Italy needs consolidation and economic growth to tackle debt: IMF

By Jan Strupczewski

BRUSSELS (Reuters) - Italy can only bring down its large public debt only if it combines reasonable fiscal consolidation with economic growth, the head of the International Monetary Fund's European department Poul Thomsen said on Tuesday.

The new Italian government coalition of the anti-establishment 5-Star Movement and the center-left Democratic Party (PD), will have to prepare a draft 2020 budget for the scrutiny of the EU executive arm, the European Commission, by Oct. 15th.

The Commission is carefully watching Rome's fiscal plans: in May it forecast an expected public debt of more than 133% of GDP this year and more seen next year unless policies change, putting Italy in breach of EU fiscal rules that say debt must fall every year.

"Italy has had a very long period of very low growth, low productivity and that is the overarching issue facing Italy: how to boost productivity," Thomsen told Reuters in an interview.

"In addition there is the fiscal issue, Italy needs to undertake fiscal consolidation, but I am no means arguing that Italy can bring down its debt through fiscal consolidation - it has to grow," he said.

To boost growth, Italy's new ruling coalition plans to raise its budget nominal budget deficit to around 2.3% of GDP next year from 2.04% this year, sources told Reuters, in a move that could boost debt and antagonize the Commission.

Thomsen said that while Italy's bloated public accounts made fiscal stimulus more problematic, a credible package of structural reforms and gradual fiscal consolidation could work.

"I am less concerned about the size and the timing (of such a package), it is a question of a fiscal strategy that is credible, that shows a political commitment over the medium term to gradually tackle the fiscal problem," he said.

"That is what we need to underpin confidence and ensure that yields stay at a reasonable level over the medium term," he said.

Italy's benchmark 10-year bond yields have fallen from around 3.5% late last year when Rome was fighting the Commission over its spending plans to below 1% earlier this month, but Thomsen said that without a medium-term plan to tackle its problems, Italy did not have a lot of leeway to borrow.

"For me the question of whether you have fiscal space depends critically on the extent to which you have a credible medium-term fiscal program," Thomsen said.

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"You have much more fiscal space if you have a policy for tackling your structural problem, including your fiscal structural problem over the medium term," he said.