EU warns of euro ‘spillovers’ from Italy problems

BRUSSELS (Reuters) – Debt-laden Italy’s financial stability is at risk from possible interest rate increases and from recent government measures, the European Commission said on Wednesday, warning of a risk that could spill over into the whole euro zone.

“Given its systemic importance, Italy is a source of potentially significant spillovers to the rest of the euro area,” the EU executive said in an annual set of economic policy recommendations to Italy and the other EU member states.

Negotiations in Rome to set up a new government of anti-establishment and eurosceptic parties have raised concerns in Brussels and the rest of the Union about future Italian policy but the Commission’s report did not address such hypotheticals.

It did, however, ram home existing concerns about the state of the Italian economy, although senior Commission officials told reporters they had no plan to institute euro zone penalty procedures over Italy’s high public sector debts.

Nonetheless, in their report, the Commission said “medium-term sustainability risks remain high as structural primary surplus is insufficient to bring about a rapid decrease in public debt”.

“Long-term fiscal sustainability is weakening too due to recent policy measures and adverse demographic trends,” it added, warning that any reversal of pension reforms would lead to an increase in debt.

“Risks may emerge if the current accommodative monetary policy stance were to be reversed.”

“As the third largest economy in the euro area, Italy is a major source of trade and financial spillovers,” the report said. “Moreover, Italy’s economy maintains strong financial linkages to other euro area countries. In particular, French banks remain in the lead.”

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