The ECB to Renzi: you have to make up for the time lost by Letta

No “tangible progress” have been made with regard to consolidation measures. Europe is experiences growth and unemployment rate at its “peak”

Italy has made no “tangible progress” with regards to the Commission’s recommended additional consolidation measures. As simple as that. The ECB in its Monthly Bulletin dismissed the actions taken by Letta’s government (and partially, by Monti’s one), putting a thorn on Renzi’s government side. “It is important that the necessary steps are taken,” underlined the ECB, particularly with regard to putting the debt-to-GDP ratio on a downward path.

According to the EuroTower, the Italian general government deficit remained at 3.0% of GDP in 2013, “unchanged from the previous year and slightly above the target of 2.9% of GDP set in the 2013 Stability Programme update.” According to the Winter 2014 Forecast of the Commission, adds the report, “the deficit-to-GDP ratio is projected to decline to 2.6% in 2014 and to 2.2% in 2015.” In order to reach that target, the Commission – in November 2013 – recommended that additional consolidation measures be adopted to ensure compliance with the Stability and Growth Pact. That is, achieving the medium-term objective of a balanced structural budget in 2014 and ensuring “sufficient progress towards compliance with the debt criterion during the transition period.” Yet, the ECB underlined that “to date, no tangible progress has been made with regard to the Commission’s recommendation. Looking ahead, it is important that the necessary steps are taken to ensure fulfilment of the requirements under the preventive arm of the Stability and Growth Pact, particularly with regard to putting the debt-to-GDP ratio on a downward path, as also recently highlighted by the European Commission in the context of its in-depth review for Italy.”

Rome is not alone – the ECB called the countries of the euro area to make “further adjustment efforts, required to ensure sustainable public finances.” Broadly speaking, it is necessary to put “high government debt ratios on a downward trajectory”: that, therefore, “must remain a priority.” The ECB shows psychological attitudes too: given that there is improved outlook for growth, there is also “a risk that complacency might set in,” leading countries to rest on their laurels. According to the latest Commission’s forecast, the structural fiscal adjustment in the euro area is expected to slow to 0.1 percentage point in 2014, well below the 0.5 percent of GDP minimum requirement under the Stability and Growth Pact. Actions should be taken to “improve the quality and efficiency of public expenditure, underpinned by structural fiscal reforms targeting unproductive government spending, while minimising distortionary effects of taxation.”

The economic recovery is expected to proceed, “albeit at a slow pace,” and there good news even dealing with the job market, in fact “further improvement in domestic demand should materialise, supported by the accommodative monetary policy stance, improving financing conditions and the progress made in fiscal consolidation and structural reform.” In particular, says the bulletin, “real incomes are supported by lower energy prices. Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports. At the same time, although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on the pace of the economic recovery.”

Deflation does not frighten Mario Draghi and his fellows, even if inflation is still low and sometimes negative: the ECB “continues to expect the key interest rates to remain at present or lower levels” for an extended period of time. In any case, the Governing Council is “ready to consider all instruments available to it, and to take further decisive action if required.”

Dealing with unemployment, the ECB sees clear signs of stabilization.” The number of persons employed in the euro area was stable in the third quarter of 2013 for the second quarter in a row, even tough with marked cross-country differences. The unemployment rate in the euro area declined by 0.1 percentage point, to 12.0%: “one encouraging sign is that this decline and stabilisation has been relatively broad-based across age groups. Looking ahead, the unemployment rate is expected to gradually decline further, albeit at a slow pace.”

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