Italy needs consolidation and economic growth to fight debt (IMF)

BRUSSELS (Reuters) – Italy can only reduce its large public debt if it combines reasonable fiscal consolidation with economic growth, Chief of the European Department of the International Monetary Fund Poul Thomsen said on Tuesday.

FILE PHOTO: The logo of the International Monetary Fund (IMF) is seen during a press conference in Santiago, Chile, July 23, 2019. REUTERS / Rodrigo Garrido / File Photo

The new Italian government coalition of the anti-establishment 5-Star Movement and the center-left Democratic Party (PD) will have to prepare a draft 2020 budget for the control of the EU executive, the European Commission, by October 15. .

The Commission is closely monitoring Rome’s fiscal plans: in May it forecast public debt of over 133% of GDP this year and more next year unless policies change, putting Italy in violation of fiscal rules of the EU which stipulate that the debt must fall every year. .

“Italy has had a very long period of very low growth, low productivity and this is the overriding problem facing Italy: how to increase productivity,” Thomsen told Reuters in an interview.

“In addition, there is the fiscal problem, Italy has to undertake fiscal consolidation, but I am not claiming that Italy can reduce its debt through fiscal consolidation – it has to grow,” he said. declared.

To boost growth, Italy’s new ruling coalition plans to increase its nominal budget deficit to around 2.3% of GDP next year from 2.04% this year, sources told Reuters, which could increase the debt and upset the Commission.

Thomsen said that even if Italy’s inflated public accounts made fiscal stimulus more problematic, a credible package of structural reforms and gradual fiscal consolidation could work.

“I am less concerned about the size and timing (of such a package), it is a credible budgetary strategy, which shows a medium-term political commitment to gradually tackle the budgetary problem”, a- he declared.

“This is what we need to build confidence and ensure that returns remain at a reasonable level over the medium term,” he said.

Italy’s benchmark 10-year bond yields fell around 3.5% late last year as Rome battled the Commission over its spending plans to less than 1% earlier this month, but Thomsen said that without a medium-term plan to solve its problems, Italy did not have much leeway to borrow.

“For me, whether you have fiscal space critically depends on the extent to which you have a credible medium-term fiscal program,” said Thomsen.

“You have a lot more fiscal space if you have a policy to tackle your structural problem, including your medium-term fiscal structural problem,” he said.

Reporting by Jan Strupczewski; Editing by Frances Kerry

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