Italy Can't Tighten Fiscal Stance More Amid Recession, Tria Says

(Bloomberg) -- Italy can’t afford to raise taxes or cut public spending now because it would worsen the economic prospects of a country that has slipped back into recession, the nation’s finance chief said.

“We cannot tighten our fiscal policy more because we are in the middle of this recession and slowdown,” Finance Minister Giovanni Tria said Wednesday at a panel discussion at the Boao Forum in Haikou, China. “We need to increase our growth rate and embark on a path of reducing the debt-to-GDP ratio.”

Italy’s debt equals 132.1 percent of economic output, the second-highest in the euro region after Greece. In December, the populist government in Rome reached a deal with the European Commission for this year’s budget, after revising down the deficit target and the forecast for economic growth. Since then, data showed that the nation entered a technical recession after contracting for two straight quarters.

The Italian Treasury may cut its forecast for economic expansion this year to 0.1 percent, down from 1 percent targeted in December, Il Sole 24 Ore reported on Wednesday. Under current legislation, this year’s deficit would rise to 2.4 percent of GDP, up from a target of 2.04% agreed to with the EU in December.

Last month, the Brussels-based Commission issued a warning on Italy, saying the country’s massive public debt and long-lasting productivity weakness are risks for other countries in the region.

Italy’s deficit “also has to be reduced, but we believe that it’s under control” even though the country is “between recession and stagnation,” Tria said in Haikou.

The European economy is facing rising risks, from protectionism to Brexit, International Monetary Fund First Deputy Managing Director David Lipton said Monday in a speech in Lisbon. He singled out Italy for its “glaring vulnerabilities,” which have left it ill-prepared for the next slump.

“Our pace of growth also depends on what’s happening on trade at global level,” Tria said on Wednesday. “There is a very strong interdependence between the Italian manufacturing sector and the German manufacturing sector, and now we are in a phase of slowdown of the German manufacturing sector.”

He added that that without coordination of the “macroeconomic policies among the big economic areas, Asia, China, Europe and the U.S., we risk entering a big slowdown, a possible recession.”

The Italian government this week is expected to pass measures aimed at boosting growth this year, including norms to help banks take soured debt categorized as unlikely-to-pay loans off their books. That will come before the Treasury updates next month its economic outlook and sets new targets for growth and public finances this year and next.

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