4 June 2001, 14:38  OUTLOOK Italy's Tremonti will not attend Eurogroup, Ecofin talks in Luxembourg

---- by VICTORIA MAIN ----
LONDON (AFX) - Italy's incoming treasury minister Giulio Tremonti will not be installed in time to attend the Eurogroup and European Union finance ministers meetings in Luxembourg today and tomorrow. An Italian treasury ministry spokesman said the outgoing centre-left treasury minister Vincenzo Visco will go to the talks as the new coalition government led by media magnate Silvio Berlusconi "will not be in place by then".
This will postpone the opportunity for Eurogroup president Didier Reynders to obtain details of the government-elect's sketchy economic programme. Reynders, who is Belgium's finance minister, vowed last month to press for information on its plans for fiscal consolidation and structural reform at today's Eurogroup meeting.
Analysts said the skeletal programme may not come under scrutiny by Italy's fellow EU states before the first Eurogroup and Ecofin meetings under Belgium's EU presidency from July 1. An earlier opportunity would be the leaders' summit in Gothenburg, Sweden, from June 15-16, if the government elected on May 13 is formed by then.
UBS Paine Webber economist Alison Cottrell does not expect the new government's economic programme to come under the European spotlight until it produces its first draft budget at the end of June.
"The question then will be, is it consistent with the previous one and is the deficit likely to overshoot the target or not?" she said. Analysts noted initial disquiet on the part of Italy's European partners at the lack of information disseminated on Berlusconi's economic plans.
Without fleshing out the details, the controversial prime minister-designate, who is Italy's richest man, has promised deregulation and liberalisation. Berlusconi also pledged increased public spending and personal and corporate tax cuts that are expected to reduce the overall tax burden to around 36-38 pct of gross domestic product from the current 42.4 pct over two years.
"The area of concern is that the government cuts tax on the assumption that this will stimulate growth and therefore tax revenue reserves, but this might not work and certainly not to the extent that they are expecting, which will mean shortfalls in the budget," Bank of America economist Lorenzo Codogno said.
"It very much depends on the timetable for the cuts though, and we don't know this yet," he said.
Standard Chartered economist Claudio Piron said that on the face of it, the mix of increased Italian government spending coupled with lower taxes is cause for concern.
However, analysts noted that fears that the programme will lead to a budget deficit blow-out have been tempered somewhat by assurances by Berlusconi and Tremonti that the government would heed the advice of the widely respected governor of the Bank of Italy, Antonio Fazio. "I saw some cautious comments from Fazio today suggesting moves to push down the deficit and implement reforms so Berlusconi will probably follow his advice and will not try to do anything too dramatic," said Bank of America's Codogno.
"At the same time though there is a need for Berlusconi to send some signals because people elected him on the assumption that he is going to do something. I think he will signal that there will be a reduction of tax over the medium term, which won't be particularly severe in the near term," he said.
UBS Paine Webber's Cottrell agreed that while the tax cut promises are of concern, "we've also had Berlusconi and Tremonti saying during the election campaign that the government would take notice of whatever Fazio said in his annual address. Fazio certainly didn't say go off and cut taxes."
In his annual speech to the Bank of Italy's general assembly last week, Fazio warned that the deficit target of 1.0 pct of gross domestic product will be exceeded "by a significant amount". He urged the new government to rebalance the budget over several years through pension and health reforms.
Analysts said that for all Tremonti's appetite for substantial tax cuts and fiscal reform, the incoming minister, who served in under Berlusconi's shortlived government in 1994, is unlikely to embark on drastic changes.
"It would be unrealistic to expect Tremonti to adopt a sea change immediately after the new government is set up. I think they will take care this time to ensure that any change is gradual," Bank of America's Codogno said.
"I think he will be advised to adopt any changes gradually, and I think he will be cautious in the end," he said.
Analysts therefore see a showdown between Italy and its EU partners as extremely unlikely in the foreseeable future despite misgivings over its economic intentions.
Standard Chartered's Piron observed that Italy's EU partners are unlikely to want to buy a fight with Italy with the Jan 1 launch of euro notes and coins so close.
"It's not going to turn up on the radar screen now. I think the EU is just going to turn a blind eye, as the last thing it'll want to do is to stir things up, when euro notes and coins are just about to be introduced," he said.
"Italy's got the other EU countries where it wants them as they want a repeat of the fiasco over Austria," he said, referring to EU's tough line on Austria following the election of its xenophobic government.
Strong signs that former WTO director-general Renato Ruggiero, known as a strong europhile, will become foreign affairs minister tend to reinforce the view that Italy will avoid a clash with the rest of the EU.

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