Draft EU Report Attacks Italy on Economy

The technocratic government of Mario Monti has made significant progress towards overhauling Italy’s economy since it came to office last year, but has not done enough to combat tax evasion and the country’s sizeable black economy, an EU finding to be released this week has determined, the Financial Times reports.

Mario Monti
Alessia Pierdomenico | Bloomberg | Getty Images
Mario Monti

The European Commission report, which is still in draft form and was obtained by the Financial Times before its publication on Wednesday, carries significant weight under new EU rules that give Brussels the right to fine and sanction eurozone countries that do not follow its recommendations.

Officials warned that the 29-page analysis and accompanying six pages of policy recommendations could still be changed, particularly after the full 27-member Commission reviews the findings on Wednesday.

Indeed, portions of the draft obtained by the FT show edits and strike-throughs that appear to be attempts to water down some of the report’s harder-hitting findings. A section that states “no significant measure has been taken to efficiently address” the high levels of off-the-books employment has been struck out. So has a line insisting “still insufficient progress has been made in improving the recovery of unpaid taxes”.

Regardless, even unedited portions of the report make clear that “undeclared work” and the “shadow economy”, as well as “significant tax evasion”, are the areas the EU sees as the unfinished business of Mr Monti’s year-long administration. The findings were first reported by the Italian daily La Stampa.

“Italy has been implementing a bold fiscal consolidation strategy,” the report states, citing areas where Mr Monti has taken the initiative after the more incremental reforms of his predecessor, Silvio Berlusconi, particularly recently introduced labour liberalisation. “Notwithstanding these important achievements, the full implementation of the adopted measures remains challenging, especially when it requires the co-operation of many actors, and there remains scope to progress further in the reform agenda.”

The report, one of 14 country-specific recommendations for eurozone countries not in bailout programmes that will be published on Wednesday, comes at an awkward time for Mr Monti, with momentum towards his reform efforts slowing at home and mounting concern abroad that he will not be able to complete long-needed overhauls before he leaves office at the end of the year.

The section on tax evasion could be particularly embarrassing, as Mr Monti has made a crackdown on tax cheats one of the most high-profile initiatives of his tenure.

Despite the strong language, the Italian report is not expected to be the toughest. According to officials who have read the reports, Spain will come under particular scrutiny. EU officials have been debating whether to grant Spain more time to hit tough deficit targets in the findings, but the Spanish government has resisted – arguing it would send the wrong message to the financial markets – and officials said such easing is unlikely to be included.

Some sections of the Italy report are full of praise, making clear Brussels believes Mr Monti has gone much further than Mr Berlusconi would have. It says the government’s current “fiscal consolidation strategy” – euro-speak for austerity measures – is “a more ambitious plan than the one presented” last year, when Mr Berlusconi was still in office.

Still, the report warns such austerity “may depress domestic demand and growth in the short term”.

In addition to the 14 reports on eurozone members without bailouts, the commission will also issue policy recommendations for the 10 non-euro members of the EU. Those reports carry less legal weight, however, since non-eurozone countries are not subject to the same punishment procedures as euro countries.