Thursday, Oct 02, 2014

Great expectations

Italian Prime Minister Matteo Renzi. (Reuters) Italian Prime Minister Matteo Renzi. (Reuters)
Written by Francesco Saraceno | Posted: March 8, 2014 2:05 am | Updated: March 11, 2014 4:22 pm

Italy has a new government, headed by the former mayor of Florence, Matteo Renzi. It faces great expectations, because of the dazzling career of Renzi, which has seen a generational clash and the “rottamazione” (scrapping) of the old political elite. Renzi is young, active on social networks and dynamic. Half the member s of his government are women. The youngest government in Italian history, it is said to symbolise the new style he wants to bring into the politics of the bel paese. In his confirmation speech, Renzi promised one major reform per month over the next six months. Even if he delivers only half as much, he will be leading the most productive government in the history of the republic.

Yet, these hopes are not likely to be fulfilled. To begin with, in the next few months Renzi may be confronted with political trouble. He was not elected but became prime minister by ousting his predecessor (a member of his own party, the centre-left Democratic Party), a manoeuvre reminiscent of the old political rituals that Renzi claims to be fighting. This has created serious discontent within his own party.

Further, the majority supporting Renzi is the same, a sort of forced grand coalition that emerged from the gridlock of last year’s elections, and which, because of its heterogeneity, virtually paralysed the previous government. Finally, many are dismayed by Renzi’s tacit pact with former prime minister Silvio Berlusconi, who had been marginalised in the last few months. Many voters from the left had supported Renzi in spite of his centrist positions, because of the argument that he was the only person capable of winning against the right.

But political problems are only one aspect of the difficult times ahead for Renzi. The Italian economy is going through a rough patch, having been hit harder by the economic crisis than any of its G-8 partners. The GDP today is at 1999 levels, 9 per cent lower than when it peaked in 2007. Long-term structural problems are compounded by the high levels of debt that made the country vulnerable to the sovereign debt crisis that started in Greece. Within the current European framework, Italy has very little room to sustain its aggregate demand, which has collapsed since 2008 (it went down by 12 per cent). The level of distress in Italian firms and households is quickly approaching a level that could trigger a spiral like the one we saw in Greece. There must be action to prevent that from happening.

In the short run, there is little that can be done to sustain income and domestic demand apart from initiating a fiscal expansion (a serious programme of public investment), and taking decisive action to ensure that the banking sector resumes lending to the private sector. As far as the first is concerned, one would have expected Renzi to focus on common European action (the continued…

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