Italy warned by EU on budget deficit

Italy on Thursday received a warning from the European Central Bank (ECB) over the lack of results in reducing its budget deficit. "Italy has not made tangible progresses in respect of the European Commission's recommendation to bring its deficit down to 2.6 percent of GDP from the 3 percent in 2013," the ECB said. The Central Bank asked Italy to implement "the necessary steps" in order to reduce its deficit and to put its public debt on "a downward path." The Finance Ministry released a statement on Thursday, saying the ECB report was not intended as an immediate reply to the plan of new measures released on Wednesday. "The ECB report is a scheduled publication and not an answer to announcements made yesterday. Certainly, there will be the chance to exchange views with the Central Bank, and explain the strategies Italy intends to follow in the medium term," the ministry statement said. Yet, the EU admonition may put fresh obstacles on the path Prime Minister Matteo Renzi's cabinet outlined for the next months, which would include income-tax cuts worth 10 billion euros (14 billion U.S. dollars) for low and middle-class workers beginning from May 1, a 10 percent cut of a regional business tax, and an equal 10 percent reduction of energy costs of small and medium companies. The cabinet said these measures would be funded by public spending cuts, and an increase from 20 to 26 percent of the tax on financial incomes. However, Renzi also mentioned the cabinet might eventually use what money could be spared from being under the EU ceiling of 3 percent between the deficit and gross domestic product in 2014. "We may use this margin if necessary," Renzi said on Wednesday, though assuring the government would respect all European commitments. The cabinet also voted on Wednesday to fully pay 68 billion euros of debt the state owed to private suppliers by July. It did not clearly explain, however, where it would find the resources for such an operation. In his first full press conference since he was sworn in on February 22, Renzi expressed hope that European authorities "would take note of Italy's efforts on reforms, when judging its public finances." Italy's economy, the eurozone's third largest, is still struggling to emerge from its worst recession in 40 years. It showed a meagre 0.1 percent growth rate in the fourth quarter of 2013, and the European Commission recently downgraded its growth forecast to 0.6 percent for 2014. Unemployment reached a record high rate of 12.9 percent in January, with a 42.4 percent rate among young people. The EU Commission put Italy, Slovenia and Croatia on its watchlist at the beginning of March because all three countries have high public debt and weak competitiveness. Italian debt is the second largest in the eurozone after Greece's, equaling 132.7 percent of economic output in 2013. EU predictions showed it might reach 133.7 this year.