Italian Finance Minister: UK's fiscal position worse than Italy's

Italy’s Finance Minister has told Prospect that Britain’s fiscal position is worse than that of Italy. Pier Carlo Padoan, formerly the Chief Economist of the OECD and who was chosen in February by Italy’s Prime Minister Matteo Renzi to oversee Italy’s economic recovery, said in an interview that: “the fiscal numbers, if I may say so, are worse in the UK than they are in Italy.” For this reason, he said, in Britain, “the need for fiscal consolidation is more urgent.”

He stressed that, while Italy had a greater level of debt than the UK—over €2 trillion—in the case of Britain’s economy, “the deficit is much larger.” Despite Italy's large debt burden, Padoan stressed that “debt sustainability is firmly achieved”. Italy plans to balance its budget by 2016, a year later than previously agreed with the European Commission, after a request was made by Padoan in April for Italy to be granted an extra year to get its deficit under control, citing “exceptional circumstances.” The request was met with dismay in Brussels.

Padoan was also clear that deflation was a concern in the euro area, and he stressed the importance of closely monitoring financial pressures that could affect inflation. He also stressed the significance of very low interest rates—the ECB’s policy rate is currently 0.25 per cent—saying that: “If you are close to the zero-bound, there is a risk that you will go beyond that threshold and once you’re in negative territory, you may be trapped into that.”

“This is something that, for instance, we know from the Japanese experience, which has been trapped in deflation.”

Asked whether it was likely that Eurozone deflation could drag the continent down into a Japan-style lost decade, Padoan said, “No, it’s not,” but added that “it has to be careful not to get there”.

On the proposed financial transactions tax, which ten EU member states plan to introduce by the end of 2015, Padoan said: “Italy is the country that has already implemented a financial transaction tax, on a limited way.” His assessment is that “so far it has worked rather well”. The tax has been excoriated by the British government, which has threatened a legal challenge to head off its introduction.

Padoan was clear that the tax has affected neither jobs nor growth in Italy. But could he see a way of Britain gaining an exemption from such a tax? “It’s not ‘the UK versus the rest of Europe’,” said Padoan. “Of course there will be impacts on other countries that do not join the cooperation,” said Padoan, “but I would really not put it in terms of the UK versus the rest.”

But is Italy still a country that wants to be part of such continent-wide law-making? The forthcoming European elections will be a two-way fight between Renzi’s governing party and the staunchly Eurosceptic 5-Star Movement, led by Beppe Grillo. Grillo, who wants a referendum on Italy’s membership of the EU, is polling at 24 per cent, with Renzi’s PD on 34.8 per cent.

“I cannot hide the fact that if you look at polls, at least, today about 30 per cent of the voters would vote for parties that have clearly said they want to re-discuss European rules,” said Padoan, whose assessment includes not only Grillo’s party, but also the anti-EU Liga Nord.

After the forthcoming European elections, Eurosceptic parties from Britain, France, the Netherlands, Austria, Greece and more besides will send newly-elected MEPs to Brussels. This raises the possibility that a large number of MEPs will have as their core aim the curtailment of European political activity. Might there be economic risks from such obstructionism?

Padoan said that this “may translate into obstructionism, or obstacles to specific legal decisions,” in Brussels. But, he added, “this might even be healthy, I guess. Because it would move political debate away from complacency.”

“The fact that such a large number of voters state that they would vote ‘against Europe’ means that they are deeply disappointed by Europe,” said Padoan.

“This disappointment is also the result of the fact that many problems were overlooked.”