LDN - Business

EU warns France, Italy over budgets, but rows unlikely

[October 22, 2019] By Francesco Guarascio

STRASBOURG (Reuters) - The European Commission said next year's draft budgets for France and Italy could be in breach of European Union fiscal rules and it asked for clarification by Wednesday in letters sent to the countries' finance ministers.

The EU executive has also issued budget warnings to Finland over its spending, and to Spain, Portugal and Belgium who have submitted incomplete budget plans because of recent elections.

The EU's move on Italy is seen as necessary, given Rome's plans to spend more to boost growth, but it is unlikely to lead to a repeat of last year's standoff, when Brussels forced Italy's former eurosceptic government to amend its budget to avoid sanctions after a prolonged tussle that hit markets.

The letter to Italy, dated Oct. 22 and signed by economic commissioners Valdis Dombrovskis and Pierre Moscovici, said a preliminary assessment of the 2020 draft budget showed that it fell short of EU fiscal recommendations to reduce expenditure.

"Italy's plan does not comply with the debt reduction benchmark in 2020," the letter said, echoing the message Brussels delivered to Italy last year.

But the situation since then has greatly changed, as Rome now has an EU-friendly government, the EU is pushing for more spending to counter recession risks in the euro zone and the current commission is also about to end its five-year mandate.

Moscovici told reporters on Tuesday that the situation was very different from last year, and that the commission would not ask for changes to Italy's budget, reiterating the soothing message he delivered last week in an interview with Reuters.

However, Brussels wants Italy's finance minister Roberto Gualtieri to explain why according to his draft budget the country's structural balance, which excludes one-off revenues and expenditures, would worsen by 0.1% of output instead of improving by 0.6% as requested by the EU.

The Commission is also asking why net primary expenditure, which strips off interest payments, is budgeted to grow by 1.9% of output next year, instead of falling as recommended by the EU.

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European Commissioner for Economic and Financial Affairs Pierre Moscovici presents the EU executive's economic forecasts during a news conference at the EU Commission headquarters in Brussels, Belgium, July 10, 2019. REUTERS/Francois Lenoir/File Photo

At the same time, Brussels is looking into whether it could grant Italy leeway for "unusual events", it said in the letter.

If granted, as widely expected after Rome's request, the flexibility could allow Italy to deviate from fiscal targets without breaching EU fiscal rules.

FRANCE, CARETAKER GOVTS

Brussels sent similar warnings to French Finance Minister Bruno Le Maire, saying under the existing draft budget that Paris would breach EU rules on public debts.

France is not envisaging any structural improvement next year contrary to EU requests for an improvement worth 0.6% of gross domestic product.

The Commission, which is in charge of assessing the budgets of euro zone countries, also sent warnings to Spain, Portugal and Belgium, whose caretaker governments were not in a position to submit complete budgets by the Oct. 15 deadline set by EU rules.

Spain and Belgium have not formed new governments following this year's elections, with Spain going to the polls again in November. In Portugal, a new cabinet has not yet been sworn in after elections held this month.

It is not unlikely that countries present incomplete budgets because of elections, but the commission warned the current budgetary measures envisaged by the three caretaker executives could fall short of EU fiscal rules.

A warning letter was also sent to Finland because of its growing public spending. Helsinki replied saying the measures were temporary and necessary to boost employment and improve public finances in the long run.

(Reporting by Francesco Guarascio,; Editing by Alexandra Hudson and Ed Osmond)

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