Saturday

28th Nov 2020

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.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

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

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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.

The under-reported power struggle at the top of the OSCE

An internal power struggle has undermined the world's leading international security body since the summer. The OSCE is due to finally get new leaders in December but the unprecedented power vacuum has hit at a crunch time for hotspots worldwide.

EU corporate due diligence: new rules, or businesses rule?

The Brussels rumour mill has it that the EU Commission is being pressured to put forward a weaker proposal than what civil society organisations, trade unions, and the European Economic and Social Committee say is needed.

China's supply chains and 're-shoring' under Covid-19?

Some in Europe are calling for re-shoring or near-shoring supply and industrial chains of such critical sectors as medicine and pharmaceuticals, to reduce dependence on China's supply chains and market. Minister Xia Xiang sets out the opposite case.

Column

US economic nationalism will be subtler - but it will persist

The more the US comes to face economic headwinds, because of the corona pandemic, but also because of the stagnating productivity, growing external debt, and an increasingly unbalanced growth model, the more the tendency of economic nationalism will become manifest.

News in Brief

  1. Brexit talks pick up pace once more
  2. MEPs back US trade detente
  3. Iran diplomat to stand trial in Belgium over 'France bomb plot'
  4. Trump says he'll leave if Biden wins Electoral College vote
  5. EU Parliament: Polish abortion ban risks womens' lives
  6. UN experts warn against racial profiling
  7. EU auditors raise red flag over maritime protection
  8. Four students charged in France's beheading case

The human cost of whistleblowing

The fate of Jonathan Taylor, a British whistleblower stuck in legal limbo in Croatia, is a test of European laws designed to protect those who put themselves at risk for the common good.

EU vs US tech agenda under Biden

What will the new Joe Biden administration bring to the realm of digital policy, and how will it affect the relationship with the EU?

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic climate debate on 17 November!
  2. UNESDAMaking healthier diets the easy choice
  3. Nordic Council of MinistersUN Secretary General to meet with Nordic Council on COVID-19
  4. UNESDAWell-designed Deposit Return Schemes can help reach Single-Use Plastics Directive targets
  5. Nordic Council of MinistersNordic Council meets Belarusian opposition leader Svetlana Tichanovskaja
  6. Nordic Council of MinistersNordic Region to invest DKK 250 million in green digitalised business sector

Latest News

  1. Erdoğan jails hundreds for life, as EU weighs relations
  2. Italian energy giant director advising EU foreign policy chief
  3. Poland and Hungary say rule-of-law link needs treaty change
  4. Portuguese presidency to focus on social rights and India
  5. The under-reported power struggle at the top of the OSCE
  6. Poland hammered on women's rights in EU debate
  7. EU 'front-line' states want clearer migration rules
  8. Von der Leyen tells Poland and Hungary to go to court

Join EUobserver

Support quality EU news

Join us