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Monday, December 05, 2011

Super Mario Shows His Hand

The new Italian government has been in office for less than 20 days. That must have seemed an eternity given the record interest rates Italy has been forced to pay by the markets over the past few weeks, while uncertainty remained over what Mario Monti and his cabinet of technocrats were actually planning to do to get Italy out of the crisis.

A new package of austerity measures, tax hikes and economic reforms worth a gross €30 billion over the next three years was finally unveiled yesterday (it is becoming a habit for Italian politicians to work and announce measures during the weekend, when the markets are closed), during an exhausting 2-hour press conference. Monti will make an official presentation in both houses of the Italian parliament this afternoon, with a view to having the new package adopted before Christmas.

Some of the proposals (especially those affecting the pension system) are undeniably ambitious, and are therefore likely to face resistance from both political parties and workers' associations. Here are the most relevant measures announced yesterday:
  • An in-depth reform of the pension system, which will effectively (although not formally) abolish early retirement pensions. Italians will be required to work for longer, and all pensions will be calculated exclusively on the basis of what each worker paid into social security during his working life (pensions for some professions are today calculated as a percentage of the latest average monthly salary);
  • Retirement age will be raised to 66 years old by 2018 for men and women without distinction between public and private sector workers (the previous Italian government committed to 67 years old by 2026);
  • As for the short-term, in 2012-2013 adjustments in line with inflation will be suspended for all pensions worth €1,000+ per month. Italian Labour Minister Elsa Fornero literally burst into tears while presenting this specific 'solidarity contribution' from pensioners at yesterday's press conference (see picture);
  • The package also involves a number of tax hikes. VAT will increase by 2% in the second half of 2012, and a local council property tax will be re-introduced. In addition, people who used the 'fiscal shield' initiative launched by Berlusconi's government in 2009 to pay lower taxes on capital repatriated from non-EU bank accounts, will have to pay an extra 1.5% on that capital. Special levies are also envisaged for people owning certain 'luxury goods', such as yachts, private jets or high-capacity-engine cars - still not a fully-fledged tax on wealth, though;
  • A new push to fight tax evasion was also unveiled. Under the new rules all payments in cash will be forbidden above a €1,000 threshold. The threshold was previously fixed at €2,500, surely a bit too high for a country struggling with endemic tax evasion like Italy;
  • The package unveiled yesterday also includes the first concrete pro-growth measures, something which seemed to be off the radar of previous Italian governments. Tax reliefs for small and medium-sized businesses are envisaged, as well as a strong push on the liberalisation of certain professions. This is certainly not enough, but it is a start and more labour market reforms are expected.
At a first glance, the measures seem to go in the right direction, as it is quite clear that Italy needs some austerity to convince markets of its credibility and for the new government to establish its credentials. As expected, the markets have warmly welcomed Monti's proposals, with the spread between Italian and German ten-year bonds plummeting below 400bps (although this was probably aided by ECB bond purchases and talk of it stepping up its financial support). Widespread approval has also been voiced by the European Commission and some foreign leaders.

However, at least three big questions remain unanswered. First, as we previously noted here, what will Italian citizens' reaction be when the new measures - which, at the end of the day, are being imposed by an unelected government - really start to bite? Second, will Italian political parties give unconditional support to the package, even if it contains measures which are not in line with their electoral manifestos? To give an example, it was Berlusconi's government, when it took office in 2008, who scrapped the local council property tax. On the other side, the leader of Italy's main centre-left party, Pier Luigi Bersani, has already expressed doubts over the 'social equity' of Monti's proposals.

But, most importantly, will these measures be enough to tackle Italy's (but also Greece, Spain and Portugal's) real problem - i.e. the loss of competitiveness experienced since the introduction of the single currency? The answer, at least for the moment, seems to be a 'no'. The measures will certainly help address the markets' lack of confidence in Italy in the short term, but ultimately without any hope for growth and a boost in international competitiveness the future for Italy in the eurozone remains bleak.

P.S.: Credit where credit is due. At yesterday's press conference, Italian Prime Minister Mario Monti announced that, in his personal capacity, he had decided to give up his salary as Prime Minister and Economy Minister in exchange for the sacrifices that his government is asking to Italian citizens. Not expected to have any significant financial impact, but still you don't hear that every day.

P.P.S.: It went almost unnoticed in the press, but it looks like the UK has lost another ally in its opposition to an EU-wide financial transactions tax. In fact, Monti (who, by the way, took lectures from James Tobin, the father of the FTT, during his years at Yale) yesterday said that his government will have a "more favourable" attitude towards an EU FTT than its predecessor.

1 comment:

Kernow Castellan said...


€30 billion (over the next three years)

That's almost a whole percent of their national debt.

And at €10 billion a year, that would be about 4% of the amount of debt they have to roll over in 2012.

At an average of 2% interest, Italy's debt goes up by €60bn a year.

At 6%, it's growing at €180bn a year

I don't think Super Mario's annual €10bn saving is going to make a lot of difference, do you?