EU puts Italy on notice over rising debt

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Italy’s government was put on notice Wednesday that it may be sanctioned by the European Union for not getting the country’s debt levels down.

In a report on Italy’s debt, the executive European Commission urged Rome to take more cost-saving measures, worth up to 0.2 percent of its annual GDP. That’s unlikely to go down well in the center-left government as it faces the possibility of elections this year or next.

“The Commission is not trying to create a storm, it’s trying to guide the ship safely into harbor,” said Pierre Moscovici, the commissioner responsible for economic and financial matters.

Since the EU’s debt crisis, countries have committed to hit certain targets to avoid a repeat. Italian debt is expected to rise to a record 133.3 percent of GDP this year from 2016’s 132.8 percent – against a decline it was meant to achieve.

Moscovici said any “excessive deficit procedure,” which in theory could result in Italy getting a hefty fine, would depend on the commission’s new economic forecasts and updated statistics. However, recent cases suggest a fine is unlikely.

Italy has until April to “credibly” enact the “additional structural measures,” according to the commission’s report.

In a series of tweets, Italian Finance Minister Pier Carlo Padoan said it was clear by the report that the European Commission appreciated Italy’s reforms and could see the results. “But we have to do more.”

“The debt/GDP has finally stabilized, but it’s in our national interest to reduce it,” he said.

The Italian economy has struggled to gain momentum over the past few years amid worries over its banking sector, which is laden with bad loans worth around 360 billion euros ($380 billion). Given Italy’s size, any jitters could far outweigh the eurozone’s more recent problems, such as with Greece.

What would help Italy is stronger growth. Its economy has grown less than other major countries for years, fueling popular discontent and the rise of previously fringe parties, such as the 5-Star Movement, which has gained on the ruling left-of-center Democratic Party in polls.

The Italian economy, the third-largest in the eurozone behind Germany and France, has also had to contend with a series of earthquakes last year as well as growing numbers of migrants trying to travel from Libya through Italy into the heart of the EU.

EU Commission Vice President Valdis Dombrovskis noted that the “earthquake and refugee costs are fully discounted in this assessment.”

There are worries that political uncertainties will dog the recovery this year, too. Italian politics was shaken in December when Matteo Renzi resigned as premier after he lost a referendum on constitutional reforms. Paolo Gentiloni has taken over as premier but new elections are expected later this year or in 2018.

Moscovici did note some encouraging signs, such as increases in employment following reforms to the tax system and the labor market.

“We know that it will take time for these reforms to take shape, we can’t judge them too quickly, but there seems to be a slowdown in the reform effort,” he said.

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