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Last Updated: Tuesday, 9 August 2005, 16:57 GMT 17:57 UK
EU budget deficit woes deepen
Silvio Berlusconi
Ratings agencies doubt Silvio Berlusconi's economic plans
Italy's public finances look set to get worse rather than better and no party has a coherent plan to improve them, a leading credit rating agency says.

The warning from Standard & Poors on Monday accentuated worries that Italy's deficit is out of control.

Italy's government says it can reduce the deficit both by selling state-owned assets and by encouraging growth.

Both France and Germany share its problems with deficits of more than 3% of gross domestic product (GDP).

All suffer from high levels of unemployment and flagging economic expansion.

The big budget deficits could spell trouble in the shape of increasing interest payments in the future.

Reducing the debt is a good thing... But it's a drop in the ocean
Olivier Gasnier, Societe Generale

Meanwhile, credit rating downgrades could make it more expensive for the Italian government to borrow money to bridge deficits which are widening as public spending continues to exceed revenues.

Short-term gains in France

France is also trying to sell off public companies to help it get its deficit under control.

Its budget deficit widened in the first half of 2005, casting doubt on the credentials of new Prime Minister Dominique de Villepin and Finance Minister Thierry Breton.

That could make it difficult to meet the government's target of getting the deficit below the European Union's limit of 3% for the first time since 2001.

But although the sell-offs - of assets such as motorways and gas and telecoms companies - may reduce the deficit in the short-term, their long-term effects are likely to be minimal, observers said.

France is carrying a total debt of 65% of GDP, and government spending is proving difficult to cut.

"Reducing the debt is a good thing," said Olivier Gasnier of Societe Generale.

"But it's a drop in the ocean."


As for Italy, asset sales are being suggested by the government of Silvio Berlusconi.

His government is also suggesting spending on large public works projects to create jobs and get the economy growing again after it shrank in the first quarter of 2005.

France Telecom logo
France Telecom is one of the assets France wants to sell

That failed to impress Standard & Poors, the second agency to issue a warning about Italy's prospects in a month.

Italy's current deficit is about 4.3% of GDP, while the sales could bring in about 2% of GDP, Standard & Poors analyst Moritz Kraemer said.

"More asset sales are welcome to bring the debt-to-GDP ratio down," he said.

"But they are not the solution."

Electoral pressures

An election due by May 2006 further reduced the chances of meaningful action to get the deficit under control in the short term, Mr Kraemer said.

But, he added, even after the poll the prospects were not encouraging, given the deep-running divisions within both government and opposition coalitions.

"Neither of the two main political groupings has presented a coherent strategy to address budget imbalances," he warned.

Italian politicians argue that, after France and Germany breached the EU's Stability and Growth Pact, which limited deficits to 3% of GDP, and got away with it, there is no reason why they cannot adopt the same approach.

Meanwhile, with Germany also facing an early election in September and uncertain economic prospects, the spectre of budget deficits is likely to haunt continental Europe for some time to come.

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