The last several months saw Italy taking significant steps to find the way to economic growth after years where the economy underperformed as a result of falling competitiveness. Italian Prime Minister Matteo Renzi convinced many of his early critics by tackling the political system that is rendering Italy almost ungovernable.
The reform of the Senate that shares authority with a lower house is an essential critical success factor that had to precede the important economic reforms that Italy needs to regain its ability to grow.
Those who follow Italian politics from a distance must have felt baffled by the opposition to the Senate reforms coming from all sides of the political spectrum. One well-founded suspicion is that some senators feared for their jobs and as they say, ‘turkeys do not vote for Christmas’.
Now that the first political reform has almost been achieved, Renzi needs to concentrate on the economic reforms that can make Italy more attractive to investors.
A sobering alarm bell rang when it was announced that Italy fell back into recession in the second quarter of this year as the GDP shrank by 0.2 per cent. In the context of increasing geopolitical risks, reversing this trend is going to be a tough challenge for Renzi.
The downside of current developments is that the Italian Prime Minister has to undertake major structural reforms at a time when reciprocal trade sanctions by the EU and Russia will hit major export-oriented Italian companies, mainly in the food industries. Even Italian luxury goods companies – especially in the field of fashion – are beginning to feel the pinch of these sanctions as fewer Russians are travelling to Italy to spend their money on goods that reassert their wealth status.
Another challenge that Renzi has to face is the continuous bickering within his own centre left party. This is not a new phenomenon in Italian politics but it still makes life difficult when a government is trying to prescribe much needed bitter medicine to sanitise the economy.
Labour market reform and snipping the red tape suffocating bureaucracy are the two priorities that ECB president Mario Draghi has prescribed to his compatriot Renzi. The Italian Prime Minister agrees that the Draghi prescription is the only one that makes sense and it needs to be administered fast.
Renzi needs to concentrate on the economic reforms that can make Italy more attractive to investors
I believe that Renzi’s main virtue is his ability to make deals with the opposition Forza Italia leader Berlusconi to undertake political reforms that can than guarantee a stronger government able to propose bitter reforms to parliament. Whether the entente cordiale between Renzi and Berlusconi will last long enough to conclude the political reforms in the coming few months remains to be seen.
In the meantime, pressure is building up from the European Commission for countries like Italy to speed up economic reform. The Wall Street Journal has warned the Italian Prime Minister that political reforms on their own will not make Italy stronger economically.
Political leaders fail miserably when they do not realise when it is time to push the accelerator of economic reform.
Draghi was diplomatic but very incisive when he gave examples of areas that need to be tackled to reduce the draconian bureaucracy of his country: “I know of stories of young people who want to set up their own business in Italy but it takes nine months to get the necessary permits.
“There are also cases of investors who want to set up factories in Italy to create jobs but it takes them months to acquire the innumerable permits to start operations.”
The challenges of structural reforms faced by Italy are not very different from those faced by other countries whose economies are underperforming.
Ageing populations in most EU countries are creating ever increasing pressure on health systems and on social services. Pensions’ reforms, understandably, keep being postponed because the economic climate for such reforms is not ideal at present.
A combination of increasing geopolitical tensions, a low political appetite for launching much needed labour market, health and educational reform, as well as weak political leadership in the EU militate against an early exit of EU economies from the sluggish period of insignificant growth and high unemployment.
Draghi may have a point when he says that the EU will only become stronger when countries within the Union give up some of their political sovereignty to ensure good economic governance.
johncassarwhite@yahoo.com