Italy has been warned by the European Commission to remedy persistently low growth and address its high public debt in its upcoming budgets. In a 30 May report that forms part of the EU’s stepped-up screening system for national budgets, the Commission has urged Rome to crack down on tax evasion and free up the jobs market for younger people and women. “Italy is faced with the twin challenges of a very high public debt and persistently low growth,” the Commission’s report says. “These challenges long pre-date the global financial crisis and largely explain investors’ mounting concerns with the sustainability of Italy’s public debt in an environment characterised by high risk aversion.”

Italy’s public debt of 120% of GDP is the second highest in the EU after Greece. Successive governments have announced a series of sweeping budget cuts after financial markets rounded on the country’s banks and sovereign bonds last summer. The Italian economy is expected to shrink by 1.4% this year as the economic reforms and budget cuts kick in, but growth should stabilise later this year, as long as government bond yields - the amount investors charge Italy to buy its debt - remain below 6%, commonly considered a trigger level beyond which public debt becomes unsustainable.

Italian interim Premier Mario Monti has pledged to cut Italy’s deficit - which stood at 3.9% of GDP last year - to below 3% by the end of this year, and wants to balance the budget by 2014. Italy has also been singled out as part of a separate economic imbalances procedure, with Economic Affairs Commissioner Olli Rehn saying it faced “serious imbalances” as a result of a decade of dwindling competitiveness and poor export performance (see separate article).