No significant breach of European rules by Italy

Similar to other euro area countries, Italy's compliance with the Stability and Growth Pact (SGP) will be assessed on three criteria ,

i) The Structural balance pillar. Countries that have not yet reached their Medium-Term Budgetary Objective (MTO - in the case of Italy, a balanced budget position in cyclically adjusted terms), must aim to improve their structural balance by 0.5% of GDP per year. 

"The government should not need to implement 0.5% of fiscal tightening, as it may be granted various exemptions. It is unlikely, however, to obtain all the flexibility it is asking for. In any case, the deviation from the objective should not be significant enough for the Commission to ask for corrective measures", in view of Societe Generale.

ii) The expenditure benchmark. In the preventive arm of the SGP, countries that have not yet reached their MTO need to contain the increase in government spending (net of discretionary revenue measures) at a rate below medium-term potential growth.

"It is highly unlikely that the Commission will base its opinion only on the expenditure benchmark and Growth in real public expenditure should be contained at between -0.2% (if no exemption were allowed at all) and 0.6% (maximum flexibility, excluding migrant clause) in 2016. The government expects to do way better than that (-1.6%). However, the lack of clarity on spending cuts in the budget plan could be an issue", according to Societe Generale.

iii) The debt reduction benchmark. The distance to the 60% debt-to-GDP threshold should be reduced by 5% per year (averaged over the past three years or in the next two years).

The government's projections are not entirely compliant with the rule (e.g. debt does not decrease sufficiently in the forecasts), but this is attributable to the various exemptions that the Commission is likely to allow, leading to less fiscal tightening than would otherwise be needed. Importantly, the intention to speed up the privatization plan for 2016-18 (with a gain of 0.5% of GDP estimated over the period) will favour adherence to the rule.