Italy encounters resistance to softer European spending rules

BRUSSELS Tue Jul 8, 2014 6:02am EDT

BRUSSELS (Reuters) - Italy and its allies will receive no special treatment when EU budget rules are enforced, the influential chairman of euro zone finance ministers said on Tuesday, drawing battle lines as Rome embarks on the bloc's 6-month presidency.

Italy, leading a drive for greater flexibility in the way the rules are applied to encourage growth and investment, has the second-highest public debt in the euro zone as a proportion of national output, after Greece.

On Tuesday, it began the first finance ministers' meeting of its European Union presidency by calling for 'incentives' to reform after years of rigid focus on budget austerity.

"Italy is delivering reforms and, as chairman, my goal is to help every country to find incentives to do reforms," Italian Economy Minister Pier Carlo Padoan told reporters.

Padoan chairs meetings of the 28 EU finance ministers, a key forum for any change in the direction of economic policy.

But even before the session began, Jeroen Dijsselbloem, head of the 18-nation Eurogroup of ministers from the single currency area, painted Italy's reform effort in an unflattering light and insisted Rome would get no special leeway.

"Competitiveness has to improve and economic growth has to pick up and lots of work needs to be done there," he said. "Italy has been showing almost zero growth of productivity for many years and that has to improve."

Asked whether any flexibility would be given to Rome to meet its budget targets, Dijsselbloem said: "We don't do flexibility per country, we do flexibility for all of the countries."

Austrian State Secretary Jochen Danninger voiced similar scepticism. "The existing rules are to be respected to the letter," he told journalists ahead of the meeting.

"Within the framework of these rules, there is enough flexibility, so no weakening of the rules."

Italy has not spelled out what it means by creating incentives for reforms. Government ministers have hinted at the possibility that public investments on schools or infrastructure would not be counted towards its budget deficit.

They have also worried about rules that will require Rome to reduce its overall debt level as the economy, just out of recession, is struggling to grow.

Italy's debt is projected to reach 135 percent of output at the end of the year, from around 133 percent in 2013.

Under EU rules, governments have to strive to balance their books and cut public debt to 60 percent of gross domestic product within 20 years.

But the regime also says that governments can be given more time if they undertake reforms that help economic growth - an option that has so far never been used.

The ministerial debate began as Jean-Claude Juncker, the designated president of the European Commission, was to begin meeting political groups in the European Parliament to outline his policy program.

The former Luxembourg prime minister and Eurogroup chairman, who has put measures to encourage economic growth at the center of his agenda, is likely to be sympathetic to arguments that more leeway needs to be shown.

Supported by the main pro-European centre-right, centre-left and liberal groups, Juncker is expected to win approval from the EU legislature in a vote on July 16.

EU leaders nominated him last month despite opposition from Britain, which depicted him as an old guard federalist and Brussels insider, unsuited to the task of shaking up the executive body which proposes and enforces EU laws.

(Additional reporting by Jan Strupczewski and Martin Santa; Editing by Paul Taylor)

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