Italy accused of breaching EU budget deficit limits

BRUSSELS - Italy violated European Union budget deficit limits in 2003 and 2004, the European statistics office said last night (NZT), revising up figures reported by Italy.

The EU executive said it would prepare a report on the repeated breaches of the EU limit, set to safeguard the euro against runaway government borrowing, in time for the early July meeting of EU finance ministers.

It is ministers who ultimately decide whether to launch sanctions against a budget sinner on the basis of the Commission's report and the Italian case will be the first major test of the new-look EU budget rules, revised in March to give member states more leeway in bringing finances back in order.

"In all likelihood it will be ready for Ecofin council of July," Commission spokeswoman for economic and monetary affairs Amelia Torres said about the Commission report.

Eurostat, which has been probing Italy's accounts because it refused to validate the 2004 numbers, said the deficit in both 2003 and 2004 was 3.1 per cent of gross domestic product, rather than the earlier reported 2.9 and 3.0 per cent respectively.

Eurostat said it expected to shortly receive more information on some other issues in the Italian accounts which could lead to further upward revisions of the deficit.

"Depending on the outcome of the examination, this could lead to a further upward revision in the government deficit for the period between 2001 and 2004," Eurostat said.

The Commission forecasts that Rome will have a 3.6 per cent shortfall this year, which will balloon to 4.6 per cent in 2006 -- the year of general elections in Italy where Prime Minister Silvio Berlusconi is facing falling support.

The ministers' decision on Italy will also be the first major test of the new-look Stability and Growth Pact, the rules that limit government borrowing to underpin the euro.

The pact was revamped after serial breaches of the 3 per cent limit by France and Germany to pressure member states to improve their public finances in good times, but also to give budget sinners more leeway in bringing their accounts back in order.

The new pact stresses that any breach of the deficit has to be temporary and close to the 3.0 per cent value, but cites any recession or a long period of slow growth as an exceptional circumstance which should be taken into account.

After two quarters of shrinking output, Italy is in technical recession and Italian Economy Minister Domenico Siniscalco said last week that the economy might not grow at all in the whole of 2005 which would boost the deficit to 4 per cent.

The Italian economy grew 0.4 in 2002, 0.3 per cent in 2003 and 1.2 per cent in 2004. The Organisation for Economic Cooperation and Development (OECD) forecast last week Italy's growth would be zero or even negative this year.

Siniscalco also said that Italy would work with the European Commission to decide how fast to bring down the deficit.

Eurostat also revised up the country's 2003 and 2004 debt, saying it rose to 106.6 per cent of GDP last year from 106.5 per cent in 2003 rather than falling to 105.8 per cent from 106.3 per cent as previously reported by Italy.

- REUTERS