The end of austerity in Italy?

Letta, the European, will feel that austerity is easier than these supply-side reforms; Berlusconi, the populist, will feel that spending is easier than austerity. Who will prevail?

Does Letta have what it takes to tackle Merkel?
Tim Hedges
On 13 June 2013 11:27

Ask any international financier what he or she most wants to see and you will be told ‘stability’. Italy has rarely since the war been a haven of stability but now it is less so: everyone knows the government is temporary although there is a plethora of opinions as to what this means. Other countries have sly central bankers and smooth publicity machines; Italy, for better or for worse, wears its instability on its sleeve.

With the imposition of – perhaps I should say reluctant acceptance of – Enrico Letta as Prime Minister there was a nod towards stability but only of limited duration. Some said he was just there to pass a new electoral law, although he seemed to want to do more, but even president Napolitano has hinted that 18 months should be enough (he wants to retire himself).

Despite his enthusiasm, several commentators, including the Financial Times, have pointed to Letta’s ‘dithering’, but to be fair he has been somewhat stymied. President Hollande of France was to be the new leader of the anti-austerity movement, located around the southern nations. But Hollande has found his own position under fire, particularly from Germany but also from the IMF, and he seems to be backtracking, falling back on the old Franco-German axis.

So Letta is to be the new leader of the South, and the Corriere della Sera cartoon had him as a boxer, with Berlusconi as his trainer saying ‘his next fight will be with Merkel’. But Letta isn’t cut out for this. He is from the mould of the European political class and likes consensus. And the consensus in Berlin and northern Europe is that Italy should stick to its agreements on spending.

Italy’s political instability is being played out against a backdrop of financial crisis. At first the population could see the need for austerity – they knew something was wrong and almost relished the medicine prescribed by its three doctors in Brussels, Frankfurt and Berlin. Or at least they kept with the doctors. The mood in Italy now is that they have done the suffering, so where are the results?

Discussion of the austerity programme’s validity was at first just a matter for economists, but there have been three upheavals this year. The first was the IMF accepting that the ‘multiplier’ was higher than thought in times of low inflation and low interest rates. This multiplier is the amount by which a reduction in spending turns into a reduction in GDP. At first it was thought that GDP would be only minimally affected as the diversion of resources from public sector to private caused the economy to grow. Greece tells us that isn’t the case.

The second arm of the argument for austerity was the Reinhart-Rogoff paper, which warned that debt levels above 90 percent of GDP themselves caused recession. This has been exposed by the most simple analysis: it contained a spreadsheet error.

Lastly, there was the IMF’s statement last week that the bailout of Greece had been botched for political reasons. France and Germany (it implied) have such huge holdings of Greek bonds that Brussels was forced not to permit a write-down of the debt, causing more austerity which this week saw the state broadcaster taken off the airwaves.

Hitherto the stuff of the Financial Times, or Italy’s equivalent, Il sole 24 Ore, these developments have filtered into the ears of those politicians who would listen, into the ears of local politicians, and into bars and homes. Even an elderly contadino will tell you that austerity doesn’t work and, perhaps less reliably, that he never thought it would.

Berlusconi, as the noisiest arguer against austerity, was the first to benefit from this change. Until recently all the polls said that if there were a general election tomorrow he would win. But Silvio has been undone by the turmoil in Beppe Grillo’s 5-star movement. This revolves around the autocratic nature of its founder, but in particular his refusal to involve himself with the other parties. Many of his parliamentarians want to form groups, little coalitions, so they would feel a part of the political process: coalitions are all they know, and despite Grillo’s insistence that intellectual honesty is better than grubby dealmaking, they and their supporters are fractious.

So at the recent municipal elections the centre-left surged ahead, buoyed by defections from Grillo. They took all the main municipalities and in Rome, as well as unseating the mayor, Gianni Alemanno, took all the individual wards as well. All this under the quiet, temporary leadership of trade-unionist Guglielmo Epifani. Berlusconi knows that in the future he is likely to come up against the fresh-faced Matteo Renzi, 38, who has that touch of charisma that suggests a winner.

So Silvio is reorganising his party. It will be leaner and fitter, given the gradual removal of funding for political parties, and will have a new, smaller, head office (the previous one was in Humility St in Rome). There are stories that it will be headed by a woman. An obvious choice might be his daughter, Marina, but that might be unpopular. There is talk of promotion for the party spokesperson, Anna Maria Bernini.

But what is the future, if not austerity? Narrowing the productivity gap with Germany is the goal, so that more jobs come to Italy; the repeal of Article 18, which makes it almost impossible to make layoffs; temperance with Health and Pensions which are better than country can afford. The mafia is a barrier to competitiveness, as is the sclerotic legal system which might take five years or more for a company to sue out on a bad debt. The closed shop professions need to be liberalised; income taxes need to be reduced. Politics needs to be reformed.

But these are difficult, upsetting various vested interests. Letta, the European, will feel that austerity is easier than these supply-side reforms; Berlusconi, the populist, will feel that spending is easier than austerity. It is a question Mr. Renzi must answer.

Tim Hedges had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer

blog comments powered by Disqus