Italy and the Euro
Italy is about to explode the Euro's stability pact and the EU is going to have to make a decision. For this and other reasons Italy's Finance Minister is leaving in frustration:
Fitch said the national debt is already forecast to rise from 106.9pc of GDP last year to 109pc in 2006, but could now start galloping upwards on a dangerous trajectory.
The IMF warned this week that the deficit is likely to reach 5.1pc next year, with growth of just 1.4pc after zero in 2005.
Vicenzo Visco, an ex-finance minister, said the real reason for the resignation was the melt-down of Italy's public accounts. "Fazio is an excuse. The truth is that he couldn't put together a budget and couldn't allow this stain on his record," he said.
The EU has so far backed away from a major clash with Italy over its breach of the Stability Pact's 3pc limit, responding to good faith pleas from Mr Siniscalco for more time.
Brussels will almost certainly take a much tougher line if budget discipline now appears to break down altogether.
HSBC warned in a recent report that Italy is in grave crisis and may be forced out of the eurozone, chiefly because its has failed to kick its inflationary habits since exchange rates were fixed irrevocably a decade ago.
Unit labour costs have soared compared to northern Europe, leaving Italy trapped inside the currency bloc with an exchange rate over-valued by some 20pc. HSBC said Italy's export performance was "truly appalling" and likely to get worse.
posted by theCardinal @ 8:13 PM
4 Comments:
Continuing big deficits suggest that Italy wants the fiscal looseness that the US administration enjoys. However national budget discipline is difficult to enforce politically, as the EU has found.
On market discipline, though, Italy is compliant. It does not practice economic patriotism. Italy is said to be selling significant stakes in its energy and banking sectors to companies based in other countries.
Italy is unusual in this. The FT reported yesterday that, like an increasing number of countries in the developed world, France has difficulty with the rules of the market : "Mr Sarkozy [a leading contender for the presidency] called for the revival of the "community preference" ensuring that "Europe bought European" goods - especially from its small companies. Criticising Peter Mandelson, the EU trade commissioner, for failing adequately to defend Europe's interests, Mr Sarkozy said the EU should make more use of the World Trade Organisation's anti-dumping clauses."
The president of the European Central Bank was interviewed last week. Politics is making the banker a worried man.
Five out of twelve countries in the euro zone currently breach the 3 per cent deficit limit. Recently, you have critized a very generous interpretation of the new rules of the stability and growth pact. Does that mean that the relaxation of fiscal discipline that you and others feared has already started?
As you know, in the past we judged that it was not appropriate to change the rules. A consensus of the governments devised new rules. We immediately called for rigorous implementation of this new law. In some recent cases the interpretation of the new rules was very much stretched, and I maintain that. The Executive branches know, as well as we do, pretty well that the system of Europe’s economic and monetary union relies on serious and professional peer analysis, peer recommendations, peer support and pressures and if necessary sanctions. We remind the executive branches that it is absolutely necessary for the sake of the economic and monetary union not to be shy in expressing opinions and taking decisions.
Perhaps Italy is being unfairly maligned.
Ten of the 25 EU member states breached the EU stability pact last year, reports the EUObserver. Deficits in excess of 3% were: Greece (6.6%), Hungary (5.4%), Malta (5.1%), Cyprus (4.1%), Spain (3.5%), Poland (3.9%), Germany (3.7%), France (3.6%), Italy (3.2%), UK (3.1%).
Moreover, France is calling for the rules of global economics to be broken: finance minister Thierry Breton called for business leaders in Europe to practise more "economic patriotism". He suggested they should look to their US counterparts as an example adding that it is "not only not shameful to talk about this but it is modern".
A million thanks for your comments. I have always had an unhealthy obsession for the stability pact. I thought it was a brilliant idea albeit an unrealistic one considering some of the countries involved.
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