Italian Passions, Politics and Economics: Mr Veltroni Hard Choice

Passions…

Political passions are running high these days in Italy. After a new wave of revelations concerning recent “financial scandals” (Antonveneta Bank, Banca Nazionale del Lavoro, Rizzoli Corriere della Sera), the outrage of public opinion against the political “class” (or “caste”, according to a recent best-seller) has reached heights comparable to the era of “Mani Pulite” (“Clean Hands”) revolution, which swept away the Christian Democratic and the Socialist parties in the early nineties. Politicians are widely held as privileged, hopeless, incompetent and corrupt. This is no news to Italy. The news is that the centre-left parties in power are also involved. The high priest of this “autumn” of discontent, Mr Grillo, a comedian-turned political activist, gathered more than one million people in 200 Italian towns, and raised more than 300 thousands signatures in favor of a two year limit of MPs’ mandate, and of a ban on sentenced politicians (about 100 actually sitting in Paliament). Most participants to Mr Grillo’s “V-day” (V for Vaffa…, i.e. “F….-off” day) on October 8, are not Berlusconi simpatizers, however.

Politics…

On October 12, another five million union-workers went to the ballot box approving the “”Welfare Protocol” signed with the government (81 per cent voted in favour). On the 15th, another three million people crowded the ballot boxes for the primary election of the leader of the new Democratic Party (DP), resulting from the union of the Democrats and the Daisy party. Mr Veltroni, the major of Rome, got 75 percent of the votes.

… Economics

The Welfare Protocol, together with the proposed Budget Law (Legge finanziaria) are good examples of what is wrong with Mr Prodi’s policies, the main reason for discontent. The Protocol is the fruit of the “concertazione” (cooperation) method of government, an explicit renounce by the government to represent the “public interests” and the voluntary submission to the veto power of organized lobbies (mainly trade unions, representing middle aged workers and pensioners, and corporations). It steps back with respect to the Berlusconi pension reform by reducing the retiring age from 60 to 58 (to be gradually raised until 61 in 2013, and provided a worker has at least 40 years of contributions) and partly dumps the huge bill (10 million Euros) on higher social contributions for temporary workers (mostly young, and not represented at the concertazione table); the much needed revisions of pension “coefficients”, determining the fraction of salary to be received as a pension, will be postponed to 2010 (!). It worsens labor market rigidity by limiting (to one year) the possibility of renewal for fixed-term contracts (in force for at least three years) and submits each renewal to the condescension of the union representative.

The “Manovra Finanziaria”, (financial manouvre), a law decree and the Budget Law (Legge Finanziaria), is a good example of the influence of the demagogic radical left. Thanks to the buoyant economy and Prodi’s effectivenes in delivering the message that the era of fiscal amnesties was over, tax revenues in 2007 rose unexpectedly by 6.4 percent, roughly 1.1 percent of GDP, with corporate income revenues (IRES) up 35 percent. In the absence of the new measures in the Manovra, the budget deficit for 2007 would have fallen to around 1.5 percent of GDP, down from 3.7 in 2006. Yet the deficit/GDP ratio would be around 2.4 percent in 2007, since most of the revenue windfall will finance higher (mostly current) expenditures, estimated at an extra 0,8 percent of GDP: subsidies for the poor, higher old-age pensions of poor retirees, full indexation of low pensions, unemployment benefits, public employment, plus tax exemptions for house-owners and renters.

