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European economy proceeds at a slow pace. Italy’s public finances at a crossroads. Brexit: Great Britain holds back

The Economic Forecasts of the EU Commission for the period 2018-2020 envisage GDP constant growth throughout the continent, amidst an increasingly uncertain international environment. Positive trends for investments, consumption and employment (with a few problematic exceptions). Moscovici forewarned the Italian government: GDP slowdown is coupled by increased deficit, thereby rebutting the data from Rome. Minister Tria replied: “a technical slip” from Brussels

Commenting on the Autumn Economic Forecasts for the period 2018-2020, released today in Brussels, Pierre Moscovici, Commissioner for Economic and Financial Affairs, highlighted five “major points.” First of all, he said during a meeting with journalists,  “the fundamentals of EU economy remain solid”, “growth will continue, albeit at a slower pace.” The second point regards “falling unemployment” throughout Europe, with differences from one Country to the next, notwithstanding some worrisome situations (notably Greece, Spain and Italy). Third point: inflation is expected to pick up slightly, signalling renewed dynamism in wages and private consumption. Fourth: improved budgetary policies, amidst some exceptions. Fifth: EU economy is exposed to “downside risks”, mostly linked to the international scenario, marked by threats of trade wars, political instability,  escalating oil prices and stronger global competition.

The next three years. The figures published by the Commission show that growth in the euro area is forecast to ease from 2.4% in 2017 to 2.1% in 2018, to 1.9% in 2019 and 1.7% in 2020. “The same pattern – the Commission declared – is expected for the EU27, with growth forecast at 2.2% in 2018, 2.0% in 2019 and 1.9% in 2020.” Unemployment in the euro area is expected to fall to 8.4% this year and then to 7.9% in 2019 and 7.5% in 2020. In the EU27, unemployment is forecast at 7.4% this year before falling to 7% in 2019 and 6.6% in 2020. “Job creation is set to continue to benefit from continued growth and structural reform implementation in some Member States.” At the same time, the Commission underlines that “employment growth is eventually dampened by increasing labour shortages” in addition to slower economic growth. Demographics are equally acknowledged amidst economic figures. “Rising global uncertainty, international trade tensions and higher oil prices will have a dampening effect on growth in Europe”, is specified in the captions describing the chart drawn up by Commission experts. Accordingly, “the drivers of growth are set to become increasingly domestic: private consumption should benefit from stronger wage growth and fiscal measures in some Member States.” Positive scenario for investment, “expected to increase in all Member States in 2019.”

Merciless confrontation. Sharp differences across Member States emerge at a detailed analysis of the figures by comparing the respective GDPs, deficits, scale of indebtedness, employment or investment. GDP is forecast at approximately 2% for the next three years at EU level and in the euro zone Countries, although at 1 percentage point less for the latter. Forecasts for Germany and France are similar, (in continuity between 1.6 and 1.8%), while Italy, ranking last in the EU, is deadlocked at 1.1 up to 1.3%. Slightly higher figures for the United Kingdom (suspended between 1.2 and 1.3%), challenged by the heavy consequences of Brexit and the isolationism that British subjects have secluded themselves into. Other Countries proceed at a steadier pace: The Netherlands at approximately 2.5%, Poland’s GDP for this year is set at 4.8%, to fall at an enviable 3.7% in 2019 and at 3.3% in 2020. An equally positive trend is forecast for Romania (3.6%). Ireland is a special case with a record-breaking 7.8% growth rate this year, set to decrease to 4.5% next year and at 3.8% in 2020: enviable numbers nonelethess. By way of comparison in this same three-year period the U.S. is projected to decrease from 2.9% in 2018 to 2.8% in the next two years. China registers a slight slowdown: 6.6%  in 2018, 6.2 in 2019 and 5.9% in 2020.

Protecting vulnerable brackets. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, said: “All EU economies are set to grow this year and next, which will bring more jobs.” However, “uncertainty and risks, both external and internal, are on the rise.” He added: “We need to stay vigilant and work harder to reinforce the resilience of our economies.” In his opinion, the EU needs to strengthen Economic and Monetary Union, while “at national level, there is even a stronger case for building up fiscal buffers and reducing debt while making sure that the benefits of growth are also felt by the most vulnerable members of society.”

The Italian case. A significant portion of Moscovici’s press-conference was devoted to the Italian case. Forecasts on Italy’s economy are far from positive. Real GDP growth in 2018 is forecast at 1.1%, at 1.2% in 2019 and at 1.3% in 2020, amounting to the lowest growth rate in Europe. Deficit is set at 1.9% this year, at 2.9% in 2019 to eventually exceed the 3% threshold in 2020 (3.1%). These figures are remarkably different from those projected by the Italian government. The debt-to-GDP ratio is forecast to remain stable at around 131%. “After solid growth in 2017, Italy’s economy slowed down over the first half of this year as exports and industrial production weakened.” The Commission thus guarded against the “risks” of the deficit and the interest rates burden.   “In some highly indebted euro zone Countries, especially in Italy, the vicious circle involving banks and sovereign debt could re-emerge in case of doubts over the quality and sustainability of public accounts”, the Commission affirmed. “Our forecasts are based” on the data “contained in the budget proposal received by the Italian government “in October – Moscovici pointed out -. “But we are expecting the revised Italian budget by 13 November that could change the forecasts.” “Italy received no special treatment. Figures are processed by the financial services of the Commission which are impartial and independent”, the Commissioner underlined.

The reply from Rome. Moscovici then “played down” the gloomier forecasts of the EU Commission as compared to those of the Italian government: “Such differences occurred also with the previous governments, and they also apply to other Countries.” He then sent a “message of peace”: the Commission “loves Italy and we want it remain at the heart of the euro zone.” He launched an appeal to dialogue with Rome on public accounts, only to reiterate ahead of the visit to Italy of the President of the Eurogroup Mario Centeno: “The Commission is not alone, it does not amount to soulless red tape. All Finance Ministers support the analysis” on the euro zone. “I have always been in favour of flexibility, but the rules must be respected in full not in scattered bits and pieces”,  Moscovici concluded. From Rome, Minister Giovanni Tria promptly replied defining it a “technical slip of the Commission”: “The European Commission’s forecasts for the Italian deficit are in sharp contrast to those of the Italian government” and they “derive from an inaccurate and incomplete analysis of the draft budgetary plan, of the budget law and of the trend of Italy’s public finances.” The tug of war between Italy and the EU continues.

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