curbing the country's high public debt,

Europe's second-largest in volume after Greece. 

     "The debt has increased by 32 percentage points during the years of

double-dip crisis" but "it has stabilised since 2014 and I'm confident it's on

its way to a decreasing path during the current year," Padoan said. 

     According to government forecasts, debt is expected to fall to 132.5% this

year, 131% in 2018, 128.2% in 2019 and 125.7 in 2020. 

     Italy is currently under European Commission scrutiny for "economic

imbalances" due to its elevated debt level, but Brussels recently showed a more

lenient approach, acknowledging Rome's fiscal efforts and reforms which will be

taken into account when evaluating the 2018 budget law. 

     The strict Fiscal Compact rule, that sets by law a medium-term objective of

 structural budget balance and a progressive debt reduction year by year for all

signatory states, has lately been questioned by former Italian Prime Minister

Matteo Renzi, who has pledged to overcome it if he wins next year's general

elections.

     Despite acknowledging that the fiscal compact "is not an issue" as "we have

implemented the rules," Padoan argued, adding that the EU must go beyond mere

budgetary requirements.

     "Evidences shows that Europe needs a strategy for growth and integration to

deal with the challenges it faces more effectively," he said.

     A strengthened union requires a leap forward in the integration process.

According to Padoan "a eurozone finance minister is needed to provide European

citizens with coverage over issues such as border protection and

counter-terrorism initiatives".

     Furthermore, "the banking union is far from completion, a market capital

union needs to be developed and we need to promote innovation on a European

scale," Italy's finance minister added.

     But the thorny issue remains Europe's still far off political union,

considered by Padoan as paramount in ensuring the irreversibility and survival

of the euro.

     In his view, it's the only way to shield the eurozone from a reversibility

risk that will persist until member states accept giving up large pieces of

sovereignty along with increased risk-sharing for the common good.

     "Europe is still only halfway in its quest for unity. In the long term,

there is no chance of survival for a monetary union without a fiscal union. And

in order to reach a fiscal union we need to make progress toward a political

union," warned Padoan. 

     But the time to push ahead with such a big European project might not yet

be ripe, though: "Under current conditions there is apparently little chance to

make progress in that direction, but we have already experienced sudden

accelerations in the process of integration," Padoan noted. 

     The minister expressed confidence in the stability of Italy's financial

sector despite the recent public support given to several ailing lenders and the

mass of non-performing loans sitting on banks' balance sheets, which is,

however, starting to decline somewhat.

     "The Italian banking sector reached a turning point when we managed the

liquidation of two banks in Veneto, together with the measures to recapitalise

Monte dei Paschi di Siena in agreement with the European Commission," Padoan

said. 

     He dismissed suggestions that the state bank interventions could put

Italy's fiscal adjustment path at risk, as "public resources have already been

made available and there will be no additional impact on public finances to

support the sector".

     Padoan said a possible revision to the Bank Recovery and Resolution

Directive (BRRD) in 2018 should take into account some critical aspects that

came to light through the rescue the Italian lenders, could be addressed through

a more "useful flexibility" of the new banking rules already provided by the

European commission. 

     "When a bank is likely to fail, the BRRD provides the resolutions as an

alternative to insolvency procedures. The aim of the resolution is to manage the

crisis so to minimize the risk of contagion and the consequences for the

taxpayers," he said. 

     "However, when the resolution is not appropriate, as the Single Resolution

Board decided for the two banks in Veneto, liquidation must avoid any

unnecessary value destruction occurring. When amending the BRRD we should bear

in mind the lessons learned so far, especially in terms of transition management

and collaboration between institutions," argued Padoan.

     Padoan also acknowledged progress made in the reduction of bad loans that

has been stifling lending in Italy. "The stock of NPLs is dramatically

decreasing and as that burden eases away the entire banking sector will better

support the recovery underway," he said. 

     According to latest data by Italian banking lobby ABI, net bad loans fell

to E76.5 billion in May, down from the record E89 billion peak seen in 2015. 

     Turning to the UK's departure from the EU and any subsequent openings for

Italy's financial markets, Padoan believes Italy has the needed infrastructure

and Italian financial services firms are in a fit state to pick up any

opportunities from any post-Brexit exodus from the City London.

"We went through a process of reform that has deeply changed the banking sector

while creating more opportunities for the financial industry as a whole. Borsa

Italiana is a source of innovation and the Italian discipline for corporate

governance is a guarantee of transparency," said Padoan. 

     The Italian stock exchange is currently a subsidiary operation of the

London Stock Exchange.

     A financial hub is being set-up in Milan to lure potential clients fleeing

the UK. In Padoan's view, Italy's stock exchange centre is "a perfect candidate

to host businesses for which human capital is so important".

     However, the minister ruled out a view that the City of London will ever

have one unique successor on the continent, but rather we could see a

diversification of roles and services among members states. 

     "In my opinion none of the potential candidate cities will substitute

London as a single financial centre. The European financial industry is

relocating in a different and more distributed manner," Padoan argued. 

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