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EU worried about France and Italy's budgets, but doesn't ask for changes

BRUSSELS (Reuters) - Draft budgets for 2020 prepared by the French and Italian governments risk violating EU rules on debt and deficit reduction, the European Commission said on Wednesday, but the Commission did not request any immediate changes.

FILE PHOTO: European Commissioner-designate for An Economy that Works for People Valdis Dombrovskis of Latvia attends his hearing before the European Parliament in Brussels, Belgium October 8, 2019. REUTERS/Francois Lenoir

The EU executive, in charge of monitoring budgets of euro zone’s countries, also said the draft budgetary plans of Spain, Portugal, Belgium, Slovenia, Slovakia and Finland were at risk of breaching EU rules.

“Among the budgetary plans found at risk of non-compliance, the ones that concern us most are those with debt levels that are high and not reduced fast enough,” Commission Vice President Valdis Dombrovskis told a news conference, explicitly referring to Italy, France, Belgium and Spain.

He said the situation in those four countries was “worrying” because “very high debt levels limit the capacity to respond to economic shocks and market pressures”.

Dombrovskis invited countries at risk of breaching rules to take “the necessary measures” to ensure compliance, but added that no immediate changes were requested to existing draft budgets.

“We are not saying that it has to be done immediately,” Dombrovskis said, adding that only countries at serious risk of violating rules would receive such a request, but none of the 19 countries of the euro area was in that situation this year.

He said the next assessment of the fiscal positions of euro zone’s countries will be made in spring. Budgets are finalised by the end of the year.

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Economic commissioner Pierre Moscovici told the same news conference that Germany and the Netherlands should do “much more” to increase their public spending because their fiscal positions allowed them to do so. That would help counter the euro zone’s economic slowdown, he said.

The Commission’s opinions are part of a regular annual assessment of national budgets. Countries have been often found at risk of breaching EU fiscal rules in past years, but no punitive action has ever been taken by the Commission which has favored a lenient interpretation of the rules.

Earlier in November the Commission forecast Italy, which has the largest debt in absolute terms in the EU, would see its debt burden increase to 136.2% of Gross Domestic Product (GDP) this year and rise further at least until 2021.

Under EU rules, countries with a debt above 60% of GDP must gradually reduce it.

The EU executive also forecast Italy’s structural deficit, which excludes one-off expenditures and revenues and is key in the Commission’s assessment, to worsen this year and next, contrary to rules dictating it should improve.

France, which has a debt close to 100% of output, is also missing its targets to reduce the structural deficit and will see its debt grow this year and in 2021.

Spain and Belgium, which are currently run by caretaker governments, could not submit complete budgets and were asked to update them. But that would happen only after new political governments are formed in those countries.

Reporting by Francesco Guarascio @fraguarascio; editing by Jan Strupczewski