Fiscal nightmares resume in Europe: Italy and France under scrutiny for high deficits

French protesters demonstrating against austerity moves in Brussels last December
French protesters demonstrating against austerity moves in Brussels last December Copyright Sylvain Plazy/Copyright 2023 The AP. All rights reserved
Copyright Sylvain Plazy/Copyright 2023 The AP. All rights reserved
By Piero Cingari
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Bank of America warns of inevitable excessive deficit procedures for Italy, France, and others, bringing back fiscal concerns of the past. Stringent fiscal monitoring and consolidation efforts are anticipated from 2025, potentially impacting economic growth across affected nations.


Fiscal nightmares that plagued Europe in the past are making a comeback, affecting Italy, France and other European countries.

Last week, during a parliamentary hearing, Italy's Finance Minister, Giancarlo Giorgetti, indicated the European Commission is likely to recommend that the Council initiate an excessive deficit procedure against Italy and several other countries.

In early March, Italy's national statistics office, Istat,revised the previous year's deficit to 7.2% of GDP from 5.3%. Italy is set to unveil its Economic and Financial Document (DEF) this week, which will provide further insight into the government's expected deficit ramifications moving forward.

Targets for 2024 and 2025 deficits projected at 4.3% and below 4% respectively

Giorgetti noted that Rome's current budget plan, announced last September and due for review on April 9, aligns with EU requirements to reduce the fiscal gap over time.

"We are not so naive as to enter negotiations without understanding the scenario we were entering," he commented.

What is the Excessive Deficit Procedure?

The excessive deficit procedure compels member states to amend significant deficit and/or debt levels as mandated by Article 126 of the Treaty on the Functioning of the European Union.

The procedure can be initiated by the European Commission if a country has breached or is at risk of breaching the deficit threshold of 3% of GDP, or if it violates the debt rule by maintaining a government debt level above 60% of GDP that is not decreasing at a satisfactory pace.

Why France and Italy could face an Excessive Deficit Procedure

After years of suspension due to the pandemic and the energy crisis from the war in Ukraine, the European Commission has postponed sanctions on member states with excessive deficits or debts until 2024.

Pent-up demand following lockdown has led to increased spending and debt
Pent-up demand following lockdown has led to increased spending and debtGian Mattia D'Alberto/LaPresse

"Many things fiscal are making a return in Europe at the moment, with France and Italy in particular on the market's radar," noted Bank of America in a recent report.

Just before Easter, France disclosed a 5.6% budget deficit for 2023, largely due to weaker-than-expected revenues, which is expected to push the country's debt-to-GDP trajectory higher.

Bank of America economist Chiara Angeloni highlighted that the Italian 2023 fiscal slippage was more pronounced, driven by increased spending, particularly the Superbonus — a construction tax credit scheme designed to stimulate the economy during the pandemic.

This deterioration in the deficit, exacerbated by the Superbonus, was notably greater than anticipated, totalling an additional €39 billion according to final figures from Istat, and represents "a reason to be cautious".

Even Germany faces challenges. The need to invest in public infrastructure, including a significant shift in the energy mix away from Russian gas, and increasing defence spending could push Germany's debt ratio above 65% of GDP by 2027 if deficit-financed defence spending increases by 0.8-0.9% of GDP, Bank of America said.

What happens next?

An excessive deficit procedure for Italy, France, and another ten member states "is almost inevitable now," according to Bank of America. This would necessitate more stringent monitoring and implementation of consolidation efforts from 2025 onwards.

After the procedure is triggered, France will need to undertake a steady budget correction of at least 0.5 percentage points per year in structural terms from 2025, as calculated by Bank of America economist Ruben Segura-Cayuela.

The risk remains that countries could be compelled into sharp fiscal corrections and structurally tight fiscal policies, potentially hampering economic growth going forward.

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