Brussels to issue grim growth forecast for Italy

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The European Commission will revise Italy's economic forecasts downward when it publishes its biannual projections for the EU and the eurozone today (10 November). This could require Italy to adopt new austerity measures, as uncertainty remains high over the country’s political future.

The negative review is part of an overall pessimistic prevision which the Commission will publish today with its autumn economic forecasts.

“I can already anticipate that there will be little room for complacency,” EU Economic Commissioner Olli Rehn said on Tuesday after a meeting of EU Finance ministers in Brussels.

The situation in Italy causes the deepest concern in the eurozone since global markets have raised the pressure, pushing Rome in the footsteps of Greece and on the path to default.

Italy has promised its European partners to reach a balanced budget by 2013 through a number of public expenditure cuts and measures to stimulate growth.

But the sluggish pace of reforms, anaemic economic growth and the skyrocketing price demanded by markets for Italy to refinance its debt are making this target impossible to reach.

Rehn sent a questionnaire to the Italian authorities at the beginning of November in which the Commission asks clarifications on the fiscal adjustments promised by Italian Prime Minister Silvio Berlusconi at the last EU summit. 

In the letter, obtained by EURACTIV, the Commission states that additional austerity measures might be necessary since “in the current economic context, the planned fiscal strategy does not ensure the achievement of a balanced budget in 2013.”

In particular Brussels is concerned by Italy’s lack of growth, and openly admits that the scenario “has deteriorated further” since the last forecasts, according to Rehn’s spokesperson Amadeu Altafaj.

In September, the Commission already revised downward Italy’s growth projections, predicting a sluggish 0.7% GDP annual growth in 2011, against 1.6% in the eurozone. In May, the forecasts for Italy stood at 1%. Now, it is expected that the projection will be further lowered.

With no growth, it appears that the bold budgetary targets set by Italy seem no longer realistic. Cuts agreed by the Italian government in two different moves in the last few months are likely to be vain if the economy does not grow.

Political uncertainty adds fuel to fire

The renewed pressure from Brussels comes as Italy lives dramatic days and faces an ever-increasing uncertainty over its political future.

After losing his majority in Parliament, Berlusconi on Tuesday (8 November) announced his intention to resign. But this will happen only after the adoption of the first package of measures promised to Europe to redress the Italian economy. These measures are expected to be adopted on Saturday.

Moreover, Berlusconi is openly calling for new elections without expecting the consultations that Italy’s president, the highly regarded Giorgio Napolitano, is presiding in a bid to find a widely agreed solution for the way forward.

Financial markets clearly favour a transitional government of national unity that could quickly steer the required reforms through Parliament. As soon as Berlusconi called for early elections, stock exchanges went down, while the spread between interest rates on Italian bonds and German Bund reached a record level.

Early elections are likely to produce a balanced result, while months of electoral campaign risk leaving Italy in a limbo while accruing vulnerability to speculators’ attacks.

If elections are ruled out, rumours circulating in Rome these days suggest that a transitional government could be led by a member of Berlusconi’s party, such as his designed political heir and the former justice minister, Angelino Alfano, or his powerful secretary of state Gianni Letta. As an alternative, the choice could fall on an internationally-respected figurehead, such as the former EU commissioner Mario Monti.

In the meantime, Napolitano yesterday appointed Monti as senator for life, a move that could be a signal of his favoured choice.

The European Commission is silent on this subject at the moment. “I have no comment to make at this point in time at what is an internal evolving situation. I have nothing to add in terms of what needs to be done,” EU Commission spokeswoman Pia Ahrenkilde said yesterday (9 November).

Italy's mix of chronically low growth, a public debt mountain of €1.84 trillion, or 120% of GDP, and a struggling governing coalition are causing growing alarm on financial markets.

The country, which is politically unstable, would need at least €600 billion in the case of a bailout, more than the balance of the eurozone's current bailout fund.

Prime Minister Silvio Berlusconi last month pushed through a €60-billion austerity package – bringing forward its original balanced-budget target by one year – in return for the European Central Bank's support for its battered government bonds market.

However, doubts remain over the government's ability to implement these austerity measures.

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