Italy’s Budget Stimulus Aims Could Backfire, IMF’s Thomsen Says

(Bloomberg) -- Italy’s plans for an expansionary budget that widens the deficit could end up doing more damage than good for the economy, according to a top International Monetary Fund official.

IMF Europe Director Poul Thomsen said Italy doesn’t have the space for fiscal stimulus and should avoid leaning on an artificial boost and instead focus on long-lasting measures.

There’s even a risk of a negative effect on growth, where budget concerns push yields higher, he said. The unfavorable market response means “the cost to Italian borrowers would go up and you actually end up slowing the economy.”

“It needs growth, but it’s not a growth that can come through fiscal stimulus,” Thomsen said in Copenhagen on Thursday as the IMF published its outlook for Europe. “There’s no fiscal space for that. It has to come through structural reforms, labor market reforms, reforms that increase productivity. That is the main challenge facing Italy.”

For the euro area, the IMF said the headwinds are growing, with “slowing global demand, escalating trade disputes, and higher fuel prices.” It sees growth slowing to 1.9 percent next year and 1.7 percent in 2020. Expansion was 2.4 percent in 2017 and is expected to be 2 percent this year.

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