Italy is to shift its focus from austerity to growth – so delaying by a year its plan to balance the budget in 2013.
Prime Minister Mario Monti has decided that reviving economic growth now had to take priority over belt tightening that could plunge the country deeper into recession.
After a cabinet meeting that accepted new economic targets based on a much deeper than originally forecast recession, Monti said: “Italy has found itself – and still finds itself in a difficult situation and we wanted to avoid the same tragic fate as Greece. But rebalancing the Italian economy will take many years.”
“Everything, everything, everything that we are doing now is aimed towards helping growth,” Monti added.
Italy’s new forecasts raise the 2012 deficit target marginally to 1.7 percent of gross domestic product from 1.6 percent, while the 2013 goal is raised to 0.5 percent from 0.1 percent. An almost balanced budget, with a 0.1 percent deficit, is now targeted in 2014.
The reaction from the markets was muted, in contrast to fellow eurozone struggler Spain which saw its borrowing costs soar when Madrid relaxed its deficit targets.
Italian bond yields rose on Wednesday but only modestly. The feeling is that Italy’s main problem is its chronically weak economy, not fiscal slippage.
For investors Italy is also a known quantity. Monti is a familiar figure after serving as a European Commissioner for almost a decade until 2004 and the country’s problems are also well known: it has struggled for many years with a huge state debt and a weak economy.
By contrast, Spain is less of an known quantity. Prime Minister Mariano Rajoy is a less familiar figure outside his home country than Monti, and doubts persist over whether his four-month-old government can tackle a property crash, a banking system that may need rescuing and Spain’s free-spending regional governments.
Italy’s budget deficit is one of the lowest in the eurozone as a proportion of output, whereas Spain’s is one of the highest.
Italy’s revised growth and budget targets are consistent with a balanced budget in the medium term and creating a “sizable” primary surplus to cut the country’s massive 1.9-trillion-euro debt, according to an internal European Commission document.
The assessment, a technical document, is to be submitted to senior EU officials.