Italy has problems - big problems

With Italy we are not just talking about a billion here, a billion there; a monetary and fiscal fix. Italy has problems

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Growth is a real problem for Italy
Timwork
Tim Hedges
On 17 May 2013 10:34

“It is not possible to have just a Europe of austerity…The EU must be different and it must act differently”. These are words you could never have heard from a public figure in Europe (outside Britain) until recently. For them to come from the sharp-suited Emma Bonino, Minister for Foreign Affairs in the Letta government and former European Commissioner, is staggering.

“Not everyone has understood,” she went on, “the political costs of a Europe as it is today”. She was warning, effectively, that the policies pushed by the Germans, the Central Bank, and the European Commission might threaten Europe’s social fabric.

She was speaking to the Parliamentary Foreign Affairs Commission, shortly after the government had returned from a retreat in a Tuscan abbey near Siena (Letta made them pay their own way). It will have been an agreed stance.

The speech came on the day that Italy announced a further contraction in its Gross Domestic Product of 0.5 percent for the first quarter of this year. The backdrop to this figure is depressing: Germany managed spluttering growth of 0.1 percent, having contracted by 0.7 percent in the last quarter of 2012 and amidst reports that it is failing to invest in its manufacturing industry. France returned to recession and Spain matched Italy with a 0.5 percent drop. The economies of the Netherlands and Portugal also shrank.

In a Europe where over the years, for political reasons, EU countries have been encouraged to trade with each other, recession breeds recession. And this is the longest recession since the start of the single currency; each unemployment figure is a new record.

But in Italy the problem is more serious: the last time the economy showed any growth was in the early months of 2011, although it shrank for 2011 as a whole. And in the ten years to 2011 annual average GDP per head grew 4 percent in Poland, 1 percent in the UK and Germany, 0.5 percent in France and negative 0.1 percent in Italy, worse than Portugal or Greece. The Italians have been getting poorer for more than a decade.

So what are Bonino’s plans? What came out of the Conclave of Siena? Letta’s agreed policy is that there should be the spending cuts designed by Monti but also tax cuts. The first of these, insisted on by Berlusconi, is the cut in the new property tax. This is not ideal – reduction of employment taxes would have been better, since at present it costs more to employ an Italian than a German – but it does put some money into the pockets of some people (property owners).

Next on the list is speeding up the delayed payments to private sector companies; told to slim down, the public sector kept its extravagances and stopped paying its bills. Lastly there is Monti’s proposed VAT increase to take place in July. This of course would take money right back out of the people’s pockets. To cancel this would require €2 billion. And Letta has been told he is not to go back on his deficit commitments; he must emerge from, and stay out of, the European Commission’s excessive deficit procedure.

After that, it is not to be forgotten that Berlusconi has said he will bring the Government down unless all the property tax is cancelled, not just the 50 percent payment due in June. More money will have to be found, and it seems unlikely that with other commitments to supporting the unemployed (there is no unemployment benefit in Italy, merely a social fund), all of which total around €12 billion, Letta would have to persuade Brussels and Berlin to close its eyes to the deficit for the next few years.

But will even that be enough? With Italy we are not just talking about a billion here, a billion there; a monetary and fiscal fix. Italy has problems: it has not grown since the introduction of the euro; it has not grown this century.

The problems are easy to see and add up to a heady brew of economic hemlock. The post war settlement, determined not to allow power to rest in the hands of a sole person, produced weak governments. Weak government produces compromise, amongst the centre and by paying off the strong communist movement. These compromises left the country with an elite which didn’t want to be removed and a growing sense of entitlement within it. MPs, without a shred of shame, have voted not to reduce their salaries or their perks. Compromises with the extreme left allowed a law which makes it almost impossible to lay off workers when times are bad.

Still, in the 21st century, more than a half of all jobs in the public sector are filled by ‘raccommandazione’ – a nod from a friend or relative. The justice system takes years to resolve a simple trade dispute, much less something of the complexity of the allegations against Berlusconi. Yet there are more lawyers in Rome than in the whole of France.

And it is here, concerning structural changes to the nation, that Letta’s position is weak. An obvious plan would be to denationalise swathes of industry; but each shareholding, in the electricity company, the oil company, the telephones, the post office, is someone’s power base. That someone has friends, protectors in the big parties, who don’t want to change. Why would they?

Letta’s hope is to get the economics right and expose the structural rigidities to the light of public scrutiny. The economy is forecast to contract 1.5 percent for 2013 as a whole (they had been forecasting a return to growth), but to grow by 0.4 percent in 2014. I personally wouldn’t put any money on this, at least for the first half of 2014.

But the polls show 55 percent of Italians support President Napolitano and 60 percent support Mr Letta. In the event of a general eneral election, however, they predict a majority for Berlusconi. The markets, meanwhile, have shown some confidence, bidding Italian debt interest rates down to record lows.

But this is Mr Letta’s honeymoon period, there is possibly bad news coming for Mr Berlusconi, and the markets are fickle friends. Nothing is certain for Italy.

Tim Hedges is a weekly columnist for the Commentator. He previously worked in corporate finance before moving to Rome where he works as a freelance writer and novelist

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