Bursting the Bubble

Italian excessive economic imbalances, let’s talk about homework

7 March 2014 | by

On Thursday, the European Commission published its In-Depth Reviews, as part of the 2014 cycle of the European Semester. The analysis concluded that Italy has excessive economic imbalances. Reactions from Rome were immediate: the new Prime Minister Renzi responded with the 134 characters of twitter. The Italian Economic and Finance Ministry elaborated a bit more than the Twitter message, issuing a press release. Both the tweet and the Press Release do not try to deny or put forward a different analysis, but rather recognizes the figures and ‘rides the wave’, repeating the reform mantra. Good sign, but not enough.

Let’s take a step back, and take a glance at the Commission’s analysis. Rehn stated that Italian excessive economic imbalances are due to public debt and scarce competitiveness. Regarding the former, it is no surprise that Italian debts (139% in Q3 2013) is persisting and prohibits investments; as for the latter, deep-rooted inefficiencies hinder competitiveness. Therefore, the Commission calls for the Italian government to enact swift structural measures. If the Commission’s analysis seems impeccable, two elements can be added for the bigger picture. The first is that, if the public debt is not decreasing, this is also due to the contribution to the EU finance assistance programmes and the recent release from public administration of due payments to private entities, as the Italian Economy Ministry stated in its Press Release. And the latter measure was actually approved and welcomed by the European Commission itself. As a second element, I find it interesting to note that the markets seem to have recovered some confidence in the country and the infamous spread (to German bonds) seems to confirm the tendency.

Thus, if the Commission is well consulted on the Italian accounts as well as related measures, and if its concerns do not come from the markets, Olli Rehn’s words are to be interpreted beyond the economic analysis, as a political pressing. This, from the eyes of an Italian citizen, is something to be generally welcomed considering the usual clumsiness of Italian public policies. However, Rehn was probably more scared from the rumours in Rome that Renzi’s measures will lead to breach the (also quite infamous) stability and growth pacts criteria.

From rumours to announcements, the ones made by Renzi, when receiving the vote of confidence from the parliament, are quoted in the Ministry statement as proof that the Italian Government is fully in line with the Commission’s recommendation to tackle the two issues of competitiveness and public debt. In its press release, the ministry concludes that the competitiveness of Italian economy remains hindered by high taxation on labour cost, “a problem which the Government is going to face with determination”. The Italian “Job Act” is expected to be proposed by Renzi in the next 10 days. A “double figures cut” of taxation on workers and companies along with the introduction of more flexibility via contracts with progressive safeguards are the main measures anticipated. Regarding the debt, the ministry seems to aim at reducing the ratio by increasing growth, rather than cutting expenditure.

However, these announcements seem to fall short of a figures-check and to crumble against the economic analysis. Time has come for the Italian government to conjugate the big principles proclaimed so far in expenditure and revenue voices. The new Minister of Economy, Padoan, has surely all the necessary experience and international credibility to put forward well-calibrated proposals. But again, this is just not enough. Those proposals will need to be backed by the same political parties in the parliament that kept alive the former government of Mr. Letta – who was indeed replaced by Renzi due to his ‘incapacity to reform’.

No easy task. Last night Renzi –who attended, in Brussels, his first European Council meeting, dedicated to Ukraine- commented that Italy does not go to the EU to take its homework home. Maybe. Even hopefully. But surely the Italians, and Europeans, need to be told how Italy is going to do its homework. Detailing how Italy will get this done may result  in increased confidence (and maybe less stringency on accounts) in Brussels as well as in the markets. And perhaps, the declarations from Rehn could be used by Renzi as pressure on its Parliamentary majority to swiftly sign up for that homework.

What do you think?