Italy economy minister warns deflation would be 'disaster'
TRENTO Italy (Reuters) - Deflation would be a disaster for the euro zone and for countries with high public debt in particular, Italian Economy Minister Pier Carlo Padoan said on Saturday.
Euro zone inflation stood at just 0.7 percent in April, far below the European Central Bank's (ECB) ceiling of 2 percent, and is expected to remain at the same level in May according to a Reuters survey of analysts.
In Italy, preliminary figures for May issued on Friday showed consumer prices up just 0.4 percent annually.
"Authorities in charge for monetary policy should give an adequate answer to this (problem) in order to prevent inflation expectations from falling," Padoan said at an economic conference in the northern Italian town of Trento.
"This would be a disaster for the euro zone and for high-debt countries in particular," he said.
At its policy meeting on Thursday the ECB is expected to cut its main refinancing rate, already at a record low of 0.25 percent, as well as reduce its other interest rates and adopt additional measures aimed at boosting lending to smaller firms.
Very low inflation or even deflation makes it harder for Italy to cut its huge public debt of 132.6 percent of gross domestic product (GDP), which has risen by 29 percentage points since 2007 despite three years of tight budget policy since 2011.
Padoan said the only way for the country to get the debt-to-GDP ratio falling was by increasing economic growth.
"This means both an inflation rate nearer to the (ECB) target of 2 percent and higher growth in nominal terms," the former chief economist for the Organisation for Economic Cooperation and Development said.
He said Italy would ask its European partners to focus more on growth and employment when it takes the rotating European Union presidency from July 1, but would not ask for a re-negotiation of fiscal rules on budget deficits and debt.
"Euro zone countries need to implement in a better way the rules that already exist," Padoan said.
The minister repeated pledges for structural reforms to help recovery in the euro zone's third-largest economy, which is struggling to emerge from a two-year long recession.
The government of Prime Minister Matteo Renzi has promised reforms of the labour market and the public administration in the coming months to modernise the country and its economy.
"The real tragedy for Italy is falling productivity," said the minister.
Italy has had the weakest labour productivity growth among euro zone countries since the single currency was launched.
(Reporting by Francesca Landini; Editing by Pravin Char)
