Italy, Spain vow new steps to keep budgets in line with EU law

By Jan Strupczewski and Martin Santa

BRUSSELS (Reuters) - Italy and Spain promised on Friday they would take additional steps to ensure their 2014 budgets were in line with EU law, after the European Commission expressed concern over initial drafts last week.

Using its new powers to judge national budget plans, the European Union's executive arm last week reviewed the draft budgets of euro zone countries, the first time it has done so before they are sent to national parliaments to become law.

Although no draft plan was sent back to be reworked, the Commission said the budget outlines of Italy, Spain, Malta and Finland could put their governments in breach of EU laws on deficit and debt reduction.

The chairman of euro zone finance ministers Jeroen Dijsselbloem said however that ministers from all the countries at risk of breaking EU rules had declared at a Friday meeting in Brussels they would ensure compliance.

"We invited those member states to take... additional consolidation measures within national budgetary processes or in parallel," Dijsselbloem told a news conference.

"These member states are in particular Spain, Italy, Malta and Finland. Their respective ministers showed their full commitment to address this risk and explained how they planned to respect the budgetary rules," he said.

"In the case of Italy, a number of measures are in the process of implementation, among which is the spending review, privatisation and a number of tax measures," he added.

"In the case of Spain, we were informed that measures are currently in preparation, including a second round of labour market reform."

Italy's Finance Minister Fabrizio Saccomanni said before the meeting Rome had fleshed out its 2014 plans over the last few weeks with measures the Commission had not taken into account when reviewing its initial submission.

"More than a month has passed and new facts have happened. So I will illustrate the new measures we have taken, the privatisations, the spending review, the project for the Bank of Italy and other things which we believe correspond with the requirements of the Commission," Saccomanni told reporters.

Asked if he would amend his 2014 budget plan, he said: "No."

ITALIAN DEBT, SPANISH DEFICIT

The main complaint against Italy is that its debt, already at 133 percent of gross domestic product, would rise to 134 percent of GDP next year rather than fall.

Under EU budget rules, that obliges Italy to cut its structural budget deficit - which excludes one-off items and cyclical swings - by at least 0.5 percent of GDP next year, although Rome would prefer a much more modest reduction.

Euro zone countries are permitted to make smaller structural deficit cuts if their nominal budget deficits are below 3 percent of GDP and if economic growth is low and debt is falling, and provided the money saved is used for investment.

To meet the falling-debt criterion and allow it to slow its deficit cuts, Rome announced last Thursday it would sell 10-12 billion euros' worth of state assets next year.

While the Commission treats estimates of privatisation revenues cautiously, it may allow the smaller deficit cut if the final budget law removes doubt that Italy's debt will fall.

The Commission also wants Italy to further expand on its spending review plans, under which the country wants to save 2 percent of GDP over a three-year period ending in 2016.

For Spain, the Commission said next year's budget draft was too optimistic about economic growth, while planned cuts in the structural deficit were too small.

Spain expects its economy to expand 0.7 percent next year after a 1.3 percent contraction in 2013. The Commission believes Spain will grow only 0.5 percent.

"It's a small difference and I would underline the Spanish government's determination to meet public deficit targets for 2013 and 2014," Spanish Finance Minster Luis de Guindos told reporters on entering the ministers' meeting.

"It is logical that the Commission warns us of the risks of not meeting targets. But we know this. We have a road map of reforms, some of which still need to be implemented," he said.

EU Economic and Monetary Affairs Commissioner Olli Rehn told the news conference the Commission wanted to see additional measures that would cut Spain's structural deficit by 0.25 percent of GDP.

(Additional reporting by John O'Donnell, Robin Emmott and Robert-Jan Bartunek; Editing by Andrew Roche)