The Letta-Government – How long will it last?

The new government headed by Enrico Letta was the only one possible in this Parliament (to avoid  new elections, which would not have solved the impasse) but it is also true that this government is something new in our country from many different points of view, indicating an important change:

 First, the experience of the so-called Gross-coalition makes its first appearance in Italy. The experiment, familiar in other European countries, above all in Germany, was less a choice than a necessity in order to avoid a new general election at a time when, among other things, the President of the Republic was approaching the end of his term in office. In a typically Italian paradox the Gross-coalition was built on the ruins of the largest party in Parliament, unable – partly because of the rules governing the election process – to reach a clear majority in both houses and hence to form a government. Also, unlike its predecessor, which was the oldest in Europe, this government is much younger. The Premier is one of the youngest, the same age as the UK’s David Cameron. Similarly, the Parliament that passed a vote of confidence in the new government is the youngest ever elected by the Republic of Italy with an average age of 48 as against 50 at the Bundestag and 55 in the French National Assembly. The number of women in the executive (7 out of 21 Ministers) is unusual in Europe and reflects the composition of the new Parliament. In Italy one third of ministers are female, against the European average of 25.5%. Only France has more women ministers, with absolute gender parity.

Finally, the renewal is not only a question of age but also of members of Parliament elected for the first time. There are many new members, replacing more familiar faces. An important, even preponderant part of the government is the component appointed for its technical expertise, although the government is certainly of a political, not technical, nature. Some key ministers such as the Finance Minister and the Minister for Employment and Welfare are experts in their fields, respectively Saccomanni, the former Director General of the Bank of Italy, and Giovannini, formerly the head of ISTAT (the Italian National Statistics Institute). Another technician is Professor Trigilia, replacing Barca in the role of territorial cohesion. Despite her significant political resume, the new Foreign Minister, Emma Bonino, can also be considered an appointment based on past experience. 

 Against main expectations this Government is achieving important results. Enrico Letta’s grand coalition government has dodged a bullet with the confirmation of Italy’s exit from Excessive Deficit Procedure on May 29. As a result of the Commission’s vote of confidence, the government can claim greater economic credibility and has avoided the potentially destabilizing effects of a negative decision. The Commission also set out a series of additional policy recommendations for Italy in conjunction with its decision. First among these is continued fiscal consolidation, which will mean balancing the budget in structural terms in 2014. Local elections strengthen the coalition. Over the near term, the failure of any of the main political parties to capitalize on this latest electoral contest is a marginally positive development for government stability. Municipal elections are admittedly an imperfect barometer of the political climate at the national level. Local-level policy issues tend to take precedence, and a proliferation of independent lists and unusual alliances tends to characterize the political offering. Turnout was remarkably low this week (62.3%, as opposed to the 75.2% in February’s national elections) but PD performed adequately The PdL, on the other hand, failed to convert its national-level lead in the polls into a wave of local successes. Finally, the Five Star Movement appears to have fallen into a sophomore slump. The lesson for Grillo appears to be that paying lip-service to radical change is no substitute for the real thing in the eyes o he public. Letta, also, accelerates on constitutional reforms. Following a majority resolution setting an end of June deadline for the launch of its constitutional reform agenda, the Letta government delivered its plan fully 24 days early. This was due in part to pressure from President Giorgio Napolitano. A special bicameral committee composed of 40 members of the Senate and lower house Constitutional Affairs Committees (the so-called Committee of 40) has been created to elaborate a series of constitutional reforms and the Government also laid-out a clear 18-month timetable for the constitutional reform process, which should be concluded by late October 2014 if all goes according to plan. The challenge is not simple despite President Napolitano. The PDL has long favored a transition to a semi-presidential model. The PD remains divided over moving towards semi-presidentialism, however, as such a change would likely imply more powers for the president and his or her direct election. It is feared that this could eventually open the door to Berlusconi’s candidacy. While setting a concrete timeline may help to bolster Letta’s credibility and provide some protection from barbs between the PD and PdL, the prospects of success for constitutional reform are dubious at best. It is unclear whether the government will last until late 2014, and elections either late this year or sometime in the first half of 2014 appear more likely than not.

