The European Commission has initiated a procedure for excessive deficit for Italy, France, and five other countries: Belgium, Hungary, Malta, Poland, and Slovakia. After the necessary steps, it will propose recommendations to the Council on deficit reduction in the autumn package of the European Semester. The Commission has also evaluated that Romania has not taken effective actions to correct the deficit as requested by the Council.
In the assessment of macroeconomic imbalances for twelve EU states, in the 2024 alert mechanism, the European Commission has assessed that Italy is now in a ‘imbalance’ situation, improving from the ‘excessive macroeconomic imbalance’ judgment of the previous year. Greece is in a similar situation as Italy. France and Portugal are no longer in imbalance. However, Slovakia joins the list of imbalanced countries, along with Germany, Cyprus, Hungary, Netherlands, and Sweden. Only Romania is considered to have an excessive imbalance. This monitoring is one of the surveillance tools for economic policy coordination.
In Italy, “vulnerabilities related to high public debt and weak productivity growth persist in a context of labor market fragility and some residual weaknesses in the financial sector, which have cross-border relevance.” The public debt-to-GDP ratio has “significantly decreased” from the peak of the pandemic but still remains high, at over 137% of GDP in 2023, and is expected to reverse its downward trend this year and the next. This reversal is attributed to a broad stock-flow adjustment that increases debt, persistent but decreasing public deficits, and lower nominal GDP growth.
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The European Commission also notes that in Italy, “productivity growth has been overall positive but limited, confirming the need for reforms and investments to overcome structural deficiencies and promote conditions conducive to productivity growth.” This is part of the European Commission’s spring package of the European Semester.
“Labor market conditions have improved in recent years and have not led to wage pressures,” the European Commission further states regarding Italy. “Labor participation rates have reached record levels, although still relatively low. The financial sector has strengthened further with improvements in the quality of bank assets and profitability, while Italian banks are still considerably exposed in their balance sheets to sovereign and state-guaranteed loans. Policy action has been favorable in addressing vulnerabilities, including through the implementation of the NRRP, which promotes productivity and potential GDP growth to help reduce the public debt ratio in the long run.”
It is crucial for Italy to maintain the implementation pace of the NRRP, and additional policy efforts would be useful. The European Commission emphasizes the need for further actions to reduce the high public debt ratio. “The reformed Stability and Growth Pact, including the implementation of the excessive deficit procedure, provides a strong and adequate surveillance mechanism to address risks to fiscal sustainability and integrate surveillance.”
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