The European Union will warn Italian Prime Minister Romano Prodi's government that it must implement pension changes in a „rigorous” way in order to cut spending and curb its rising debt, according to a draft ruling.
Government debt in Italy, the euro region's third-largest economy, rose last year to 107.6% of GDP, government estimates show, the second straight yearly increase and the highest in the 13-nation euro area. Debt will continue to grow without cuts in pensions spending, the EU will say, according to the draft document obtained by Bloomberg News.
Italy is expected to reduce its budget deficit this year to below the EU limit of 3% of GDP for the first time since 2002, the European Commission said last month. Still, the government's overall debt is bigger than the nation's economy and well above the EU's ceiling of 60% of GDP. Prodi's administration should „rigorously pursue fiscal consolidation so as to put the debt-to-GDP ratio on a declining path,” EU ministers said in the draft report, which will be discussed at a February 27 finance ministers' meeting in Brussels.
The final report is expected to be endorsed by European heads of state at a summit March 8-9. Italy should also „fully implement the pension reforms with a view to improving the long-term sustainability of public finances,” according to the draft report.
Prodi's government is divided over the urgency of changing the pension system again, after warnings by the European Commission and rating agencies over Italy's debt and spending. The country has the third-lowest birth rate in the EU and contributions to the system won't keep pace with retirement spending as the population ages. Bank of Italy head Mario Draghi last month renewed a plea for the government to raise the current retirement age in order to ease the burden of one of the most expensive pension systems in the EU.
Pension spending will only decline to 13.8% of GDP in 2050 from 14.1% in 2005, according to the state auditor. That's even after three changes to the system, including a 2004 law raising the retirement age. Finance ministers also will urge Germany and France, the largest economies in the euro area, to cut government spending and improve competition, according to the draft ruling.
French Finance Minister Thierry Breton will need to cut spending and take into account the nation's aging population. The EU document said „the meeting on pension systems scheduled for 2008 will have to hang on to the gains made following the introduction of the 2003 reform.” In 2003, the French Parliament passed a law shoring up the country's overburdened pension system by raising the number of years people pay into the state funds and granting tax breaks for private retirement plans. France won approval from the EU last month for its plans to keep its budget deficit under the EU limit for a third year. Breton expects the French budget deficit to fall to 2.5% of GDP this year after a shortfall „close to 2.6%” in 2006.
The European Commission, the EU's executive body, forecasts a budget gap of 2.6% in 2007 and 2.2% next year, below the EU's limit. In Germany, the government must reduce debt, introduce health-care reform, open up markets and improve competition in the rail, gas and electricity sectors, the draft report said. „Germany is making good progress overall,” according to the draft. Germany's budget deficit will be 1.5% of GDP this year, within the EU limit of 3% of GDP for a second year.
In 2008, it will be also be 1.5%, according to the government's stability program. „Germany needs to continue to consolidate public finances,” after the excessive deficit procedure is lifted this year, EU Monetary Affairs Commissioner Joaquin Almunia said on February 9. „I have no fears at all regarding the commitment of the German government and regarding the positive attitude of the German government,” Almunia said. (Bloomberg)