24 September 2013

Reuters: New Italian targets show lack of progress since Berlusconi's fall

More important than the numbers is the fact that Italy's political situation has made no more progress than its economy, dimming prospects for the reforms needed to turn things around.

According to Lucrezia Reichlin, a former head of research at the European Central Bank, Italy's medium-term growth potential is now close to zero due to its failure to reduce costs and bureaucracy, tackle corruption or reform the justice system. "Since the days of the deepest crisis (in 2011) Italy has done nothing to improve its competitiveness", she said in a column in Corriere della Sera daily. As a result its prospects for sustained debt reduction are "non-existent".

Letta cuts a far more sober and reassuring figure than Berlusconi, but his ruling coalition is just as unruly and is deeply divided on economic policy. Speculation has risen that there will be a new election in spring and on Sunday Economy Minister Fabrizio Saccomanni threatened to resign as the government squabbled over whether to suspend a hike in sales tax due to take effect in October. "I'm not going to make a desperate search for a billion euros if in February there's going to be a vote", he said. "It's all useless if the election campaign has already started."

The parties have done nothing to reform the dysfunctional electoral law which led to February's hung parliament, meaning that a new vote in the spring may well produce an equally inconclusive outcome.

While the eurozone's debt crisis seems to have calmed for now, Italy, with the region's most chronically sluggish economy and second largest debt, remains vulnerable to future tensions. "Markets will start to worry about Italy's rising debt when the next recession comes", said Deutsche Bank economist Marco Stringa. "Then they will see if it has done the reforms needed to improve its growth potential and if we are still where we are now it will be in a very difficult position."

Full article

© Reuters