Sunday

25th Jun 2017

Opinion

Italy: Is there a way out of the woods?

  • Failing to reform, Italy may have to plan for a future outside the single currency (Photo: The Council of the European Union)

Following recent market panic, the European Central Bank’s (ECB) decision to step in and buy Italian bonds has given Rome some breathing space. Market fears were driven by a frightfully simple prospect: if Italy, the EU’s fourth largest economy, goes, so does the euro.

To avoid the worst, Italy now has one, possibly final, chance to push for radical economic reform and break its chronic growth problem. Failing this, Silvio Berlusconi & Co. may have to plan for a future outside the single currency.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

Italy’s economic problems have been well documented: a gigantic public debt coupled with an embarrassingly low growth rate and an ageing population. These problems are not new - they are structural.

The current period of relief may prove short-lived since the ECB’s lifeline comes with a likely cut-off date. Italy is simply too big to bail. With its gigantic €1.8 trillion public debt, neither the ECB nor foreign governments can guarantee Italy’s finances in the long-term.

To shelter Italy from the markets, eurozone taxpayers would have to underwrite hundreds of billions of Italian public debt, either via the ECB or the EFSF (the eurozone’s bailout fund). An increase on that scale would face insurmountable opposition in the German, Dutch, Finnish and Slovakian parliaments.

This means that, for all the talk of European solidarity, Italy is left to its own devices. But it won’t be easy. Italy is stuck in the all too familiar situation of having an overvalued currency and inappropriate interest rates (ideally they should be close to zero now, not the ECB’s 1.5%) due to the single currency’s one-size-fits all monetary policy. Therefore, it needs to cut deeper and harder than, say, the UK to convince markets of the long-term viability of its debt burden – the unfortunate cost of sharing a currency with the likes of Germany.

So can Italy get back on the path to economic growth and show the world that it belongs inside the eurozone? Well, the game isn’t up for Palazzo Chigi quite yet - but time is quickly running out.

Pressured by both the ECB (who wanted some concrete austerity measures in return for buying Italian bonds) and the markets, Berlusconi and the Economy Minister Giulio Tremonti have committed to achieving a zero deficit by 2013 rather than 2014 as originally planned, through additional savings worth €45.5 billion. This is welcome, but now the key is to first get this new austerity package adopted by the Italian parliament and then, most importantly, implement it properly and push for pro-growth reforms. As we know all too well from Greece, it’s one thing to pass an austerity package - another to put it into practice.

Colossal challenges

If Italy is to get out of the woods, several things need to happen - and all of them throw up colossal challenges.

Berlusconi has to go: His premiership has descended into farce and his coalition government gets wobblier by the day, hostage to the sometimes ludicrous demands of the Lega Nord. When he addressed Italian MPs on the eurozone crisis, Berlusconi looked tired, powerless, sometimes disoriented. Unfortunately, Il Cavaliere seems determined to stay. Everyone will be the worse for it.

But Italy’s future is on the centre-right: Alas, the opposition is not in much better shape than Berlusconi’s rag tag coalition, with any centre-left government likely to have to rely on several small post-communist parties to get a majority in parliament - hardly a recipe for the successful labour market liberalisation that Italy so desperately needs.

Get the regions on board: The two austerity packages unveiled in less than a month have been with resistance from Italy’s regional administrations, which will be heavily affected by the proposed cuts to transfers from central government. As in Spain, a strategy needs to be put in place to convince the regions that these cuts are necessary.

Freeing up the labour market is essential: Radical reform of the labour market should be the top priority for any Italian government. Firing and hiring simply has to become far easier, which in turn lowers barriers to entering the job market. In addition, the tax burden on businesses should be reduced, particularly on SMEs where Italy’s economic strength lies. At the end of the day, Italy cannot live on austerity alone. It’s these kinds of reforms that will win investors’ confidence.

Stay the course: Having decided to bring forward the balanced budget target, the Italian government will most likely need to further dip into pensions. This is a huge challenge which will make the government even less popular. The opposition is now pushing the narrative that Italy is under the thumb of the EU, with key decisions being taken not in Rome, but in Berlin, Frankfurt and Brussels. As elsewhere in Europe, such a message is political dynamite. But the government needs to stay the course. If there’s one advantage to Berlusconi’s growing unpopularity, it’s that he can push through the necessary reforms.

There are a range of other things that need to happen. Not least, there needs to be a way to boost domestic demand, particularly with Italian exports losing ground on the world stage.

Will all these reforms take place? We shall see. But both Italy and Europe need to be fully aware of the consequences of Rome failing to deliver deep-rooted and necessary change. It’s time to finally bite the bullet or Berlusconi may soon have to add yet another, less than flattering point of note to his CV: bringing down the eurozone.

