Italy escapes EU warning by pledging budget cuts

Italian Prime Minister Silvio Berlusconi escaped a humiliating budget warning yesterday after promising European Union finance ministers a package of budget cuts.

Standing in for ousted Economy Minister Giulio Tremonti, the Italian premier laid out plans for €7.5 billion of measures this year to keep Rome's deficit below the EU cap of three per cent of gross domestic product.

This was good enough for EU finance ministers, whose only caveat was that Rome had to ensure any tax relief measures should be financed by savings in public spending and speed up debt reduction.

"The commitments of a prime minister are very important ones so we have to give credibility to the ones of Mr Berlusconi," said European Monetary Affairs Commissioner Joaquin Almunia.

Mr Berlusconi offered up €5.5 billion worth of spending cuts and tax measures, and topped it up with one-off measures worth a further €2 billion. The package is expected to be put to the Italian cabinet in the next 10 days.

The political ructions that led to Mr Tremonti's departure at the weekend prevented the Italian cabinet from discussing the proposals but Mr Berlusconi assured finance ministers he would face no problems in winning such backing.

He welcomed the finance ministers' decision: "It is a good result as I had predicted."

Still, Rome is likely to need more austerity next year, according to Dutch Finance Minister Gerrit Zalm, who is the chairman of euro zone and EU finance ministers' meetings.

"There will also be a need for measures in 2005," he said. The Commission has forecast that Italy's budget deficit will hit 3.2 per cent of GDP in 2004 and four per cent in 2005.

Italy, the euro zone's third biggest economy, follows in the footsteps of Germany and Portugal, which escaped warnings in 2002 and had been assured of equal treatment even before the meeting of euro zone finance ministers kicked off.

Germany, which went on to break the EU deficit cap in 2002, has pledged every year since then to rein in its fiscal shortfall but is seen surpassing the limit again in 2004. France has matched that record.

Mr Zalm said Germany and France had both reaffirmed to the meeting that they would abide by commitments they made in November to rein in their budget deficits.

EU finance ministers also proceeded with budget disciplinary action against Greece, which broke the EU deficit limit in 2003.

"We congratulated Greece on winning the European football championships and then immediately went into the excessive deficit procedure," said German Finance Minister Hans Eichel.

"That's finance ministers' special way of expressing congratulations," he quipped.

They approved the medium-term budget plans of the 10 states that joined the EU in May and endorsed budget disciplinary action against Cyprus, Czech Republic, Hungary, Malta, Poland, and Slovakia, which broke the EU deficit cap last year.

Euro zone ministers also launched a more general discussion on how to improve economic policy coordination, a topic close to the heart of the Commission as it works on revamping the EU's budget rulebook, the Stability and Growth Pact.