Brussels grants a discount on public finances to Italy, but sets conditions. The EU Commission "endors a budget adjustment even lower than what is prescribed by the flexibility matrix, as long as it is consistent with the need to reduce the ratio between public debt and gross domestic product". This can be read in the note accompanying the MEF to the letter of the European Commissioners Moscovici and Dombrovskis. As the Minister of the Economy, Pier Carlo Padoan has repeatedly recalled, "the main road to lowering the debt-to-GDP ratio is GDP growth".
In detail, the European Commission "will exercise its degree of discretion when assessing the deviation from the fiscal adjustment prescribed by the common agreed matrix, especially in the phase in which it has to establish the existence of a significant deviation". This is the key phrase of the letter from the Dombroskis-Moscovici couple to Economy Minister Pier Carlo Padoan, in response to Italy's choice to reduce the structural budget maneuver in 2018 from 0,8% to 0,3%. The letter does not contain figures, it does not essentially say whether the measure of the 0,3% government maneuver is accepted, but limits itself to defining the principles for the future decision.
The condition for a flexible assessment by the Commission is precisely indicated by the EU leaders: "The Italian government - it is written in the letter - should ensure an adequate improvement in net primary expenditure on the basis of the European Commission's autumn forecasts". By shifting attention to the trend in spending and the pace of its reduction, the two heads of economic governance provide an indication.
In the report on Italy published two months ago, Brussels indicated that according to the 'matrix' used in the EU, the nominal reduction rate of net primary public expenditure should be at least 0,2% in 2018 corresponding to an annual structural adjustment of at least 0,6% of GDP. Italy expects a structural improvement of 0,8% of GDP (now revised downwards to 0,3%) while the European Commission estimates that the structural balance will deteriorate by 0,3%.
The Commission, write Dombrovskis and Moscovici, will use the interpretative flexibility of the Italian budget law project taking into account two objectives: support for growth and guaranteeing the sustainability of public finances over time. It will use the measure of the "output gap" (the difference between potential growth and actual growth according to a method contested by Italy but also agreed by Italy in the past) to assess the cyclical position of each Member State, "but it will also consider other indicators of weakness of the economy, as well as short-term market vulnerability and medium-term sustainability challenges, including prospects for debt relief”.
And here is another key indication: "As a result of this qualitative assessment, the Commission may in some cases consider a fiscal adjustment somewhat lower than the requirement prescribed by the matrix to be adequate". At the same time, the letter continues, the community note circulated among the sherpas of finance ministers at the end of June, "clarifies the implications on the basis of the rules of the stability pact of a lack of significant fiscal adjustment in cases of non-compliance with the benchmark debt reduction” (situation in which Italy risks finding itself in 2018).
Overall, the letter continues, “full implementation of all country-specific recommendations should be an integral part of the government's commitment to an appropriate balance between maintaining current and future growth and ensuring fiscal sustainability in line with the commitments indicated in the letter (by Padoan) to extensive structural reforms and the reduction of the public deficit in nominal terms, ensuring the reduction of the debt/GDP ratio".
Dombrovskis and Moscovici declare themselves "confident that with these policies Italy can fully benefit from the more solid economic expansion in the Eurozone".
The letter from EU Commission Vice-President Valdis Dombrovskis and Commissioner Pierre Moscovici to Italy on the 2018 maneuver sent today "is good news". So the Prime Minister Paolo Gentiloni questioned on the issue during the press conference at the end of the Western Balkans Summit in Trieste. "I heard Minister Padoan - reported the premier - and he said to me: 'Guys, the letter with which Vice-President Dombrovskis and Commissioner Moscovici replied to a letter, I would like to remind you, signed by a group of European countries. Letter in which it was requested to recalculate the matrix through which the ratio between deficit and GDP is calculated. That letter from seven countries essentially said: the European economy is experiencing better levels of growth than expected, this is a moment to accompany and not depress this growth. I am satisfied with the fact that a country like Italy, which has always respected the European rules in recent years, in respecting these rules is right on a fundamental issue: that the rules are respected but they are respected with an attitude that tends to to encourage and not to depress growth. The Commission's response will comfort us in this line, that of a country that respects the rules but also obtains results, as it has done in recent years". And in any case, Gentiloni specified, “margins are not discounts to Italy. They are margins to the idea that today's growth must be fostered, accompanied and not depressed”.
