Matteo Renzi ignores Italy’s economic realities

Image by © Dreamstime

Image by © Dreamstime

by Enrico Colombatto

Italian Prime Minister Matteo Renzi deserves credit for stabilising the Italian political situation. Even though his ancient rival Silvio Berlusconi of Forza Italia has been cleared by the courts, his party is in trouble and while the Northern League makes progress, it remains isolated with little impact on national politics. Mr Renzi’s Democratic Party (PD) dominates the scene and he dominates his party. But political stability is not leading to economic reforms. And while the ECB’s quantitative easing has taken the pressure off overhauling public spending and cutting public debt, the government is in no hurry to make drastic changes. Italy’s economic shortcomings remain where they were some seven years ago. If European growth resumes and quantitative easing stops, Italy will be left in big trouble.

Three main topics are occupying the attention of Italian newspapers – former Prime Minister Silvio Berlusconi’s acquittal from the so-called bunga-bunga sex party charges, the balance of power in Italian politics and Prime Minister Matteo Renzi’s constitutional reforms. But these are not the key issues in shaping Italy’s scenarios over the next few months.
Juicy gossip which accompanied Mr Berlusconi’s political career effectively weakened his charisma and statesmanship, and contributed to his political demise. His relationships with a large number of attractive, young and open-minded ladies broke no laws and involved no use of taxpayers’ money. Yet, Italians considered his behaviour was inappropriate for a man who represented the country on the international stage, especially in a difficult economic context. Millionaire Mr Berlusconi’s lack of interest towards economic matters outside his own companies also contributed to his downfall.

Stumbling block

Therefore, despite his bellicose announcements, his acquittal on March 10, 2015, does not restore his credibility, or help solve the crisis facing Forza Italia – Mr Berlusconi’s party – which has been sinking in popularity during the past four years. Mr Berlusconi’s attempt to revive his party will achieve nothing and his presence will actually prevent a credible centre-right political party emerging.

Forza Italia will stay at about 12 per cent of the electorate, or possibly decline further, having dropped from 21 per cent at the 2013 general election.

The Northern League is the most vociferous threat to Prime Minister Renzi’s power. It almost disappeared in the aftermath of a variety of scandals, and has recently resurfaced under Matteo Salvini’s leadership.

Seat of power

The Northern League would today attract almost 15 per cent of the votes, according to the polls. Its battle cries include opposition to immigrants, quitting the euro, introducing tariff barriers to protect Italian companies from ‘unfair competition’, enforcing more stringent regulation in the banking sector, and devoting more resources to the police.

What is clear is that unless Forza Italia and the Northern League agree to merge, and possibly absorb some minuscule right-wing political movements, both parties will simply freeze out about a quarter of the Italian electorate.

Beppe Grillo’s populist Five Star Movement has already frozen another 20 per cent of the votes because his MPs are widely ignored in parliament.

The essence of Prime Minister Renzi’s position is that his power rests more on his opponents’ weakness and ineffectiveness and on his ability to destroy dissent within his own Democratic Party (PD) than on his performance as policymaker.

Attracting followers

Mr Renzi has achieved very little, since taking power in February 2014, to reform the Italian bureaucracy, cut spending and simplify the tax system. Yet, he has worked on strengthening his partners, and new followers from the Five Star Movement are flocking his way, while MPs from Mr Berlusconi’s Forza Italia are tempted to do the same.

Mr Renzi’s constitutional reforms are simply a way of making sure his position becomes even less contestable. This is what some observers have defined as his ‘authoritarian turn’. And while Mr Renzi is certainly not a statesman, he has definitely proved to be an excellent and energetic crew leader with nationwide ambitions.
Mr Renzi has stabilised Italy, which is what Italians want and the international community appreciates. But this applies only to politics. So what has happened to the economy?

More experts

The data are not exciting. The Italian treasury has benefited a great deal from quantitative easing introduced by the European Central Bank’s president, Mario Draghi. Italy’s economics minister Pier Carlo Padoan is now able to refinance Italy’s public debt and sell Italian treasury bills at very low interest rates, which range from less than 0.1 per cent for three-month maturity to about 1.7 per cent for 10-year maturity.

But the Italian budget is not under control. A new group of experts has been appointed to make proposals to cut spending. This means the budget deficit is running higher than was anticipated and suggestions put forward by previous experts – which Mr Renzi has declined to publish – are being rejected.

Ambitious goal

Mr Renzi’s worries focus on 2016 in particular, when he should meet the 1.8 per cent budget-deficit to GDP ratio required by the European Union. The government could meet this target if the economy grew at 1.5 per cent.

The target is not entirely out of reach, especially if oil prices remain low and the euro’s weakness continues. But it remains an ambitious goal, if one considers that the Italian economy is expected to grow at a rate between 0.4 per cent and 0.6 per cent in 2015 and between one per cent and 1.3 per cent in 2016.

The debt to GDP ratio keeps growing in the meantime and is now above 132 per cent when it was 128.5 per cent a year ago. The result is, that unless the picture improves between the end of 2015 and 2016, Mr Renzi’s government must find some 15 billion euros. This will probably trigger a rise in VAT, from 22 to 25.5 per cent.

Wasted opportunity

Italy has moved over the last few years from someone who wasted a golden opportunity to bring about substantial reforms when the political cost was limited under Mr Berlusconi, to a man in Mr Renzi who just wants power in and of itself, but has neither the vision nor the intention to do what the economic situation requires.

Unsurprisingly, growth is currently close to zero, investments are modest and unemployment remains high. However – and in contrast with 2011 – today the scenario is relatively quiet and will stay so for at least another year.

Mr Renzi is in firm control of the political situation, and Mario Draghi’s quantitative easing is reassuring.

The only source of trouble on the horizon could be the international context, an area in which Italy has never taken significant initiatives during the past decades. Mr Renzi is unlikely to go against this tradition and will abstain from intervening in, for example, the Libyan or the Greek crises, regardless of their importance for Italy.

Illegal immigrants

This is probably an appropriate course of action given the circumstances.

The Italian government has neither a strategy nor the means to engage in military intervention in Libya and it is too late, anyway.

The Italians also seem confused about how to deal with illegal immigrants who travel across the Mediterranean from Libya on a daily basis. This is an issue characterised by scandals and tensions. The authorities seem helpless, public money is being wasted in murky first-aid initiatives including hospitality and accommodation for the refugees, while tolerance by the residents diminishes.

Do-nothing strategy

By contrast, Italy does have a strategy for the Greek crisis. It consists of ensuring that the EU and the ECB do not withdraw their support to vulnerable countries, and that markets continue to believe it will be business as usual for the next two or three years.

After that, growth is supposed to resume and solve all the problems – unemployment, public debt, and fragile banks.

This do-nothing strategy is not unique to Italy. After encouraging the Greeks to press ahead with a new approach to EU policymaking, Italy, France and Spain pulled in their horns and left the Greeks stranded.

Mr Renzi does not really care about Greece. Yet, schmoozing the big players in Brussels, Frankfurt and Berlin will not be enough to counteract a future rise in interest rates. This would be an event which could wreak havoc with the Italian public accounts and destroy Mr Renzi’s political fortunes if it happens before the next Italian elections which are due no later than 2018.

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Source: Geopolitical Information Service

2015-03-24T09:28:46+00:00

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