Monday

24th Sep 2018

Does Italy need €14bn of EU budget waivers?

Two weeks ago, the European Commission agreed to relax Italy’s deficit-reduction targets, giving prime minister Matteo Renzi leeway to spend an extra €14 billion this year. But does the most indebted nation in the eurozone after Greece deserve such credit?

“No other member state has requested nor received anything close to this unprecedented amount of flexibility,” the economy and euro commissioners, Pierre Moscovici and Valdis Dombrovskis, wrote in a letter to Italian economy minister Pier Carlo Padoan two days before the commission’s decision.

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  • Turbulent times for Italian banks (Photo: Michelle Lee)

In Rome, the official newspaper of Renzi’s Democratic Party, L’Unita, hailed the news from Brussels with a mocking headline on its front page that said: “Auf Wiedersehen Austerity”. Il Foglio, a conservative daily that is also pro-government, wrote: “Can we say it? Yes we can. The fiscal compact is dead. Long live the fiscal compact!”. The fiscal compact is a set of EU budgetary rules agreed in the wake of the financial crisis.

More than half of the waiver granted to Rome - €8.2 billion - was a reward for its government having embarked on what is arguably Europe’s most ambitious reform agenda, encompassing legislation on the labour market, schools, the electoral system and a constitutional overhaul subject to approval by a referendum in October.

Another €4.1 billion have been earmarked for investment projects partly financed by the EU. The remaining €1.7 billion are to cover extra spending on migration and anti-terrorism measures.

A former premier and EU commissioner, Mario Monti, says Rome deserved no more than the €4.1 billion linked to investments, however. "What Italy has obtained with remarkable diplomatic skill is, in my opinion, not a positive thing," the economics professor said on 17 May. He warned that Renzi was going to squander the rest of the bonanza to “cut taxes in the hope of winning more votes”.

Budget concessions from Brussels come at a useful time. Big cities like Rome, Milan, Turin and Naples will be holding mayoral elections on Sunday (5 June) in which the prime minister’s Democratic Party risks embarrassing setbacks.

Referendum

More importantly, Renzi needs to stay on the right side of public opinion ahead of the referendum battle, as he has vowed to quit politics in case of a defeat.

The risk of losing for Italy’s big reformer is real: in a first opinion poll conducted by the Ixe institute on 25 March, the Yes vote on the referendum was leading 57-43 percent, but in the most recent survey, on 20 May, the No camp was ahead 52-48 percent.

With that in mind, Renzi has hired US president Barack Obama’s former advisor Jim Messina as referendum campaign advisor and has started touring the country to announce crowd-pleasing public works projects. In a recent example, he signed an agreement on 20 May to release €1.4 billion for metro and railway lines, highways, aqueducts and hospitals in Rome and its surrounding Lazio region.

Speaking on Thursday at the G7 summit in Japan, Renzi described himself as a “neo-Keynesian” and blamed Italy’s poor economic performance - its GDP has barely expanded for the past 15 years - on public investment cutbacks resulting from the austerity enforced by the EU.

Under his predecessors Monti and Enrico Letta, public spending on upgrading infrastructure fell to €20 billion per year, from €40 billion in 2007, Renzi said in Ise-Shima. "It's clear then that you should not be surprised if Italy's growth is stuck on 1, 1.1, 1.2, 1.3 percent rather than 2 percent, as we would like,” he said.

The latest economic forecasts from the EU Commission show Italy to be one of the slowest performers in the eurozone alongside Greece and Finland, with GDP projected to expand by 1.1 percent this year, five decimals of a percentage lower than the average for the single currency bloc. Last week, visiting experts from the International Monetary Fund concluded that it would take another decade for Italy to return to the levels of wealth it had before the 2008 global crisis.

Modest recovery

“Our economy has certainly restarted. But it is not enjoying a recovery. It is growing at a modest, disappointing rate which will not quickly take us back to pre-recession levels,” the new head of Italy’s business lobby, Vincenzo Boccia, said in his maiden speech on 26 May, in which he bemoaned the country’s slipping competitiveness.

“There are two numbers to keep well in mind: from 2000 onwards, total productivity in the economy has grown by 1 percent in Italy, versus 17 percent in our main European partners. On the manufacturing side, the gap is bigger: +17 percent here, +33-34 percent in Germany and France, +43 percent in the United Kingdom and +50 percent in France. This is the knot that needs to be untied,” Boccia said.

Francesco Daveri, an economist from the Sacred Heart University in Piacenza and a contributor to the well-known lavoce.info blog, said decentralised wage bargaining, less red tape, faster bankruptcy procedures were some of the things Italy needed to regain competitiveness. But greater government largesse may also have a role to play, he added.

“It would be suicidal to think that a country with public debt at 133 percent of GDP could spend its way out of trouble,” Daveri told EUobserver. “But not all forms of public investments are bad: if they serve to build infrastructure, then they don’t just increase aggregate demand, they also boost productivity”.

Tradition of waste

In a country where internet broadband coverage is still patchy and roads are often crumbly, especially in poorer southern regions, there is a case for putting public money to good use.

However, Italy has also a long tradition of government waste, corruption and Mafia infiltration that may prove sceptics like Monti right.

The EU Commission has asked Italy to start tightening its belt in 2017, and promised a fresh review of its books in November. The arrangement gives Renzi a clear run at least until the crucial referendum, and that seems to suit the high guardian of austerity in Europe - German finance minister Wolfgang Schaeuble - just fine.

Meeting foreign journalists on Thursday, he said: “The [commission’s] recommendations [on the Italian deficit] have not for now been discussed in depth [by Eurogroup ministers] but I have not heard any criticism [against them], and I have not made any.”

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