Brussels to Italy: be cautious about spending

The European Commission makes precise recommendations to Italy on the subject of NRP, sustainability of the accounts and reforms.

As regards the National Recovery and Resilience Plan, the EU Commission asks that it be used “to finance additional investments to support the recovery, while maintaining a prudent budget policy”. Secondly, “when conditions permit, pursue a policy that aims to achieve prudent budgetary targets over the medium term and ensure sustainability, while at the same time strengthening growth potential”. Thirdly, Italy is urged to pay “particular attention to the composition of public finances, both on revenues and expenses, to ensure sustainability and inclusiveness”. Brussels calls for priority to be given to sustainable investments that support growth, digital and green transition. And, according to what the chapter on the Peninsula reports, to structural and tax reforms that contribute to budget sustainability and the strengthening of a health system that covers everyone.

In the Spring Package of the European Semester “we confirm that Cyprus, Greece and Italy continue to show excessive macroeconomic imbalances”, warned the vice president of the EU Commission, Valdis Dombrovskis, at the press conference presenting the recommendations. However, the EU executive confirmed that the Stability Pact will also remain suspended in 2022. But Italy, given the very high debt, has suggested pursuing a prudent budget policy.

“We have decided to extend the safeguard clause in 2022, with the aim of deactivating it in 2023,” added Dombrovskis. “We are encouraging Member States to maintain support measures this year and next. A spending mix, focused on investment while keeping other spending in check, will facilitate the return to more cautious positions in the medium term, which will be particularly important for the countries with high debt “such as Italy, in fact, with the stock of debt that is close to 160% of the gross domestic product. But the Peninsula is not the only one. 13 Member States did not comply with the debt rule in 2020. Among these, in addition to Italy, Germany, France and Spain.

However, Dombrovskis acknowledged that the outlook is brighter than anticipated a few months ago and that recovery is just around the corner. For the EU, economic activity should return to pre-crisis levels this year. “There are divergences between countries, but all member states will return to pre-crisis levels by the end of 2022 at the latest. This is also thanks to the unique monetary and budgetary policy response during the pandemic. The RRF, with its 672.5 billion available with grants and loans will allow states to carry out reforms and investments as part of their national plans “, predicted the vice president of the EU Commission.

Indeed, this year the “launch of the RRF was taken into account, which will allow for a gradual development. We are evaluating the 23 NRPs that have been evaluated so far and today’s package focuses on budgetary stance”, he added, confirming that the general safeguard clause will be active until 2022 but not in 2023 and that Member States must not prematurely withdraw their stimuli and fiscal policy must remain supportive both this year and next. “The RRF will contribute significantly to this as aid will be made available to bridge debts and deficits.”

Hence, fiscal policies need to become more differentiated and high-debt countries need to have prudent policies using RRF to finance more investments. In practice, “those who have a lower sustainability risk”, explained Dombrovskis, “must always support the economy through the RRF. Growth must be kept under control especially for those with high debt. This allows to promote growth by avoiding excessive public burdens “.

In the medium term it is also important to have a credible and coordinated approach but at this stage, he warned, “uncertainty still reigns. We do not know what the long-term effects of the crisis will be and the precise impact of the Fund for Recovery and resilience. This is why the orientation is based on qualitative aspects and we have not launched excessive deficit procedures for now. It is clear that when conditions allow it, States will have to pursue policies with prudent medium-term budgetary positions and which guarantee the sustainability. All EU countries must improve the composition of public finances, be efficient and focus on well-targeted spending “, concluded Dombrovskis. (All rights reserved)

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