The European Commission’s assessment of the state of the Italian economy lacks macroeconomic plausibility. Fiscal policy recommendations need to change.
- The European Commission’s recommendation for starting an excessive deficit procedure against Italy is based on the controversial technocratic assessment that Italy’s economy is not really in deep crisis.
- This assessment builds on the Commission’s model-estimations of the so-called ‘output gap’, which is estimated to be very low.
- Low output gap estimates lack macroeconomic plausibility: slack is still substantial as unemployment remains above 10%, youth unemployment is above 30% and headline inflation is too low at 1%.
- The Commission’s recommendations on Italian fiscal policy would need to be different if the degree of underutilization of economic resources in the Italian economy was estimated to be higher.