The European Commission put Italy on Wednesday on its watch list because of the country's very high public debt and weak competitiveness and warned France that will miss agreed budget deficit reduction targets unless it takes action. The Commission, the European Union's executive arm, conducted in-depth reviews of the economies of 17 EU countries that it believes have macro economic imbalances.
Under EU rules, if such imbalances are considered excessive, a country has to take action under the European Commission's surveillance to address them or risk a fine. The Commission said that Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the Netherlands, Slovenia, Finland, Sweden, and the United Kingdom all had imbalances in their economies.
But they were excessive in Croatia, Italy and Slovenia. This means the Commission will now monitor their economies closely, making sure they implement reforms recommended by EU finance ministers.
"Italy has to address the very high level of public debt and weak external competitiveness; both are ultimately rooted in the protracted sluggish productivity growth and demand urgent policy attention," the Commission said.
"The need for decisive action to reduce the risk of adverse effects on the functioning of the Italian economy and of the euro area, is particularly important given the size of the Italian economy," it said.
But it added that reaching and sustaining very high primary budget surpluses and economic growth for a long time, needed to bring down debt, would be a major challenge.
So far, Rome's efforts were not enough, the Commission said. "The adjustment of the structural balance in 2014 as currently forecast appears insufficient given the need to reduce the very large public debt ratio at an adequate pace," the Commission said.
Italy's economy ministry said in reaction that reforms it has promised are in line with the Commission's statement, adding that for the past two years, Italy has concentrated on stabilising public finances and has been rewarded with a sharp reduction in borrowing costs.
The country's new Prime Minister Matteo Renzi pledged on Wednesday to introduce a series of "very important reforms" next week to help create jobs, make housing more affordable and remodel crumbling school buildings.
France, which last year was given two extra years to bring its budget deficit below the EU ceiling of 3 percent of GDP, was not delivering on its consolidation promises either.
"France is projected to miss both headline deficit and structural adjustment targets over the entire forecast period," the Commission said.
French ability to compete on the global markets was also weak, the Commission said.
"Despite measures taken to foster competitiveness, so far there is limited evidence of rebalancing. While wages have developed in line with productivity, the labour cost remains high and weighs on firms' profit margins," the Commission said.
"The unfavourable business environment, and in particular the low level of competition in services, further aggravate the competitiveness challenge. In addition, rigidities in the wage setting system result in difficulties for firms to adjust wages to productivity," it said.
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