Wolfgang Münchau: Italy misses the chance to reform

Earlier this year I wrote that Mario Monti was the wrong man to lead Italy. Now it has turned out that the former Italian prime minister could not even manage to lead the small centrist political party he founded less than a year ago. He resigned last week as president of Civic Choice after a dispute over his decision to criticise the 2014 Italian budget; he also quit the party’s group in the Senate, the upper house. Mr Monti succumbed in one of those snakepit moments of Italian politics with all its rivalries, conspiracies and grandstanding.
The decline and fall of the former European commissioner is a cautionary tale about an outsider’s sudden rise to power – and more importantly, about the hopelessness of economic reform in Italy. In his substantive criticism of the budget – proposed by the governing coalition of which Civic Choice is a member – Mr Monti was right. The budget reshuffled tiny amounts of spending and taxation, and missed a big opportunity for reforms.
The headline item in Italy’s 2014 budget is a symbolic €2.5bn reduction in the labour “tax wedge” – the difference between the cost of labour to an employer and an employee’s take-home pay. This is a measure of competitiveness – and one where Italy scores particularly poorly. To close the gap with Germany, the Rome government would have to reduce the wedge by 20 times what it is proposing now.
Cutting Italy’s high labour taxes sits right at the top of almost every reform agenda. To do so requires a wider change of spending and taxation priorities. I am not a supply-sider, but if you have locked yourself into a monetary union with a competitive Germany, it is hard to maintain high levels of labour taxes. Unless you find a way for Germany to adjust to you – dream on – you have to adjust to Germany.
Like Mr Monti, Enrico Letta, Italy’s current prime minister, and Fabrizio Saccomanni, the finance minister, are acutely aware of what needs to be done. But they face extreme constraints. Mr Letta’s Democrats are one of Europe’s last unreformed socialist parties. It supports the prime minister in his determination to stay within the EU-mandated deficit target of 3 per cent of gross domestic product. But it also opposes the changes needed to free up resources for tax cuts.
Meanwhile, Silvio Berlusconi’s centre-right People of Liberty party, another member of the coalition, opposes increases in wealth, property and consumption taxes. If one coalition partner vetoes spending cuts, and the other vetoes tax increases, the margin for budgetary manoeuvre is close to zero.
To fund a bigger cut in labour taxes, Mr Letta would have to cut out a layer of regional government. Inefficient state-owned utilities – many of which serve as havens for clapped-out politicians – would also need to be sold. The main benefit of privatisation is not just the cash it brings but efficiency gains. In the short run, one of the most important measures should be to clean up the banks, which are currently unwilling to lend to the private sector.
I am not sure that any of this is politically feasible inside the confines of the European fiscal target. Even the German government was forced to breach the rules when it launched a much more moderate reform programme in 2003.
Do not expect the same from Italy. Instead of accepting a breach in fiscal rules as the price of pursuing reforms, Rome has chosen fiscal compliance – and no reform. With no prospect of growth, the only way the government will hit its fiscal targets will be through a toxic combination of austerity and smoke-and-mirror accounting tricks, such as the use of one-off revenue measures to fund permanent expenditures.
The next few months will see many amendments to the budget, the purpose of which will not be to improve its quality but to cater to special interests. It is possible that PDL hawks might seek an excuse to let the government fail. Would new elections help? Mr Monti’s experience shows that reformers in Italy do not necessarily win elections.
The centre-right, meanwhile, is currently preoccupied contemplating life after Mr Berlusconi’s increasingly certain political exit. The PDL is not reformist either. It is the ultimate special interest party.
The best hope may lie with Matteo Renzi, the 38-year old mayor of Florence who is the only top politician who both stands a chance of being elected and who offers some clarity about what needs to be done, such as bigger cuts in the tax wedge. Mr Renzi may soon take over the leadership of the Democrats. His first job would be to align a reluctant party behind his agenda, a task of a similar scale to the one faced by successive leaders of the British Labour party in the 1980s and 1990s.
We know such transformations take a long time. But Italy does not have that time. The Italian establishment’s preference of not reforming, not defaulting, and staying in the eurozone is inconsistent. It has been the great failure of Italy’s political establishment, including Mr Monti in his role as a politician, to make that clear.

Wolfgang Münchau

Fonte: FT