EU signals flexibility on budgets, aiding France, Italy

Tue Jan 13, 2015 12:42pm EST
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By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission said on Tuesday that public investment and structural reforms could win some leeway for countries breaking EU budget rules, reducing the likelihood of tough penalties on France or Italy.

The commission's interpretation of the rules is a balancing act between retaining financial markets' confidence and responding to EU leaders who want to use whatever flexibility there is in the rules to boost meager economic growth.

France has been running a budget deficit above the EU's 3 percent of GDP limit for years despite promises of change and could be facing a fine in March.

Italy, even though its deficit is smaller than 3 percent, has a large public debt and could face disciplinary action for not reducing it. Rome also does not want to cut its deficit as fast as EU rules say.

Both countries say harsh fiscal steps now would only make matters worse for their economies -- contracting in the case of Italy and barely growing in the case of France.

In response, the commission spelled out what leeway EU countries can count on when it assesses their fiscal efforts.

Normally, EU countries should cut deficits by 0.5 percent of GDP a year until they reach balance. But Italy wants to freeze the structural deficit at around 0.8-1.0 percent until 2016.

The commission now offers Rome a way out. If Italy started reforms that would eventually improve its public finances, it might be allowed not to make the annual reduction at all.   Continued...

European Central Bank (ECB) President Mario Draghi and European Euro and Social Dialogue Commissioner Valdis Dombrovskis (R) attend a euro zone finance ministers meeting in Brussels December 8, 2014.   REUTERS/Francois Lenoir