(c) 2014, Bloomberg News.

(c) 2014, Bloomberg News.

ROME Italy's new government under Prime Minister Matteo Renzi faces a "major challenge" in achieving strong growth and lowering its public debt, the European Commission said Wednesday.

"Italy has to address the very high level of public debt and weak external competitiveness," the Brussels-based commission said in a report on the EU member countries' economic imbalances. "Both are ultimately rooted in the protracted sluggish productivity growth and demand urgent policy attention."

Italy's public debt rose to 2.07 trillion euros ($2.84 trillion) or 132.6 percent of gross domestic product last year, from 127 percent in 2012, national statistics office Istat said on March 3. Italy has the second-biggest public debt as a percentage of GDP among the 18 euro countries.

"High public debt puts a heavy burden on the economy, in particular in the context of chronically weak growth and subdued inflation," the European Commission said. Reaching and sustaining high primary surpluses and robust GDP growth "for an extended period, both necessary to put the debt-to-GDP ratio on a firmly declining path, will be a major challenge."

The Italian government's agenda is in line with the commission's recommendations and the Cabinet is determined to address issues like high payroll taxes which are having a negative impact on the economy, the Rome-based Treasury said in a statement.

The euro area's third-biggest economy has lagged behind its peers in the euro region for more than a decade as consumption fell, aggravating the effects of waning productivity and competitiveness. Italy's economy shrank 1.9 percent last year as exports failed to offset the effect of weak domestic demand. The gross domestic product's fall followed a revised decrease of 2.4 percent in 2012.

The budget deficit was unchanged at 3 percent of GDP in 2013.

"We want to encourage the new Italian government to take rapid and effective action to unleash the formidable growth potential of Italy and at the same time address the issue of the high level of public debt in the country," European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today.

Italy will expand this year 0.6 percent, less than the 0.7 previously projected, the EU executive arm said last month in its winter forecast. The commission also expects Italy's deficit to fall to 2.6 percent of GDP in 2014.

"The adjustment of the structural balance in 2014 as currently forecast appears insufficient given the need to reduce the very large public debt ratio at an adequate pace," the commission, the 28-nation European Union's regulatory arm, said in Wednesday's report.

Next week the Italian government plans to pass new measures to help the country's labor market and housing sector, Prime Minister Renzi said at a televised event in Syracuse, Sicily. The new legislation will be presented at a press conference in Rome on March 12, the premier said.