The author is a researcher at Open Europe, an independent think-tank based in London and Brussels, which calls for reform of the EU

Berlusconi pep talk struggles to persuade markets

Italy's Prime Minister Silvio Berlusconi on Wednesday sought to allay market fears about a potential default. But some experts say the country's fiscal position is unsustainable.

Berlusconi struggles to implement austerity measures

Italian Prime Minister Silvio Berlusconi on Monday agreed to scrap a controversial wealth tax and to limit the cuts to regional governments, raising questions about the government's ability to implement a €45 billion austerity package.

A positive agreement for Greece

The outcome of the Eurogroup meeting this week leaves a positive footprint, setting the basis for the Greek economy to exit the vicious circle of austerity and debt.

Britain preparing to jump off a cliff

Following the poor performance of Theresa May's Conservatives in the recent UK general election, her prospects of negotiating a good Brexit deal have gone from bad to worse.

Forcing refugees on Poland will do more harm than good

While the principle behind the EU's decision to take action against Poland for rejecting its refugee quota is understandable, the move could have damaging long-term consequences while bringing absolutely no benefit at all.

Are MEPs too 'free' to be accountable?

The European Parliament is currently fine-tuning its negotiating position on the Commission's proposal from September 2016 for a mandatory transparency register. Sadly, so far it seems to prefer empty statements to bold action.

News in Brief

  1. Merkel and Macron hold symbolic joint press conference
  2. Juncker has 'no' clear idea of kind of Brexit UK wants
  3. Belgian PM calls May's proposal on EU citizens 'vague'
  4. UK lacks support of EU countries in UN vote
  5. Spain to command anti-smuggler Mediterranean force
  6. Estonia confirms opposition to Nord Stream 2 pipeline
  7. Ireland and Denmark outside EU military plan
  8. EU leaders renew vows to uphold Paris climate deal

Stakeholders' Highlights

  1. EPSUOn Public Services Day, Stop Austerity! Workers Need a Pay Rise!
  2. EGBAOnline Gambling: The EU Court Rejects Closed Licensing Regimes In Member States
  3. World VisionFaces of Today, Leaders of Tomorrow: Join the Debate on Violence Against Girls - 29 June
  4. ECR GroupThe EU Must Better Protect Industry from Unfair Competition
  5. Malta EU 2017Better Protection for Workers From Cancer-Causing Substances
  6. EPSUAfter 9 Years of Austerity Europe's Public Sector Workers Deserve a Pay Rise!
  7. Dialogue PlatformGlobalised Religions and the Dialogue Imperative. Join the Debate!
  8. UNICEFEU Trust Fund Contribution to UNICEF's Syria Crisis Response Reaches Nearly €200 Million
  9. EUSEW17Bringing Buildings Into the Circular Economy. Discuss at EU Sustainable Energy Week
  10. European Healthy Lifestyle AllianceCan an Ideal Body Weight Lead to Premature Death?
  11. Malta EU 2017End of Roaming Charges: What Does It Entail?
  12. World VisionWorld Refugee Day, a Dark Reminder of the Reality of Children on the Move

Latest News

  1. Macron’s investment screening idea watered down by leaders
  2. Leaders unimpressed by May’s offer to EU citizens
  3. New Irish PM praises unscripted nature of EU summits
  4. EU extends sanctions on Russia
  5. UK's universities set 'Brexit wish list'
  6. Decision on post-Brexit home for EU agencies postponed
  7. May's offer on citizens’ rights dismissed as ‘pathetic’
  8. 'Historic' defence plan gets launch date at EU summit

Stakeholders' Highlights

  1. European Social Services ConferenceDriving Innovation in the Social Sector I 26-28 June
  2. Dialogue PlatformMuslims Have Unique Responsibility to Fight Terror: Opinon From Fethullah Gülen
  3. EUSEW17Check out This Useful Infographic on How to Stay Sustainable and Energy Efficient.
  4. Counter BalanceEuropean Parliament Criticises the Juncker Plan's Implementation
  5. The Idealist QuarterlyDoes Europe Really Still Need Feminism? After-Work Chat on 22 June
  6. EUSEW17Create an Energy Day Event Before the End of June. Join the Call for Clean Energy
  7. UNICEF1 in 5 Children in Rich Countries Lives in Relative Income Poverty, 1 in 8 Faces Food Insecurity
  8. International Partnership for Human Rights26 NGOs Call on Interpol Not to Intervene Versus Azerbaijani Human Rights Defenders
  9. Malta EU 2017Significant Boost in Financing for SMEs and Entrepreneurs Under New Agreement
  10. World VisionYoung People Rise up as EU Signs Consensus for Development at EU Development Days
  11. ILGA-EuropeLGBTI Activists and Businesses Fighting Inequality Together
  12. Nordic Council of MinistersNordic Prime Ministers Respond to Trump on Paris Agreement