Just one week ago the Italian government presented the so-called “To Do” decree, which contains new measures aimed at stimulating economic growth and implementing some of the EC recommendations. The main points are: administrative and regulatory framework simplification; action to enhance SME’s access to finance; measures to support education; further steps in terms of liberalization of the energy network industries. Given the tight constraints related to fiscal consolidation, any attempt to free resources or to better use existing ones to restart economic growth is a step in the right direction although it probably will not be enough to generate any material boost to GDP in the short term.

On the economic side, some signals confirm that the country is on the right path for finally catching the recovery, leveraging on its unquestionable strengths:

 – Even thus the debt/GDP ratio is around 130%, if one includes contingent liabilities from aging-related expenditures predominantly pension liabilities, Italy’s public debt position looks among the lowest among Eurozone peers.

 – Italy’s primary surplus (2,5% of GDP) is on par with Germany’s and contrasts with a primary deficit for most of the other EMU countries.

– Sound financial situation of households and firms, whose financial debt is well below the Eurozone average.

– The current account of the balance of payments moved into surplus in 1Q13 for the first time since 1999, while the net foreign debt position stabilized to a relatively low level. This progress, together with the improvement in the public finances, should help stabilize the government bond market.

–       Even thus the debt/GDP

As a result of the austerity measures introduced in summer 2011, despite its weak economic performance, Italy managed – together with Germany – to take important steps in the difficult process of righting public accounts, reducing the deficit to below the reference value of 3% of GDP, whilst other countries, such as France, still have a long way to go.  Italy had a 3% deficit against GDP in 2012, with France at 4.8%, Spain at 7%, Portugal at 4.9% and, outside the Eurozone, the United Kingdom at 6.6%. Estimates by the European Commission suggest that the Italian deficit this year will be 2.9%, and in 2014 2.5%, well below the parameter of 3% of GDP established by Maastricht, and hence well on the way to avoiding the penalties for excessive deficit hanging over the head of Italy since 2009. On the whole, the most recent data for the first two quarters of 2013 indicate that this is the longest recession in the Eurozone (the sixth consecutive quarter) since the introduction of the Euro. Unemployment in Europe now stands at 12.1%, France is technically in recession (2 consecutive quarters in which the economy has shrunk), Germany is growing slowly and Italy continues to see its production and, above all, its overall economy shrink. In Q1 2013, GDP in the Eurozone was down 0.2%, with a fall in Italy of 0.5% (as in Spain), 0.2% in France, and growth in Germany at just 0.1%. 

Italy must be able to invest in productivity. Reacquiring competitiveness via structural reforms is absolutely necessary if the country is to breathe relatively easily once more and reduce the level of unemployment, estimated at 12.2% in 2014. In the past ten years growth of Italian productivity has been on average 0.4% a year against 2.8% in Holland, 2.5% in France, 1.8% in Germany, 1.5% in Spain, 3% in the United Kingdom, 3.3% in Japan and 5.2% in the USA. In countries where productivity has increased, competitiveness has improved with positive impacts on the balance of current debt, whereas in Italy, where productivity has not increased over the past decade, our GDP has practically flat-lined. The weak performance is due to numerous structural features including limited competition, especially in non-tradable sectors, an unfavorable operational framework in terms of company growth and inefficiencies in the public sector (tax evasion and a terribly sluggish legal system) together with high taxation. This has impacted negatively on entrepreneurial activity, increasing costs and eroding competitiveness precisely where it is needed. It is not surprising therefore that innovation and DFIs have been limited, with Italy’s exports losing market share. Some of the effects on competition and the employment market of the failure to carry out reforms in Italy are significant: for example, the cost of electricity in Italy is one of the highest in Europe, more than 50% above the European average, especially for companies. In the employment market, only one in five youngsters between the ages of 15-24 manages to find work, against 35% in the Eurozone as a whole. The IMF estimates that a simultaneous reform of the market for products and of the labor market could increase real GDP in Italy by 5.7% over five years and by 10.5% in the long term.  Another example: the cost of labor per unit of production could fall by almost 4.5% after 5 years, since the increase in productivity would more than offset higher salaries. Therefore the new Italian government must adopt effective measures to support growth and employment, whilst continuing to render public finances manageable.