Daily Archives: November 20, 2013

Italy’s government just survived another bout of instability, following the splits in Silvio Berlusconi’s People of Liberty party and Mario Monti’s Civic Choice party, which were part of the ruling coalition. However, political instability is unlikely to fade away. The main reason lies in the government’s stated intention to last until the end of 2014.

With slightly more than a year left, it would be difficult for any administration to take policy decisions capable of reversing a trend decline in economic growth such as the one Italy has experienced in the past 15 years. The eurozone’s third-biggest economy is the only one where gross domestic product is now lower than when the single currency was launched in 1999. Household disposable income has fallen to the levels of 20 years ago.

Italy needs major structural reforms in areas such as justice, public administration, education, taxation, the fight against corruption, and the labour and goods markets. These reforms have been repeatedly recommended by international organisations such as the European Commission, the International Monetary Fund and the OECD.

But, while everyone agrees reforms are necessary, they have not been implemented or they have been diluted because they are politically difficult and costly. Legal reform is opposed by judges and lawyers, who are widely represented in the parliament. Reform of the bureaucracy or the educational system is opposed by the unions, who tend to defend incumbents rather than the unemployed. Service sector reform, in particular in the health system, is opposed by local authorities.

An additional obstacle lies in inefficiency of the parliamentary system, which attributes similar powers to the upper and lower houses, so that any amendment introduced by one house has to be confirmed by the other. The result: an interminable ping-pong that provides ample room for filibustering.

Any government serious about reform must expect strong opposition, even within the parties supporting it. Also, as other countries have experienced, the initial impact of structural reforms may be recessionary, which means public opinion may not initially be supportive.

This implies that governments need to implement structural reforms at the very start of their term in the hope that the benefits are felt before the next election. Today’s constraints tend to discourage governments from even starting the process. As Jean-Claude Juncker, Luxembourg’s former prime minister, used to say: “We know the reforms that we need to do. We just don’t know how to get re-elected afterwards.”

The problem is particularly complicated in Italy, where the government is supported by a grand coalition of parties. The closer the expected election date, the less each of these parties has an incentive to share the pain deriving from unpopular actions. The country experienced this problem in 2011-12, when the Monti government was able to start some reforms only at the very beginning of his term under pressure of from markets. After a few months, as the election deadline grew closer, the reform agenda was shelved.

For coalition governments to function properly and remain stable, the supporting parties need to agree from the start on a detailed programme that precisely defines the measures to be adopted and, as a consequence, the length of the mandate. This is the reason negotiations in Germany between the Christian Democratic Union and the Social Democrats are so lengthy and detailed. It will, let us hope, guarantee future stability.

Italy might want to learn from the experience of the past few months and from the Germans. It could take the opportunity of the recent shake-up in several parties to force an agreement on a detailed series of reforms that would be able to turn around the economy, making it competitive again. This would require a programme of least three years.

Without such a change in gear, the economy will probably continue to languish. Even if the recession ends this year – as projected by international organisations – growth in the next two years will barely compensate for the loss recorded in 2013 (-1.8 per cent). Unemployment and the public debt are expected to rise. In such a dire scenario, it is unlikely the coalition parties and their supporters will gain popularity. Extremist, anti-EU and populist movements may gain further at the next elections. The next parliament could be even more fragmented than the current one, making it even harder to form a government and practically impossible to implement reforms.

If the current government has gained any strength from the recent shake-up in its supporting parties, it should take this opportunity to request a stronger mandate. To do so would be to raise the stakes – but, if it does not, it could fall victim to its own short-sightedness.

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