BRUSSELS. Italy remains a risk factor for the eurozone, and Mario Draghi’s intentions, on which the European partners rely, do not seem to dispel doubts. A first examination of the draft budget reminds the government. “Italy has been recommended by the Council to limit the growth of nationally financed current expenditure. It is expected that this will not be sufficiently guaranteed ”, reads the European Commission document included in the broader European semester package, the economic policy coordination cycle.
The need to support the economy is recognized, but Brussels’ impression is that it is taking advantage of this need dictated by the repercussions of the pandemic to the detriment of national and euro area stability. For this reason, the Commission “invites Italy to adopt, as part of the national budget process, the necessary measures to limit the growth of current expenditure financed at the national level”.
Recalls on the budget law that find their explanation in the debt report. The alert mechanism, as it is called, is the process of continuous control and monitoring for all those Member States that have situations of public finances and economic conditions that can represent a factor of risk and contagion. Italy is one of these risk factors.
Overall, the Commission considers that ‘the persistence of macroeconomic risks should be further examined and progress in resolving excessive imbalances should be monitored’. The conclusions of the analysis for Italy speak for themselves. But this is a duty, Paolo Gentiloni points out. “Macroeconomic imbalances, in many cases exacerbated by the pandemic, require attention,” explains the Commissioner for the Economy.
The strong public support for non-financial businesses is of particular concern. Currently “corporate debt is at or very close to the highest level since the mid-nineties”, and public intervention exposes the country, which is already too indebted. The debt / GDP ratio reached 155.6%. “More than half of the increase in the debt-to-GDP ratio came from the denominator effect,” that is, low growth. So it will take measures and actions to pull it off.
Also because Italy will take some time before fully recovering from lockdown losses. “Some countries with significant export market share losses in 2020 should only recover part of the losses in the near future,” predicts the EU executive. The list also includes the boot.
Then there is the question of banks and their non-performing loans, loans that are struggling to be repaid. The reduction in the ratio of non-performing loans (NPLs) has further progressed but, at 4.5% in the first quarter of 2021, remains above the euro area average of 2.4%.
Strong debt, low growth, exposure to loans that are hard to get back. The Italian situation is this, and therefore “prudence” is called for, especially on the expenditure side. Some corrections are expected from Draghi. “The priority now is to give the right shape to the reforms and investments” that are needed, warns Valdis Dombrovskis, executive vice president of the EU Commission responsible for an economy at the service of people. Waiting for reassurance on the budget law, considered too imprudent and, given the circumstances, reckless.