Berlusconi Promises Tough Budget Measures For Italy – Attempt To Avert Greek Style Debt Crisis – Good Show, But Do Not Count On Structural Public Spending Reforms – Italian System Is Incapable

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By Paolo von Schirach

August 15, 2011

WASHINGTON – The European Council President, Herman Van Rompuy, praised the Italian Government led by Prime Minister Silvio Berlusconi for its “timely and rigorous financial measures” aimed at reducing the government deficit as a way to contain the effects of the debt crisis. The measures announced are more stringent than a previous package which Rome announced only a few weeks ago.

Balance the budget?

Under the new plan, Italy aims to cut its deficit to only 1.4% of GDP in 2012 and balance the budget in 2013. This will be accomplished via a mix of spending cuts and tax increases. Why the new round of “rigorous” measures? Well, because the bond market had began wondering how Italy would ever pay back its astounding debt.

Unmanageable debt

Sure enough, until now Italy managed to service its debt, notwithstanding its staggering size, now more than 120% larger than the country’s GDP. But, in the midst of the growing Eurozone turmoil, caused in large part by market fears of huge piles of debt in many countries characterised by weak economies, Italy’s oversized debt looked very bad. And so investors started asking for higher interest rates for Italian bonds. And a rise in interest rates could be disastrous, given the size of Italy’s debt and the impact of higher interest rates on the yearly cost to service it. So, the European Central Bank, ECB, came to the rescue, buying Italian bonds, (and Spanish bonds, as Spain is also doing poorly), in order to alleviate the interest rate pressure.

In return for the favor, the ECB wanted Italy to show more forcefulness in spending cuts as a demonstration that the country is well on its way to balance the budget, and very soon capable of generating budget surpluses, so that it can credibly show that it is has a strategy to start retiring this enormous debt.

Italy “does not do” long term plans

Well, here I invite a pause. Such a transformation in Italy’s fiscal policies would be a revolution. In size and scope this would be totally unprecedented. Italy “does not do” long term strategies. It never did. And I suspect it never will. The political system was and is paralysed. Silvio Berlusconi, haunted by criminal prosecutions and even sex scandals, is a totally discredited leader attacked from within his shaky coalition. And there is no credible center left political alternative.

Everybody is wedded to the system as is

Besides, whatever their politics, the Italians are wedded to a costly and ineffective welfare system. And the Italian economy is strangled by bad laws and extremely onerous labor regulations. Some Italians reacted to this through the “grey economy”, also known as “the submerged” sector, (no invoices, no records, no taxes). Organised crime, through its main “holding companies”: Mafia, Camorra and N’drangheta feeds on all these structural inefficiencies, collecting rents at every step of the way.

A “rigorous” plan would entail trasnforming all this, so that –puff– the old Italy is gone and a new one born. So, please, forget about it. With this I do not mean to say that nothing will be done in Italy. “Something” will be done, for sure. But count on cosmetic, mostly window dressing, temporary stuff.

Count on clever moves

Italy is famous for last minute improvisations and clever manoeuvres. But, serious, structural reforms are too complicated in a country kept together by layers upon layers of interlocked vested interests and where it is a remarkable political achievements to survive the day.

And, please do remember that Prime Minister Silvio Berlusconi himself came onto the Italian political scene as the anti-establishment “new man”, a self-made businessman who would finally introduce sound market oriented economic policies. Well, this was back in 1994. And while lucky enough to govern with a large majority, at least after the most recent elections, he did basically nothing.

But now it is different, bold action needed

One might object that now the situation is different, as Italy is confronted with a fate similar to Greece, unless drastic action is taken right now. Well, you would think so. But I doubt it.

Look, even Greece, a Eurozone country that did fall into the abyss and is now in the midst of a real national tragedy, still does not get it. The Greek Government is still a long way from having all its citizens buy into a real reform plan. Mostly the Greeks resist the changes enacted to save it.

Italians still believe that they will get by

The Italians, who want to believe that their predicament is not as bad as Greece’s, are even farther away from buying into anything. For sure, to assuage the markets, “something” will be done. Hence Rome’s policy announcements. But do not expect any serious, radical and implementable long term plan. This would be way beyond what a weak political system can design, sell and execute.

The EU partners know this

So, to read today that Italy’s new initiatives are regarded as “timely” and “rigorous” by its EU partners makes me wonder. Don’t the other Europeans know that this is going to be some more Italian window dressing, with little substance? My hunch is that probably they do know. Still, it is expedient to say nice things in public, hoping that the bond markets will be fooled. After all, last year when the Greeks promised to put their house in order, in return for EU and IMF money, nobody doubted their intentions in public. And then we saw what happened.

Proclivity for farce

This proclivity for farce makes me think. It used to be said about Italy that “The situation is dramatic….but not serious”. Now, if the other Europeans play along and accept Italian smoke and mirrors as substance, I am beginning to think that this sarcastic characterization of basic lack of seriousness applies to the rest of Europe as well.

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