by Eric J. Lyman
ROME, Sept. 23 (Xinhua) -- Italy's recent revision of its deficit-to-GDP ratio up at 3 percent is likely to come under increased scrutiny after the strong showing in weekend voting for Chancellor Angela Merkel.
Analysts in Germany said the stronger-than-expected result at the polls will likely bolster Merkel's status as the dominant political figure in the European Union (EU), where her prescription of austerity and pan-European solidarity is the increasingly standard policy for confronting European debt woes.
That could be bad news for Italy, which ten days ago upped its estimate for its government budget deficit as a percentage of the country's gross domestic product to 3.0 percent from 2.9 percent previously. The EU caps the deficit-to-GDP ratio for countries using the euro currency at 3.0 percent, giving the country no margin for error while a stronger-than-ever Merkel keeping tabs on.
"Under other circumstances, Italy may have had more leeway," said Hildebrandt and Ferrar economist Javier Noriega. "But after Merkel's showing, Italy will have to abide by both the letter and the spirit of the law."
That could be difficult, given the circumstances. Italy's National Statistics Institute, ISTAT, now predicts the country's economy will contract by 1.7 percent this year. But it has revised that figure downward twice already (the previous estimate was a 1.3 percent contraction, from April) and a further downward revision could push the deficit above 3.0 percent of a diminished GDP even if tax revenue remains on track.
At the same time, it is still far from certain tax revenue will remain on track: the Enrico Letta government earlier this month eliminated the controversial IMU property tax -- a move that won it popular support but leaves a budget shortfall of at least 5 billion euros (6.75 billion U.S dollars) that it has so far failed to say how it will replace. Meanwhile, extra revenue from efforts to force corporate and individual tax evaders to pay their share has slowed since mid-year.
Despite those problems, the Letta government has done its best to show it is serious about keeping its deficit within the allowed limits. When the deficit estimate was raised to 3.0 percent, on Sept. 13, Letta vowed not to let it rise further: "We must be credible," he said. "If we are not, nobody will buy our bonds."
More recently, Economy Ministry Undersecretary Pier Paolo Baretta told reporters on Friday that Italy will do "whatever is needed to stay within the 3-percent limit," and Baretta's boss, Economy Minister Fabrizio Saccomanni over the weekend said he would quit if the 3-percent cap was breached. If Saccomanni quit, it would be a blow to Italy's credibility on international financial markets.
Saccomanni was speaking in the context of a movement within the Letta government to further slash taxes, a move that would almost certainly push the deficit above 3.0 percent of GDP. Such a move would be a kind of political defense, perhaps boosting the government's popularity enough that it would be positioned to withstand a loss of support of some allies of Silvio Berlusconi, the former premiere definitively convicted of tax fraud and false accounting.
Parliament is currently debating whether or not to strip Berlusconi of his Senate seat, and some of Berlusconi's supporters say they'll withdraw from the coalition behind the Letta government if Berlusconi's seat is taken (Berlusconi has stayed away from such threats in recent statements, however).
But Saccomanni said such concerns are not a factor in his view of the situation.
"The government's promises must be kept; if they are not, I will not stay," Saccomanni said. "I must defend my credibility, and I have no political ambitions to consider."