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11 August 2014

Open Europe: Italy slips into recession

Its GDP contracted by 0.2% in the second quarter of 2014 - worse than expected. The country's national statistics office ISTAT now expects Italian GDP to shrink by 0.3% this year, unless the trend is reversed. This is below the 0.8% GDP growth predicted by Renzi's government.

Open Europe reports on Italy's reform programme:

Renzi's reform programme is progressing but is far from complete.

  • Some of the promised reforms have been passed only in part (such as the reform of the labour market);
  • Others have been proposed by the government but are still awaiting parliamentary approval (such as the reform of the electoral law);
  • Others have been announced but have yet to be turned into an official legislative proposal (such as the reform of the judiciary).

The slow growth prospects put  a question-mark over  Italy's ability to keep its deficit below the  3% of GDP and start reducing its public debt. Unless Renzi can show substantial progress on the reform side, he's unlikely to achieve any of the 'flexibility' on the application of EU fiscal rules that he's been demanding. This may set the scene for another political stand-off between the core and periphery of the eurozone.

Perhaps more worryingly, Renzi seems to be currently focusing too much of his reform efforts on the political-institutional side. The reform of the Italian Senate - which has recently taken the centre stage in Rome - is of great symbolic importance and will help speed up the decision-making process once (and if) passed. But its economic impact is limited, and it involves changing the Constitution, meaning that it may not be finalised until early 2015 and will then also be put to a referendum - whose outcome cannot be taken for granted at this stage. Italy can only benefit from the removal of the institutional blockages stemming from a system where the two chambers of parliament have equal powers. However, Italy's economic situation means Renzi should consider investing his best energy and political capital elsewhere - not least because economic reform is the key area where his EU counterparts wish to see progress.

On the economic front, the main achievement of Renzi's government to date is probably a tax cut worth €80 a month for employees earning less than €25,000 a year. The measure may have played a part in Renzi's Democratic Party winning an outstanding 40.8% of votes at the European Parliament elections in May - but the jury is still out as regards its effectiveness as a means to boost domestic demand.

Furthermore, uncertainty remains over Italy's plans to cut public spending and use the savings to finance tax cuts for workers and businesses.

Full article

© Open Europe

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