With a predicted budget deficit of 2.6%, Italy is close to breaching the eurozone's Stability Pact
Italy is slipping up on its budget deficit and other members of the European Union are beginning to take public notice.
Italian economic minister, Guilio Tremonti, recently forecast his country's budget deficit this year could reach 2.6% of GDP. Almost everyone was under the impression Italy's deficit would be as little as 0.8%.
Under the terms of the Stability Pact, signed by European countries before they enter the euro single currency agreement, no member country is allowed to run a budget deficit in excess of 3% of GDP. Moreover, all signatories promised to work toward achieving a balanced budget.
Though not in technical violation of the rules, Italy's deficit is troubling. Edgar Meister, a Bundesbank council member, was on Tremonti's case almost at once. 'We are of the unanimous opinion that this doesn't conform to the spirit of the EU deficit limits,' he said.
The Stability Pact was an invention of the Kohl government. In theory, keeping individual member countries on a tight budget leash was supposed to harmonise economic conditions across the Union.
The pact had a political raison d'Ãªtre: Kohl was trying to qualm concerns among German citizens about entering into a monetary union with Mediterranean countries.
After receiving rebukes from several nations along the lines of Meister's, Italy began to offer assurances to the EU that it wasn't backsliding as much as the 2.6% number would suggest. First, Tremonti sent a nice letter to EU Economic Affairs Commissioner, Pedro Solbes, the EU's top deficit cop.
Solbes's spokesman, Gerassimos Thomas, told the AFP just over a week ago that the letter contained reassurances Italy would take corrective measures to meet the budget requirements of the Stability Pact.
What is more, Tremonti last Monday joined his 11 eurozone counterparts in reaffirming their pledge to keep the 2001 deficit to no more than 0.8%.
There were also statements put out by the Italian government to the effect that it intended to speed up the sale of interests it had in companies to lessen the deficit. One such stake, valued at e2.2bn, is in Telecom Italia SpA.
But last Wednesday, Tremonti went on Italian television and predicted that the deficit would in fact be between 1.9 and 2.6% of GDP.
So what does this all mean? For starters, the swiftness of the reaction by other European ministers to Italy shows ample concern for the fragility of the Stability Pact.
That is poison for the euro. If the deal between the European nations is unenforceable, the euro will reflect the economic policies of the worst nations, financially speaking, rather than the best.
Wilhelm Noelling, a former member of the Bundesbank's council, gave voice to these concerns when he said that the Italian budget forecast would 'darken the future of the euro'.
'It is totally out of the question to raise confidence in the euro in the face of the latest from Italy,' he added.
Not that Italy is the only culprit on budget deficits in the European Union. Germany will have a deficit of at least 1.7% of GDP.
It is here that I have a prediction to make. I think that if the issue of the budget deficits takes centre stage, the blame will be redirected from the finance ministries to the European Central Bank (ECB).
It's going to be too tempting not to blame the ECB. Growth in Europe is slowly slipping. Last year the eurozone grew at 3.4%. This year looks more like 2% to 2.5%, although the later looks optimistic. When the economy slows, tax collections head south.
So I am waiting to hear it cried far and wide: the budget deficits are the fault of the ECB. The deficits wouldn't exist but for the fact that the ECB refused to give Europe the lower interest rates it needed.
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