We note,
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.
....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.
We note that, in order for Italy to get out of the woods, several things need to happen: Berlusconi has to go, the centre-right parties need to form a credible coalition (as a left-leaning coalition is likely to block vital pro-growth reforms), the regions need to accept cuts and reforms - and, most importantly, we note that,
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.We conclude,
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.Read the full piece here.
3 comments:
Interesting piece. As one who lives part-time in Italy, the rest in Belgium, where politics are just as fuzzy as in Italy, perhaps a couple of points are useful.
The essential problem in Italy is economic. The light industry at the basis of its 1990s economic success story has been hit like no other by Asian, particularly Chinese, imports. This has caused the social benefit programs to become ever more costly, at precisely the time that tax receipts stagnate as a result of the economic slowdown. Coupled with the early Italian retirement age, public finances go from bad to worse.
Politically, Berlusconi is Berlusconi. He is farcical--74, and under prosecution for sex with a 17 year-old(!), passing private laws to legitimize his previous offenses, using a state aircraft to fly girls to his "bunga bunga" parties in Sardinia--but he amuses a large part of the Italian electorate. They seem to prefer him in any case to Romano Prodi, ex-Commission president, referred to popularly as "Il Professore"--competent, honest, but boring and at the head of an impossible left-center group of parties.
Berlusconi has recently managed on several occasions to impose parliamentary discipline on rightist parliamentarians deathly afraid that if early elections occur the Italian electorate will boot them. The next scheduled elections are in 2013.
In short, it's a soup. Berlusconi is getting on in years and is a farce. The left is in disarray. It's hard to really see a "coming man."
In this context, perhaps Berlusconi's austerity program and budget reform will actually be enacted. At the Euro level, however, there will continue to be a problem. Too many people at too many levels are making too much money on Eurozone sovereign debt. They will continue to try to do so. There, the problem is that few Eurozone members have met the Maastricht Treaty convergence criteria. Italy had an exemption from the total debt limit going in--it had debt equal 130% of GDP instead of the maximum 60%. This has not changed, and with the weakening economic situation, austerity will not bring growth.
In this commentator's view, this situation pertains in varying degrees in a number of Eurozone countries--too much debt and too little receipts, particularly should interest rates at some point rise (They will). The solution seems to me not to scrap the Euro, which is a convenient medium of exchange for many countries, as is the US dollar. Instead, it is to recognize that the premise of EMU that those using the same currency would also borrow at a single rate was a bridge too far. Europeans do not want the single economic government that would underpin this; there is zero sentiment for it anywhere. The individual member states can use the Euro, but they each borrow in capital markets based on their own merits. That is the situation in the markets today.
To the extent that the rates mean that certain Eurozone countries de facto have no access to capital markets, that in itself will impose a certain discipline on them. The discipline should come from the markets, not from the ECB or the EU Council of Ministers.
Itlay will bring down the Eurozone if it stays in the Euro. On the other hand, Italy could start the salvation of the Eurozone by a planned exit. They will soon be followed until the Eurozone becomes a circle of 2 or three north-European states who caqn live with the Deutchmark.
Thanks for those interesting thoughts, Lukoff. The second austerity package unveiled by the Italian government is far from a done deal. This is clearly one to watch with the ruling coalition split on a number of issues. Berlusconi's party is now backtracking and considering a VAT rise, for example, and Lega Nord is ready to veto any further pension reforms and is also opposed to cut transfers of money from the central government to Italian regions. Italy’s biggest trade union has called a general strike for 6 September – we bet it won’t be the last one.
Needless to say, the Italian government has bought itself time by promising that it will achieve zero deficit by 2013. But we should also remember that the single currency is part of the problem. Berlusconi claimed a few years ago that, thanks to the euro, national governments would no longer be able to “sweep their sins and weaknesses under the carpet of their national currencies.” The irony is painfully obvious. By the way, what do you think about Tremonti as a potential PM candidate?
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