European Commission says Italian economy one of EU's most at risk

By Francesco Guarascio

BRUSSELS (Reuters) - The Italian economy is one of the most at risk in the European Union because of its large debt and weak banking sector, the European Commission said on Wednesday in a recurrent warning that may resonate strongly after Italy's inconclusive elections.

As part of its regular monitoring process of European economies, the EU executive said Cyprus and Croatia were the other member states which, alongside Italy, were facing "excessive" economic imbalances.

Eight other states, including France and Germany, had less acute shortcomings.

Italy's woes, although not new, may become more serious as it embarks on likely lengthy negotiations to form a new government after elections on Sunday delivered a hung parliament and boosted anti-austerity forces.

While the European economy is growing at a sound pace, some countries remain exposed to risks if they do not carry out structural reforms, the Commission said.

Bulgaria, France, Germany, Ireland, the Netherlands, Portugal, Spain and Sweden need to address economic shortcomings.

The commission noted that France under the presidency of Emmanuel Macron had made progress on several fronts "including labour markets and taxation," which warranted Brussels' decision to de-escalate its warning to Paris. Last year France was listed among the countries with excessive imbalances.

Bulgaria and Portugal, whose finance minister Mario Centeno leads the Eurogroup of eurozone finance ministers, also received a softer warning compared to last year.

Slovenia has been removed from the list of countries experiencing imbalances.

Germany, the bloc's largest economy, was reminded that its "persistently high current account surplus has cross-border relevance and reflects a subdued level of investment," the commission said reiterating a warning that has become a leitmotif over the past years.

ITALY

In the case of Italy, "high government debt and protracted weak productivity dynamics imply risks with cross-border relevance," the EU executive said.

Italy's giant public debt, one of the largest in the world, is set to stabilise but is not expected to decrease, as required under EU rules.

The Commission welcomed recent reform efforts, especially in the banking sector, by Italy's outgoing government which set aside funds to recapitalise weak lenders.

But the high amount of bad loans on the balance sheets of Italian banks remain a major vulnerability, as well as high unemployment.

The Commission's report also noted that "the reform momentum has somehow slowed," although it avoided direct comments on any possible impact of the vote.

EU states are required to submit to Brussels their annual budgetary plans by the end of April, but Italy is unlikely to have a new government by then.

"We will need to see what is the state of play in the formation of the government because we recognise that interim governments may not have full budgetary authority to come forward with proposals that will affect the incoming governments," the commission's vice-president Valdis Dombrovskis told a news conference.

"In this case we are accepting documents under the so-called no policy-change scenario," Dombrovskis added.

(Reporting by Francesco Guarascio; editing by John Stonestreet)