Countercyclical budget deficit growth could bring on a national credit crisis in the Eurozone that makes the current US situation look like child’s play.

This is their vulnerability that came with the Maastricht Treaty and has yet to be tested.

Italy Halves Growth Forecast, Sees Deficit Rising

by Flavia Krause-Jackson

(Bloomberg) The Italian government cut its 2008 economic growth forecast by more than half, as slumping confidence and rising prices threaten to brake expansion to the slowest among the 15 nations that share the euro.

The $2.2 trillion economy, Europe’s fourth-biggest, will grow 0.6 percent this year, the Rome-based Finance Ministry said today in a statement. That’s down from a forecast of 1.5 percent in December and would be the weakest rate of growth since 2005.

Italy may be the first and only country in the euro region to enter a recession this year and may have contracted in the fourth quarter, according to Morgan Stanley economist Vladimir Pillonca. Growth is slowing just as rising food and energy prices are fueling inflation and sapping consumer and business confidence.

“If you add to the mix an international situation that is now weaker than expected, this creates a real mess in a country where productivity was already declining,” said Luigi Speranza, an economist at NP Paribas SA in London.

Italy’s budget deficit will rise to 2.4 percent of gross domestic product, more than the 2.2 percent formerly predicted though still under the European Union ceiling of 3 percent. The shortfall narrowed last year to 1.9 percent of gross domestic product, the least since 2000, the Rome-based national statistics office said Feb. 29. That’s about half the 2006 deficit of 3.4 percent.

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