The Hindu Business Line : Rising budget deficit brings more woes to Italy

HOW will the European Union finance ministers meeting here respond to Italy's financial crises over rising budget deficit and ensuing political challenge faced by the Prime Minister Berlusconi Government remains to be seen.

Mr Berlusconi flew in today to present special measures proposed by his government to drastically reduce Italy's budget deficit by almost half to keep up with the European Union's budget rules to maintain member states budget deficit to below three per cent of GDP.

The EU member states — currently 12 who have adopted euro as their national currencies — are also members of the European Monetary Union. Mr Berlusconi centre-right government proposes to cut off public spending by some Euro 7,000 millions to keep within Euro Zone's self-imposed budget deficit guideline of less than three per cent of GDP.

Italy is today faced with prospects of downgrading of its credit rating and could also face prospects of European Union sanctions for failing to work within the budget deficit parameters of less than three per cent of GDP. It is ironical to note that the Germany and France - Europe's two largest economies in the Euro Zone have, so far escaped economic sanctions despite overstepping the Euro Zone budget-deficit limit. The sanctions could be as high as 0.5 per cent of GDP. But 12 of the 25 member states of the European Union are already over limit.

Recently agreed structure of the proposed European Union Constitution would also give the European Commission - the executive arm of the European Union - more powers to punish member states for over spending. The strategy is to boost viability and credibility of euro as the world's second biggest global trading currency after the US dollar and also ensure that the member states maintain a healthy financial profile.

Today Italy's financial presentation to the European Union finance minister was going to be done by Mr Trimonti, Italy's widely admired Economics Minister and close political colleague of Mr Berlusconi, but he resigned on Sunday after serious disagreement with extreme right partners in the centre-right coalition government. There is much speculation in the Italian media about Mr Tremonti's successor and current squabbles with the European Commission over budget deficit issues is at the root of latest upheaval in Mr Barlusconi's cabinet. The Italian prime minister is now rated as the longest serving post-war prime minister. Mr Berlusconi cannot survive without the support of his coalition partners and this would force him to call for fresh national elections, two years before the current Parliament mandate runs out in 2006. It is argued that Mr Berlusconi declining popularity and Italy's budgetary problems are largely the result of Italy's stagnating economy. Italy may today face an "early warning'' reprimand from the European Union and according to the European Union officials Italy may have a deficit of 3.2 to 3.6 per cent this year.

The EU finance ministers could delay decision on Italy till July 13, when the European Court of Justice could rule on whether to waive or impose fines on Germany and France as demanded by the European Commission. It also remains to be seen what impact proposed Euro 7,000 millions spending cuts to cut Italy's budget deficit currently in range of 3.2 to 3.6 per cent may have. Italy proposes to drastically cut social welfare and pension payments and with fast ageing population this could have severe political repercussions. The trade and investment flows have remained "static if not subdued" and the unemployment level remains high - nearly nine per cent mark. Hence Prime Minister Mr.Berlusconi's administration is plagued by "paralysis" according to Professor Tito Boeri, at Milan's Boconi University, who says that because centre-right coalition government wants to protect state industries and employees Italy runs " the risk of increased government spending". Italy's GDP hovers round $ 1.3-trillion mark with per capita income of $19,390

From Indian perception this is obviously a far cry from India's consolidated fiscal budget deficit now running at 10 per cent of the GDP - one of the highest in the world, which the Indian Finance Minister may try toll correct this week in proposed $ 97 billion budget.