Angela Merkel’s guest in Berlin this Friday will probably have some sympathy for her: Italian Prime Minister Paolo Gentiloni knows all about fragile coalitions and indecisive elections. He is, after all, the sixth Italian prime minister that Ms. Merkel has had to deal with in her time in office.
But soon Italy’s problems may overshadow Germany’s, should the Italian elections on March 4 serve up a political stalemate in that country too. For years, German politicians have fretted about possible Italian economic chaos, but now anxieties about the state of Italian politics are also growing. “Very wide-ranging Euro-skepticism” is spreading, a new phenomenon in Italy, say German government sources.
Economic stagnation and the refugee crisis have had a deep impact on a country which was one of the traditional pillars of the European project. The long-standing support for Europe makes the rise of Euroskeptic forces all the more worrying to Brussels and Berlin. They can only hope that pro-European forces can win a majority, say government sources in Berlin.
With lagging growth lagging, and debt at 132 percent of GDP, Italy remains vulnerable. Lorenzo Codogno, economist
Stable, reform-friendly government in Rome is badly needed, not only for Europe’s sake, but for Italy’s own. There has been some good news lately. Annual GDP growth in the Eurozone’s third-largest country recently hit 1.4 percent, its best level in eight years, and unemployment is falling. “2017 has seen clear increase in growth and investment, and GDP growth will be higher than 2 percent for the next two years,” Ignazio Visco, the Italian central bank governor, recently announced.
But the country’s economic problems are still very serious. While Italy may, as predicted, hit 1.5 percent growth this year, and 1.2 percent in 2019, this is comparatively weak growth, particularly when the global economy is strong. The Italian economy remains very sluggish, with the worst performance in the euro zone and the entire EU.
The main reason for this is the half-hearted reform package pushed through by the Italian government. After some initial progress, “reform efforts have once again weakened since the middle of 2016,” confirmed the most recent major report on the country from the European Commission. There has been little progress in privatization. Tax discipline is unsatisfactory, with too little economic competition, and halting, haphazard reform of state institutions. Non-performing loans in the banking sector continue to be a massive problem, although their level has been slightly reduced recently.
“With growth lagging behind the rest of Europe, and public debt running at 132 percent of GDP, Italy remains vulnerable,” says economist Lorenzo Codogno. Speaking to Handelsblatt, Vincenzo Boccia, the head of Italy’s employers’ federation, said the post-election government must push ahead with reforms, as well as supporting industry with research and development, and renewing Italian infrastructure.
Mr. Visco, the central bank governor, has said that the next Italian government must prioritize the credibility and effectiveness of its reform program, instead of striving to maintain the European Central Bank’s low-interest rate monetary policy. Rising interest rates are not a threat, “ if national economic policy can consolidate the upturn we have seen recently.” Above all, he added, the next government should not raise doubts among the investors who keep public finances on an even keel.
Lethargic economic growth will not help the country clean up its chaotic state finances. According to predictions from the European Union, the government’s budget deficit will climb from 1.8 percent this year to 2.4 percent in 2019. Almost no reduction will be made in the mountain of government debt, the second-largest in the euro zone, after Greece: EU predictions say it will fall only very slightly, from 132.1 percent this year, to 130 percent in 2019.
Rome has regularly asked for – and received – lenience in interpreting EU budget rules. The latest European Union judgment on Italian state finances has already been postponed from November last year. Now it is to be delayed again, until May, well after the election. At that point, the new government – if there is one – must present a budget for next year, including a rise in value added tax, already twice postponed.
“We have to structurally reduce the deficit, otherwise we will lose our credibility on the international stage,” says the former EU Commissioner Emma Bonino, whose party list “More Europe” is standing in the election on the ticket of the governing Partito Democratico. “We must pay down the debt, but gradually, not all in one go,” says Matteo Renzi, former prime minister, who will lead the governing party into the election. Not that long ago, Mr. Renzi was blasting the EU’s austerity policies for curbing the Italian recovery.
In the corridors of Brussels and Berlin, the hope is that rational voices will win out in the elections, and that they will stay rational after they achieve power.
Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. Moritz Koch is a political editor for Handelsblatt in Berlin. Regina Krieger is Handelsblatt’s Italy correspondent. To contact the authors: [email protected], [email protected], [email protected], [email protected]