EU Warns France, Italy on Debt in Qualification to ECB’s Message

(Bloomberg) --

The European Union issued a fresh warning about debt levels in some countries, qualifying the message from the European Central Bank that the euro area needs a bigger fiscal boost.

While it echoed the ECB in saying that governments with fiscal space should spend more, the European Commission is growing increasingly worried about high-debt countries that aren’t doing enough to get their house in order.

The problem it identified is that “some of those euro-area member states with no fiscal space plan either no meaningful fiscal adjustment or a fiscal expansion in 2020.”

In an assessment of governments’ spending plans, the bloc’s executive arm said eight countries are “at risk of non-compliance” with its rules. They include France, Italy and Spain -- the three largest economies after Germany.

Italy was singled out as a particular risk, with a note that an increase in sovereign borrowing costs could spell trouble. The verdict at least marks an improvement from the tense standoff last year, which almost triggered a disciplinary procedure against Rome, but debt is still more than double the 60% ceiling.

Italian 10-year yields have risen slightly since falling to a record low in September, in line with a decline in borrowing costs across Europe. However, at 1.2%, they’re well below the 3.5% level seen in 2018.

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“We except negotiations between the Commission and Rome, Paris and Madrid to continue and it is unlikely that the tightening called for will be implemented. Still, the chances of a meaningful fiscal loosening look remote. It remains the case that those governments that can afford to loosen, don’t want to while those that want to can’t afford to.”

--Maeva Cousin, Bloomberg Economics

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In its assessment, the commission said that the 2020 budget plans submitted by 11 other members were found to be compliant or broadly compliant with the rules.

“While no euro-area member state faces risks to fiscal sustainability in the short-term, the short-term sustainability of Italian public finances continues to appear vulnerable to increases in the cost of debt issuance,” the commission said.

In its report, the commission also echoed ongoing calls that the euro area needs fiscal support to combat the current economic slowdown. Those with fiscal space, particularly Germany, “‘should stand ready to continue using it,” it said.

--With assistance from Zoe Schneeweiss and Lucy Meakin.

To contact the reporter on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Fergal O'Brien, Richard Bravo

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