Errants come under Ecofin’s fiscal focus

BRUSSELS (Reuters) – European finance ministers are likely to turn up the heat on Italy this week for failing to cut its budget deficit fast enough, but fellow fiscal rule-breaker Germany should escape more lightly, diplomats and officials say. The new Italian government’s budget plans, plus those of Germany, are up for review today when eurozone ministers hold talks which will also focus on the prospect of accelerating interest rate increases by the European Central Bank. With the eurozone economy growing healthily, ECB President Jean-Claude Trichet has given the impression that the next rate rise to head off inflation could come earlier than expected on Aug. 3. Italian Economy Minister Tommaso Padoa-Schioppa gets a first chance today to explain his mini-budget for 2006, deregulation plans and austerity measures needed to cut the fiscal shortfall below the EU’s ceiling of 3 percent of gross domestic product next year as promised. Padoa-Schioppa said on Friday he planned to lower the deficit to 2.8 percent of GDP next year from 4.0 percent expected in 2006 by cuts in health, pension, local and central government spending. Germany, which has exceeded the ceiling every year since 2002, has said its finances are looking better and it now expects a punishment procedure started by the European Commission against Berlin to be ditched. «Germany’s returning to the path of fiscal virtue will put pressure on other countries to do the same, including Italy,» an EU diplomat said. «They will no longer be able to say ‘Germany is breaking budget deficit rules, so we can do the same’,» added an official from the Commission, which is responsible for tracking adherence to budget rules in the EU Stability and Growth Pact. Germany and Italy have been given until the end of 2007 to get their deficits within the limit. German Finance Minister Peer Steinbrueck said this week his country was likely to bring its budget deficit below 3 percent in 2006. The federal budget cleared by the Cabinet on Wednesday envisages lowering the deficit to 2.5 percent of GDP in 2007.