In a sense, its perfectly legitimate for a centre-left government to pursue redistributions goals. However, there are three problems with this argument. The first is that, unlike the Manovra’s impact on the deficit, the redistributive effects of these measures are negligible: the (one-off) effects of the subsidies for the poor are almost exactly compensated by the (permanent) benefits to the richer house-owners (see Pellegrino on www.lavoce.info). The second is that Italy is no ordinary country: with a public debt still at 105 percent of GDP in 2007, interest payments at 5 percent of GDP, no room for increasing tax revenues (now at the historic high of 46,7 percent of GDP), a very resilient public expenditures (44,2 percent of GDP), large and often unknown implicit liabilities (not only pensions commitments: in recent years local governments have used structured financial products, estimated at 1,3 percent of GDP, for circumventing the so called “the internal stability pact”), the italian public finances are simply too vulnerable for keeping postponing the adjustment . The third problem is that the economy is slowing down, making future adjustments more painful: growth, already among the lowest in Europe, is estimated to decline to 1.3 in 2008 from 1.9 in 2007, due to lower exports, a slowdown in domestic demand, high oil prices, strong Euro, and lower growth in the Euro area.

Back to Politics: Mr Veltroni’s Hard Choice

Mr Veltroni, the new Democratic Party leader, is therefore facing the following dilemma. He can support the Prodi government and try to contrast the paralizing influence of the radical left. Unfortunately, however, he cannot change the numbers in Parliament, which give veto power to the leftist parties. If he take this route, he may prolong the vegetative life of the government. But the ailing economy will contribute to inflate the popular discontent, only to be capitalized by Mr Berlusconi at the next elections. Alternatively, he can withdraw the DP’s support to the Prodi government and face an election right now (after agreeing with Berlusconi on a necessary electoral reform). If he does so, he may well loose the elections. Yet, unless he makes this choice, he will inevitably be filed away as the powerless leader who wasted his chances to make the reforms that Italy badly needs.

7 Responses to "Italian Passions, Politics and Economics: Mr Veltroni Hard Choice"

  1. Nicolas   October 19, 2007 at 10:25 am

    Bring back Berlusconi The left is taxing the hell out of Italy and should crumble.

  2. Guest   October 19, 2007 at 10:53 am

    @Nicolas

    Berlusconi’s way has been: a tiny bit less taxes for emplyees, a basically voluntary self taxation for the rich (via an yearly amnesty) and booming goverment spending… that means, more debt for everybody.

    The problem with the current government is not the taxation level, but its inability to take a decision, good or bad.

  3. Guest   October 19, 2007 at 4:42 pm

    Italy needs a political reform that will lead to a majoritarian system. Otherwise any coalition government will be hostage to smaller parties that will veto any needed fiscal and structural reform. Legislative reform is thus essential!

  4. Guest   October 19, 2007 at 4:43 pm

    Are you optimistic or pessimistic about the ability of a new center left government to implement the needed economic policies to restore sustained growth? Will things ever change in Italy or is it all hopeless?

  5. Paolo Manasse   October 21, 2007 at 4:35 pm

    I do not think Mr Berlusconi is a solution. His disastrous government, in terms of fiscal deficit and economic reforms, could even count on an overwhelming majority in parliament. I agree with one comment: I see for little hope for the centre-left unless a majoritarian electoral reform is approved. The problem is that there are few candidates for suicide among left-of centre parties.

  6. eparisi   October 25, 2007 at 10:01 pm

    see also the Spiegel Magazine article that came out today:”Veltroni Faces a Brutus Dilemma”http://www.rgemonitor.com/redir.php?sid=1&tgid=402&cid=222834″Rome’s Mayor Walter Veltroni has been voted leader of Italy’s newest political party the center-left Democratic Party (PD). Now he faces a tough dilemma. Should he support the fragile center-left government, or go for political power even if that means undermining his friend and longtime ally Prime Minister Romano Prodi?”

  7. siass   May 21, 2008 at 2:54 am

    I think this new government should do something against illegal immigrants only to those who r involved with many crimes like(robbery,drugs,kidnapping…but not to all..bcoz here lives many illegal immigrants…many of them r good like indian, pakistani,bangladeshi.srilankans..they dont do any crime…they works in restaurants.homes..frutta bunker..care of olderly people…overall they do such kind of work in less salary which not possible to do by Italian people…so its a good thing to make them legal who r not involving with crimes,,,,