European finance ministers gave Italy extra time to cut its budget deficit, taking pressure off Prime Minister Silvio Berlusconi to come up with new savings before next month's local elections. Finance ministers from the 12 countries using the euro postponed until July a decision whether to issue an ``early warning'' to Italy over the deficit, which the European Commission says will swell past the limit of 3 percent of gross domestic product in 2004. ``The idea isn't to take a country in difficulties and hold its head under water,'' French Finance Minister Nicolas Sarkozy said after the ministers met late yesterday in Brussels. ``Each of us has known, knows or will know difficulties.''
Italy is among six euro countries, including Germany and France, that the European Union expects to break the deficit rules in 2004, undermining the ``stability pact'' devised by Germany to buttress confidence in the currency and hold down interest rates. The decision to delay the reprimand further weakens the Brussels-based commission's role in enforcing the fiscal rules as the European economy struggles to rebound from growth of 0.4 percent in 2003, the weakest pace in a decade. Yesterday's reprieve also clears the way for Berlusconi to outline 12.5 billion euros ($15 billion) in tax cuts to shore up waning public support before June's local and European parliamentary elections.
Popularity
Berlusconi's popularity has dropped 15 percentage points to 30 percent since peaking at 45 percent in September 2001, according to an Ispo/Allaxia poll published in Corriere della Sera newspaper last week. The survey of 4,239 people was conducted between April 23 and April 25. No margin of error was given. ``Italy is trying to avoid negative publicity before the European elections,'' said Lorenzo Codogno, co-chief European economist for Bank of America in London. ``On the one hand, the government is announcing and promising tax cuts, and on the other hand Brussels is saying they can't afford it.'' Asked whether the ministers used the elections as the reason for the two-month delay, Dutch Finance Minister Gerrit Zalm said: ``I didn't hear it mentioned, no. But as you know, sometimes there are motives that aren't mentioned.''
Precedents
Germany and France, the two largest of the 12 countries using the euro, repaid Italy for helping them shoot down a commission call to make additional cuts in their own deficits in November. ``There are some good arguments in favor of delaying the process,'' said Pedro Solbes, who as European monetary commissioner fought unsuccessfully to force Germany and France to cut their budgets last year and has since become Spain's economy minister. Italy would take ``emergency measures'' to keep the deficit below the limit in 2004, the Finance Ministry said Friday, rejecting a commission prediction that the shortfall will widen to 3.2 percent. Tremonti didn't outline ``specific measures'' in Brussels, said Irish Finance Minister Charlie McCreevy, the meeting's chairman. Italy posted excessive deficits for three decades before using one-time steps such as a ``Eurotax'' to squeeze below the limit in 1997 in order to be among the first 11 countries to adopt the euro in 1999.
Debt Load
Also on Friday, the Italian government said it is taking longer than expected to reduce the debt, Europe's largest. Italian debt will total 105.9 percent of GDP at the end of this year, compared with a forecast of 105 percent made at the end of 2003, the Finance Ministry said. Debt in 2003 was 106.2 percent. The slow pace of debt reduction reawakens concerns voiced by Germany and the Netherlands in the buildup to the euro that Italy was papering over cracks in its public finances without making ``sustainable'' savings.
Standard & Poor's is threatening to cut Italy's long-term AA debt rating unless Berlusconi's government replaces one-time measures with permanent spending cuts. A rating cut would boost the cost of financing the debt by forcing Italy to offer higher returns to attract investors. S&P revised its outlook on Italy to negative from stable in January 2003. EU Monetary Affairs Commissioner Joaquin Almunia, who took over from Solbes in April, is calling on Italy to cut spending or raise taxes by 0.5 percent of GDP, or about 7 billion euros, in 2004 and make similar savings in future years. ///www.bloomberg.com