September’s prize for Headline of the Month goes to the sub-editor with the dry sense of humour who put these words at the top of a story about Silvio Berlusconi, the Italian prime minister: “Berlusconi is Best Leader in Italy’s History, says Berlusconi.”
The story itself quotes Berlusconi as telling a news conference in Sardinia, where he was hosting talks with Spanish premier José Luis Rodríguez Zapatero: “I sincerely believe I am by far the best prime minister Italy has had in its 150-year history.” So the headline, if not the sentiment behind it, cannot be faulted for lack of accuracy.
I would like, however, to put forward a different idea and suggest that if anyone in the Italian government deserves praise, it is Giulio Tremonti, Berlusconi’s finance minister. When the global financial crisis erupted a year ago, the challenge to Italy was daunting in the extreme. Italy had the highest public debt (well over 100 per cent of gross domestic product) in the European Union, a reputation for occasionally wayward management of its public finances, and a long-term average economic growth rate that was among the lowest in the 27-nation bloc.
Given Italy’s reliance on exports, it was obvious that the crisis was going to strike Italy with especial force, and, sure enough, latest forecasts suggest the economy will contract this year by 4.8 per cent of GDP. It would have been tempting last year to follow the example of France, Germany and the UK and indulge in some hefty emergency deficit-spending to mitigate the effects of the recession.
Instead, Tremonti saw the risk that such action would spook financial markets and raise Italy’s borrowing costs by increasing the yield on its government bonds. The interest rate spread between Italian and German 10-year bonds, extraordinarily low in the early years of European monetary union, did indeed shoot up to about 170 basis points last January. But with the return of calmer markets it now stands at between 70 and 80 basis points. Tremonti has striven to be the soul of prudence, and traders have reacted accordingly.
For sure, Italy’s budget deficit is forecast to be 5.3 per cent of GDP this year and 5 per cent in 2010. But these are relatively modest deficits in comparison with countries such as Ireland, Spain and the UK. Tremonti is sticking to a cautious three-year plan, drawn up at the start of the crisis, which tries to take the politics out of Italy’s annual budget deliberations by taking no risks with either expenditure or taxes.
You can criticise some aspects of the Italian government’s economic policies – the latest tax amnesty being one example. But the financial crisis dealt Tremonti a truly difficult hand to play, and he has played it well.
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