Italy Gets Unofficial EU Nod for Stimulus to Combat Virus

(Bloomberg) -- The European Union will lend a sympathetic ear to Italy's plans to boost spending in response to the coronavirus.

Faced with Europe's largest outbreak, the Italian government announced 3.6 billion euros ($4 billion) of stimulus to counter the virus-induced slump. The economy was already headed for a recession after contracting at the end of last year.

“It is a proportionate response to the emergency,” Economic Affairs Commissioner Paolo Gentiloni said Monday in Brussels. “We will consider the Italian request, which is for sure based on these extraordinary circumstances and we will consider this in the spirit of solidarity and understanding of the situation.”

Italy has almost 1,700 confirmed cases and its economic engine in the north was brought almost to a standstill by contagion prevention measures. Air carriers including Delta and United Airlines have suspended flights to Milan, the country's financial hub, and several countries have advised to avoid travel to Italy.

Making the government's task somewhat easier is the country's better-than-expected performance in 2019. The fiscal deficit fell to 1.6%, the lowest since 2009, and the economy expanded 0.3%, slightly above an initial estimate.

Despite sluggish growth, tax revenues rose 2.8% in 2019 due to a government effort to reduce tax evasion. Some 3.4 trillion euros of transactions have been processed since the introduction of compulsory electronic invoicing last year, according to the latest data.

The 3.6-billion-euro program announced by Finance Minister Roberto Gualtieri on Sunday comes on top of relief measures worth some 900 million euros for the hardest-hit areas. As many as 650 million euros, some of them already budgeted, will be spent to help Italian exports.

Still, saddled with debt of 135% of gross domestic product, Italy remains Europe's economic weak link, and the stimulus measures will be constrained by the precarious state of its finances. The spread between Italian and German yields rose to the highest level since August on Monday.

“It's not hard to envision a scenario in which public debt rises to 140% of GDP in coming years,” Dennis Shen, lead analyst for Italy at Scope Ratings, said in a client note. “The recent increase in government financing costs related to growing concerns over the arrival of the Covid-19 virus in Italy alongside a ‘risk-off' mood in markets also do not support debt sustainability.”

--With assistance from Alberto Brambilla, Viktoria Dendrinou, Giovanni Salzano, John Follain and Zoe Schneeweiss.

To contact the reporter on this story: Alessandro Speciale in Rome at aspeciale@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Catherine Bosley

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