Italy’s new Prime Minister has left little doubt that Rome’s era of austerity is winding down. What remains in doubt is how Enrico Letta plans to pay for it.
In Monday’s maiden speech in the Chamber of Deputies, Parliament’s lower house, Mr. Letta made it clear that the economic foundation of the previous government – tax hikes and spending reductions in the name of austerity – is finished.
“We will die of fiscal consolidation alone, growth policies cannot wait any longer,” the 46-year-old Prime Minister said, noting that the Italian economy remains in “serious” condition after a decade of stagnation followed by recession.
Mr. Letta’s speech put Italy at the leading edge of Europe’s anti-austerity campaign, which began in earnest in February when former prime minister Silvio Berlusconi and Beppe Grillo, leader of the anti-establishment Five Star Movement (M5S), used their anti-austerity, and vaguely anti-euro, messages to surge in the polls.
Their popularity deprived Pier Luigi Bersani’s Democratic Party (PD) a majority in the upper house, the Senate, leading to a stalemate that only ended on the weekend, when Mr. Letta, the compromise prime minister, unveiled the coalition government’s new cabinet.
The uneasy three-party coalition brings together the centre-left PD, now led by Mr. Letta, with Mr. Berlusconi’s centre-right People of Liberty (PdL) party, though not Mr. Berlusconi himself, and the small centrist party.
Since the Italian election, both France and Spain have lobbied the European Commission for more leeway on their budget deficit targets and, with Germany’s support, it appears they will get it as austerity takes the blame for pushing unemployment to unbearable levels. In Spain, the jobless rate is 27.2 per cent, a figure not seen since the Great Depression.
Mr. Letta’s speech, given three days before the European Central Bank’s expected interest rate cut amid compelling signs of weakness across the 17-country euro zone, was vague on details but strong on ambition. In addition to committing the coalition to electoral reform and overhauling the constitution to give separate roles to the now equally ranked upper and lower houses of parliament, he outlined a tax-cutting campaign that, he hopes, will lay the groundwork for job creation.
The centrepiece of his tax pledge is the suspension of the hated property tax, known by its acronym IMU, that was imposed on primary residences by former leader Mario Monti and strenuously opposed by Mr. Berlusconi. He did not, however, vow to kill the tax. Some economists think it will ultimately be reduced or imposed only on residences above a certain value.
He also said he hoped the planned hike in the value-added tax to 22 per cent from 21 per cent, another initiative of Mr. Monti, would not go ahead, and that taxes on employers – a “tax on jobs,” as he put it – would be cut. Mr. Letta is trying to gain European support for his anti-austerity, job-creation plans by visiting German Chancellor Angela Merkel and European Council President Herman Van Rompuy this week.
How Italy will pay for these measures was left unsaid and Italy has virtually no flexibility, even though its sovereign funding costs are well below their crisis highs of 2011, when Mr. Berlusconi was effectively ousted and replaced by Mr. Monti. While Italy is not Greece, the country is in deep recession and is saddled with a ratio of debt to gross domestic product of 127 per cent, the second largest in Europe, after Greece.
Mr. Letta said government ministers’ pay would be cut, and hinted that public funding of political parties would be eliminated or reduced. But that was about it, leading some politicians to ask whether the tax cuts would be financed by shredding what’s left of the social safety net.
The implication from Mr. Letta’s speech was that tax cutting will stimulate job creation and that structural reform will take care of the rest. Italy needs reform – from breaking open protected professions to making it easier for employers to fire and hire. But the country lacks a culture of economic compromise and reforms have always been slow in coming.
Reforms may be even more difficult under the new coalition government, where old enemies will try to find common ground, with no guarantee of success.