IMF Fears Italy Slips On Homemade Problems

Wednesday, November 02, 2005

The IMF fears that Italy could fail to meet its deficit targets, set at 4.3% for this year and 3.8% for 2006; in both cases above the Euro stability pact level of 3.0%. In a report compiled after a mission the IMF still sees the possibility that government spending will increase another 0.6% of GDP although "the budget envisages deep cuts in central government current spending. With underlying determinants unaltered, irrepressible pressures are likely to arise." The IMF denied that Italy is suffering from a strong Euro but sees a big homemade problem in very slow productivity growth. "Over 1996-2004, growth of output per hour worked was the lowest among all industrial countries, and a cumulative 5.5 percentage points below the euro area average," the report stated.
While the economy will be stagnant at best in 2005 - economic growth is seen at 0.25% - the next year should bring GDP growth of 1.5%. Improved cyclical prospects should not, however, mask a somber medium-term outlook, the IMF cautioned.
The problems of Italy are still the same. Costly government employees and the resistance of Italy's economic structure to change are a symptom of deep-seated rigidities and inefficiencies in its labor, product, and services markets, the report said.
The IMF urged the government to seize every opportunity to strengthen the budget. The other advice for Italy will be even harder to follow though. As prime minster Silvio Berlusconi's coalition government was ousted last month, it is highly unlikely that any key reforms will be approved by parliament before the elections in spring 2006.


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