Joaquín Almunia
European Commissioner for Economic and Monetary Affaires

Press conference by Commissioner Almunia on the budgetary situation in Italy

Press Conference on EDP Recommendations - Italy
Brussels, 29 June 2005

Buenos dias,

The Commission today adopted a recommendation for the Council concluding that Italy is in a situation of an excessive deficit.

As you may remember, on the 7^th of June the Commission already adopted a report under Article 104.3 which showed that both the deficit and the debt criteria set in the Maastricht Treaty were not fulfilled.

The Economic and Financial Committee provided its opinion on the Commission's report last week. The EFC examined the relevant factors assessed by the Commission, plus other put forward subsequently by the Italian authorities. However, like the Commission, it concluded that both the deficit and debt criteria of the Treaty were not respected. Given that the excess over the 3% deficit reference value was neither exceptional nor temporary, those factors could not be taken into account for excluding Italy from the procedure.

Let me recall, that in 2003 and 2004, Italy recorded a deficit of 3.2%. In our spring forecasts, we estimated a deficit of 3.6% for this year on the basis of a growth of 1.2%. But the figures and market data we have received since April show a deterioration of the Italian economic situation. Assuming a more likely scenario of a GDP growth rate close to zero the deficit will increase to above 4% in 2005. At 106-107%, the debt-to-GDP-ratio is also clearly above the reference value and has not declined at a satisfactory pace over the recent years.

On this basis, the Commission it is of the opinion that an excessive deficit exists in Italy and proposes to go ahead with the procedure. Accordingly it adopted recommendations for the Council to decide on both the existence of the excessive deficit, and on its correction, according to Articles 104.6 and 104.7 of the Treaty.

With regard to the correction path, you are aware that the Stability and Growth Pact, both old and new, sets a normal deadline of one year - in this case 2006 - unless there are "special circumstances".

Clearly, a rapid correction of the Italian deficit is necessary to put the public finances back on a sustainable path and prevent a situation in which persistent budgetary imbalances weigh on confidence, and ultimately on economic growth.

However, in view of the current cyclical weakness in Italy and the size of the required adjustment to bring the deficit below 3%, 2007 is a more appropriate deadline.

To correct the excessive deficit, we recommend that the Italian authorities:

• implement with rigour the 2005 budget,
• and take the necessary measures to ensure a cumulative reduction in the structural deficit of at least 1.6% of GDP over 2006-2007 relative to its expected 2005 level. This adjustment needs to be structural. We will not take into account one-off or temporary measures.
• At least half of this correction should take place by 2006.

Assuming, as we have, a GDP growth rate of zero in 2005 and of 1.5% in 2006 and 2007, this would lead to a deficit of below 4% in 2006 and just below 3% of GDP in 2007.

The Commission also recommends the Council to request Italy to ensure that the debt level - the second biggest in the EU after Greece - is put firmly on a descending path by restoring appropriate primary budgetary surpluses and by giving due attention to the so-called below-the-line operations which increase the debt but not the deficit.

Finally, Italy is also recommended to further improve the collection of government statistics in view of the many sizeable revisions that occurred in the last few years.

A word on the next steps of the procedure: the recommendations will now be discussed and, I hope, adopted by the Ecofin Council on 12 July. According to the Regulation on the excessive deficit procedure, a deadline of four months, i.e. 12 November, is proposed for Italy to take effective measures to correct its budgetary situation.

Ladies and gentlemen thank you. I'm at your disposal for questions.