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Italy's economy minister warns against 'sterile' austerity debate
June 3, 2014 / 6:41 PM / 3 years ago

Italy's economy minister warns against 'sterile' austerity debate

Italy's Finance Minister Pier Carlo Padoan smiles during a news conference at Chigi palace in Rome March 12, 2014. REUTERS/Remo Casilli

ROME (Reuters) - Europe risks being trapped in a “sterile” debate over austerity unless it takes a broader view that balances the need for sound public finances with reform, Italian Economy Minister Pier Carlo Padoan said on Tuesday.

Italy, which assumes the rotating presidency of the European Union in July, has long sought to shift the policy debate in Europe away from budget rigor and towards measures to boost economic growth and create jobs.

Speaking to foreign journalists in Rome, Padoan, a former chief economist at the Organisation for Economic Cooperation and Development, offered little detail on what Prime Minister Matteo Renzi’s government will propose when Italy takes the EU chair.

But he said the government would push for an approach which addressed structural reform and sound finances together, using the scope for flexibility offered by existing EU rules and pushing for measures that would free up private investment.

“It’s not irrelevant whether a country achieves budget consolidation with good reforms or bad reforms, it’s not irrelevant whether it comes through flat, across-the-board cuts or an intelligent overhaul of public spending,” he said.

“We can’t continue to ignore the qualitative aspect of reforms - they are a fundamental part of a country’s economic policy - and get stuck on a zero point,” he said.

“Otherwise we fall back into a sterile debate about ‘austerity yes’ or ‘austerity no’.”

The comments by Padoan, who meets his German counterpart Wolfgang Schaeuble in Berlin on Thursday, point to a possible confrontation with traditional defenders of budget orthodoxy in the euro zone such as Germany or Finland.

After dipping in and out of recession since 2008 and posting a 0.1 percent fall in gross domestic product (GDP) in the first quarter of this year, Italy, the euro zone’s third largest economy, still has youth unemployment of more than 43 percent, the highest since at least 1977.

REFORM CALLS

Boosted by a record victory in last month’s European parliamentary election, Renzi has promised to reform tax and labor market rules to encourage job creation and to overhaul Italy’s complex web of bureaucracy and sluggish justice system.

However the poor record of past Italian governments in implementing reform promises and Italy’s huge public debt means that he will face some scepticism from EU partners.

Italy’s expected 2014 budget deficit of 2.6 percent of GDP is within the EU’s 3 percent ceiling but Renzi has put back by a year a target of a balanced budget in structural terms, which exclude the effects of the business cycle and one-off factors.

On Monday, the European Commission asked Rome to reinforce budget tightening measures for this year to help bring down the debt, expected to reach more than 133 percent of GDP this year after growing by 29 percentage points since 2007.

It said the government’s recent budget plans were “slightly optimistic” and it was unlikely to meet a target of reducing the structural budget deficit to 0.2 percent of GDP this year.

But after years of restrictive budget policy, with 182 billion euros ($248 billion) of tax hikes and spending cuts over the past three years, Italy has become increasingly impatient with calls for further budget tightening.

Padoan noted that along with Germany, Italy has the highest primary surplus, net of interest payments, of any country in the EU at more than 2 percent of GDP but because of its weak growth, had been unable to make much impact on its debt.

“With a debt as big as Italy‘s, there needs to be sufficient growth to go along with the efforts on fiscal consolidation which the country has been undertaking for years,” Padoan said.

A combination of moderate debt servicing costs, through current low interest rates, rigorous public finance policy and structural reform would enable the debt to fall.

“This aspect of economic policy, which has been well known for a long time, should enter the conversation about economic policy in Europe in a more precise and non-ideological way than it has so far.”

Editing by Ruth Pitchford

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