Italy asks to make the most of the new SGP rules

Tuesday, October 13, 2015 3:54 AM UTC

Italy will be broadly compliant with the Stability and Growth Pact rules, as it should benefit from a number of exemptions. In fact, the European Commission allows for temporary deviations from the MTO in specific cases (major structural reforms, an unusual event outside the control of the member state, or a severe economic downturn as defined in a recent communication).

According to Societe Generale, in reality, the amount of structural adjustment that Italy will need to implement in 2016 will likely be far short of the stipulated 0.5%,

Flexibility in exchange for reforms: The Italian government benefited from the structural reform clause back in May, giving the possibility to deviate by 0.4pp in 2016.

More flexibility for reforms: The government is asking for an additional deviation of about 0.1pp to make full use of the reform clause.

The investment clause. The government is requesting a cumulated 0.3pp (€5bn) deviation from the required path towards the MTO.

The Commission will allow this deviation, simply because the country meets all the criteria specified in the new European guidelines, it is in the preventive arm of the SGP, the output gap is below -1.5% of GDP, and the deviation will not lead to a deficit above 3%.

Only investment in projects co-funded by the EU or co-financed by the EFSI will be eligible. In addition, the impact on the structural balance will need to be offset over four years. A hypothetical migrant clause, the government is requesting €3.3bn (0.2% of GDP) to offset the cost of recent migration flows.

"Importantly, this last clause will not be included in the budget (in contrast with the investment one) before the Commission gives its assent. The Commission, which has officially judged Italy's requests for flexibility to be at the "high end" of expectations, is thus unlikely to allow the full use of clauses", says Societe Generale.

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Italy asks to make the most of the new SGP rules

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