UPDATE 1-EU warns Italy is in economic trouble, France to miss deficit targets
* Italy, France need policy action to fix economies
* Germany's c/a surplus an imbalance, but not excessive
* European Commission will monitor countries' policies
* Paris, Rome reiterate will both do homework as promised
By Jan Strupczewski and Martin Santa
BRUSSELS, March 5 (Reuters) - The European Commission put Italy on Wednesday on its watch list because of the country's very high public debt and weak competitiveness and warned France that will miss agreed budget deficit reduction targets unless it takes action.
The Commission, the European Union's executive arm, conducted in-depth reviews of the economies of 17 EU countries that it believes have macro economic imbalances.
Under EU rules, if such imbalances are considered excessive, a country has to take action under the European Commission's surveillance to address them or risk a fine.
The Commission said that Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the Netherlands, Slovenia, Finland, Sweden, and the United Kingdom all had imbalances in their economies.
But they were excessive in Croatia, Italy and Slovenia. This means the Commission will now monitor their economies closely, making sure they implement reforms recommended by EU finance ministers.
"Italy has to address the very high level of public debt and weak external competitiveness; both are ultimately rooted in the protracted sluggish productivity growth and demand urgent policy attention," the Commission said.
"The need for decisive action to reduce the risk of adverse effects on the functioning of the Italian economy and of the euro area, is particularly important given the size of the Italian economy," it said.
But it added that reaching and sustaining very high primary budget surpluses and economic growth for a long time, needed to bring down debt, would be a major challenge.
FRANCE, ITALY MUST DO MORE
So far, Rome's efforts were not enough, the Commission said.
"The adjustment of the structural balance in 2014 as currently forecast appears insufficient given the need to reduce the very large public debt ratio at an adequate pace," the Commission said.
Italy's economy ministry said in reaction that reforms it has promised are in line with the Commission's statement, adding that for the past two years, Italy has concentrated on stabilising public finances and has been rewarded with a sharp reduction in borrowing costs.
The country's new Prime Minister Matteo Renzi pledged on Wednesday to introduce a series of "very important reforms" next week to help create jobs, make housing more affordable and remodel crumbling school buildings.
France, which last year was given two extra years to bring its budget deficit below the EU ceiling of 3 percent of GDP, was not delivering on its consolidation promises either.
"France is projected to miss both headline deficit and structural adjustment targets over the entire forecast period," the Commission said.
French ability to compete on the global markets was also weak, the Commission said.
"Despite measures taken to foster competitiveness, so far there is limited evidence of rebalancing. While wages have developed in line with productivity, the labour cost remains high and weighs on firms' profit margins," the Commission said.
"The unfavourable business environment, and in particular the low level of competition in services, further aggravate the competitiveness challenge. In addition, rigidities in the wage setting system result in difficulties for firms to adjust wages to productivity," it said.
France, responding to the Brussels report, said it would pursue cleaning up of public finances right through to the end of its current term in 2017, with the bulk of efforts to rein in public spending slated for the 2015-2017 period.
Finance Minister Pierre Moscovici said in a statement that reforms were underway or in the pipeline to improve French competitiveness.
Germany's very high current account surplus was an imbalance, the Commission said, but not worrying enough to put Berlin on the imbalances watch list, because it was likely to diminish over time as domestic demand in Germany rises.
Germany has had a current account surplus in excess of 6 percent of its gross domestic product since 2007, meaning it exports far more than it imports from the rest of the world.
"In the case of Germany, the surplus has been receding vis-à-vis the euro area since the onset of the crisis and a gradual correction of the current account is expected to take place over the coming years on the back of a stronger contribution to growth from domestic demand," the Commission said.
Berlin should aim to boost investment and labour supply and liberalise its services sector, the EU executive said.
Spain, which was put on the imbalances watch list last year, was now taken off, even though risks remained.
"In the case of Spain... the Commission considers that a significant adjustment has taken place over the last year and that on current trends imbalances would continue to abate over time," the Commission said.
"While this is the basis to conclude that imbalances in Spain are no longer excessive, the Commission stresses that risks are still present," it said.