The summer's over and Italy's baby-faced prime minister has got work to do, lots of it, as he seeks to deliver on his promise to transform a country teetering on the brink of its third recession in seven years. A back-to-work cabinet meeting on Friday is being billed as the first of what Renzi says will be 1,000 days of reform designed to free the country from the dead hand of institutional inertia and lay the foundations for a renaissance of the moribund economy.
Critics point out that Renzi came to power in February - via an internal party coup - promising a 100-day blitz on vested interests. And there is growing scepticism about the former mayor of Florence's ability to deliver against a backdrop of economic figures that make grim reading.
Economic growth has just turned negative for the third time since the financial crisis erupted and sent Italy into a particularly vicious tailspin. Over that period, the whole economy has shrunk by nine percent. National output is no greater now than it was in 2000. Industrial production has fallen to levels last seen in 1980. "Renzi's strategy may have a rationale," says Marco Valli, a chief economist at UniCredit bank. "The economy cannot work properly unless there are sound institutions, but it is clear that now is the time to change gear on economic reforms."
The pressure on public finances resulting from Italy's stagnation has hammered investment levels and it is beginning to show in the form of crumbling infrastructure. In a land where it was once said that all roads lead to Rome, that is now only true if you can avoid the potholes. Renzi rose to power, vowing to lift the gloom and reverse the downward spiral with a combination of fiscal measures designed to foster growth and jobs, action to slim down a bloated public sector and measures to speed up the snail-like judicial system and shake up the labour market.
The authority of Italy's youngest prime minister yet has since been bolstered by his Democratic Party's extremely strong showing in European elections in May, which suggested many Italians have bought into his reform agenda and his boy-scout enthusiasm for implementing it. But progress has been patchy. His major achievement to date has been the implementation of a tax break worth an average of 80 euros ($100) a month to the poorest Italian families.
Electoral reform proposals (aimed at producing governments with strong majorities) and an ambitious plan to strip the powerful second chamber of parliament, the Senate, of its ability to block and delay legislation have also advanced, although they remain far from being enacted. But moves which would make it much easier for companies to hire and fire have been shelved until next year at the earliest. And big business is still waiting for full details of promised reductions in payroll taxes, which are among the highest in the world and widely seen as contributing to chronic levels of unemployment, particularly amongst the young.
Renzi promised that much of the money raised from taking the knife to public spending would be reinvested in "growth-friendly" areas like upgrading school buildings and a scheme to give smaller businesses easier access to credit. He has also pledged a "surprise" on Friday, which some media are predicting will be an accord to make 100,000 teachers currently on temporary contracts permanent employees. But economists are beginning to question how, with tax revenues falling sharply as a result of the slowdown, Renzi will be able to finance such measures and stick to Italy's budget targets as a member of the eurozone.
He could raise income tax for the wealthy. But that would mean going back on a pledge he made when he came into office, and would threaten to undermine the popularity he needs to sustain the momentum of his reforms. "Tax rises would be bad, both for the Italian economy and for Renzi's ability to push reforms," said Holger Schmeiding, chief economist at Berenberg, a private German bank.
Schmeiding adds: "He is absolutely right to focus on institutional issues. The Senate and the courts are big issues for Italy - as is the labour market. If he delivers changes in these three fields, he can make a big long-term difference. "None of it looks like a quick fix, though."
Comments
Comments are closed.