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24 November 2013

Simon Nixon: Is Italy facing the stability of the graveyard?

Many Italian business people consider the prospect of another 18 months of the Letta government seriously alarming, writes Nixon for the WSJ.

They believe that the government has only been able to remain in office by attempting little and achieving even less. Even ministers privately acknowledge that the 2014 budget was disappointing: Thanks to coalition wrangling, it contained just €2.5 billion ($3.38 billion) of spending cuts next year out of total government expenditure of €800 billion, which will fund a €2.5 billion tax cut. A new privatisation plan announced last week included just €12 billion of assets.

Although Italy has made more progress than other countries toward balancing its budget, public spending is equivalent to just over 50 per cent of gross domestic product and personal taxes are among the highest in the eurozone. Nor has the coalition shown any serious appetite for reform. Like its predecessor, the technocratic government led by former Prime Minister Mario Monti, which started out with apparent reforming zeal but soon ran into the sand, Mr Letta's administration appears paralysed by political opposition both inside and outside Parliament.

Without any improvement in productivity, it is hard to see how an economy that barely averaged 1 per cent annual growth during the global economy's boom years will deliver the growth needed to meet the EU's demanding debt targets. With the government debt to GDP ratio currently at 133 per cent of GDP, Italy will need to run a primary budget surplus—before interest payments—of 5 per cent a year for much of the next decade, up from a 1 per cent surplus this year.

Identifying cuts is easy: What is difficult is confronting the vested interests—among the unions and employers—that have blocked previous efforts at reform of the justice system, labour rules and public administration, which are among the biggest obstacles to growth. Many doubt that even with Mr Berlusconi's influence now diminished, Mr Letta will be able to unite the two sides of his coalition behind a wide-ranging reform programme.

Many despairing Italians are increasingly pinning their hopes on Matteo Renzi, the 38-year-old mayor of Florence, who on December 8 seems certain to be elected secretary of the Socialist party, giving him control of the country's largest political party. They hope that Mr Renzi, an energetic reformer with broad popular appeal, will win by a wide enough margin to force the Letta government to agree to new elections, paving the way for a majority government with a mandate to undertake a major reform programme.

But between these two scenarios—an unshackled Letta government and a successful Renzi insurgency—there is a third, more troubling possibility. After all, Mr Renzi will find it hard to oust Mr Letta, who enjoys the support of his parliamentary party and President Giorgio Napolitano. Instead, the two men may be drawn into their own bitter rivalry to match the split on the political right, creating a new political stalemate that further hampers reform.

No wonder many Italians worry that the stability that Mr Letta is offering will turn out to be the stability of the graveyard.

Full article

© Wall Street Journal

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