Con­flicted Italy hov­ers on the brink of re­newed hard times

Af­ter a long re­ces­sion, Ital­ians have en­joyed three pre­cious years of growth: but now the coun­try is stalling again as its pop­ulist lead­ers cross swords with the EU.

The Observer - - Business - An­gela Gi­uf­frida re­ports from Rome

Giuseppe Pasini, the pres­i­dent of Ital­ian steel­maker Fer­alpi, based in the north­ern province of Bres­cia, has rea­son to be con­cerned. When Italy fi­nally emerged from its crush­ing triple-dip re­ces­sion in 2015, Bres­cia, an im­por­tant Euro­pean in­dus­trial hub some 50 miles east of Mi­lan, en­joyed un­in­ter­rupted growth.

But af­ter the gen­eral elec­tions in early March the econ­omy started to slow, and in the most re­cent months it has ground to a halt. “Af­ter three years of op­ti­mum growth, be­tween June and Septem­ber our econ­omy slowed to 0.1% [down from 1.3% in Q1 and 0.6% in Q2]. This came as a shock,” said Pasini. “Busi­nesses are wor­ried; this slow­down could be par­tic­u­larly dan­ger­ous in 2019, not just for Bres­cia but for the en­tire coun­try, as our re­gion is con­sid­ered a driver for the rest of the econ­omy.”

The slow­down in Bres­cia has co­in­cided with eco­nomic stag­na­tion across Italy, an in­di­ca­tion that the po­lit­i­cal and fiscal un­cer­tainty cre­ated by the coun­try’s coali­tion govern­ment, made up of the an­tia es­tab­lish­ment Five Star Move­ment (M5S) and the far-right League, is hav­ing an ef­fect. Fear is mount­ing among busi­ness chiefs that Italy, which is sad­dled with a pub­lic debt worth more than 130% of GDP, could slip back into re­ces­sion. Its po­lit­i­cal lead­ers are show­ing no sign of back­ing down on their big-spend­ing plans be­fore a dead­line on Tues­day to present a re­vised bud­get for 2019 to the Euro­pean com­mis­sion.

The com­mis­sion warned on Thurs­day that the plans, which in­clude tax cuts, a univer­sal ba­sic in­come and low­er­ing the re­tire­ment age, would push Italy’s deficit to 2.9% of GDP next year, as op­posed to the govern­ment’s pre­dic­tion of 2.4%.

“The pri­or­ity for the [two par­ties] is to show they are de­liv­er­ing on their prom­ises,” said Mas­si­m­il­iano Pa­narari, a pol­i­tics pro­fes­sor at Rome’s Luiss Univer­sity.

The yield, or ef­fec­tive in­ter­est rate, on 10-year Ital­ian govern­ment bonds rose six ba­sis points higher to 3.39% af­ter the com­mis­sion’s an­nounce­ment, 293 ba­sis points higher than the yield on Ger­man debt, seen as Europe’s safe-haven in­vest­ment.

Italy’s prime min­is­ter, Giuseppe Conte, has dis­missed the com­mis­sion’s fore­cast as “im­plau­si­ble”, in­sist­ing that the bud­get will steer growth to­wards 1.5% of GDP over the com­ing year, com­pared with the com­mis­sion’s lat­est fore­cast of 1.2%, while re­duc­ing the deficit. The govern­ment is count­ing on the ba­sic in­come for the un­em­ployed and tax cuts to al­le­vi­ate poverty and give peo­ple more money to spend.

But busi­ness lead­ers ar­gue that the bud­get con­tains lit­tle to spur growth and in­vest­ment, and will in­stead lead to an econ­omy based on “hand­outs”.

Pasini said it would also di­min­ish pro­gramme in­tro­duced by the pre­vi­ous cen­tre-left govern­ment known as In­dus­try 4.0, which is cred­ited with en­abling com­pa­nies to ex­pand and com­pete in global mar­kets: it pro­vided tax in­cen­tives for in­no­va­tion, train­ing and the pur­chase of new ma­chin­ery.

Gior­dano Riello, the founder of three elec­tron­ics com­pa­nies in the Veneto re­gion, who has ben­e­fited from the pro­gramme, said the coali­tion govern­ment lacked longterm eco­nomic vision.

“What we need is in­vest­ment in in­fra­struc­ture, fac­to­ries and ma­te­ri­als … not give­aways to make peo­ple happy for only a brief time,” he said. “I’m re­ally afraid to in­vest in my coun­try right now as there is no fu­ture vision. All we have is pop­ulism, and you don’t de­velop with pop­ulism.”

There are warn­ings that mea­sures in­clud­ing the so-called dig­nity de­cree, in­tro­duced in July by the M5S leader, Luigi Di Maio, to cur­tail tem­po­rary job con­tracts and pe­nalise com­pa­nies that shift pro­duc­tion abroad, could have the op­po­site ef­fect.

“The labour mar­ket de­cree makes it much harder to hire tem­po­rary work­ers, yet such con­tracts are a cru­cial part of em­ploy­ment,” said Francesco Gi­avazzi, an economics pro­fes­sor at Mi­lan’s Boc­coni Univer­sity. “As

for tax­ing com­pa­nies for de­lo­cal­i­sa­tion – mod­ern firms try to op­ti­mise the value chain by build­ing firms around the world. If you don’t al­low them to do that, they will move ev­ery­thing abroad.” The move to lower the re­tire­ment age was aimed at mak­ing more jobs avail­able to young peo­ple, but com­pa­nies might in­stead use it as an ex­cuse to re­duce labour costs, Gi­avazzi added.

Li­cia Mat­ti­oli, chief ex­ec­u­tive of the jew­ellery com­pany Mat­ti­oli and a vice-pres­i­dent at Con­find­us­tria, the con­fed­er­a­tion of Ital­ian in­dus­try, said the slow­ing econ­omy was a re­sult of un­cer­tainty as well as anx­i­ety over the costs of ser­vic­ing the coun­try’s debts.

She also crit­i­cised the bud­get for lack­ing a clear in­vest­ment strat­egy, es­pe­cially for much-needed in­fra­struc­ture pro­jects. The coali­tion part­ners, for in­stance, are cur­rently locked in bat­tle over TAV, a high-speed rail project link­ing Italy and France that M5S op­poses and the League sup­ports. Mat­ti­oli is wor­ried about it be­ing can­celled: “Not only will it mean €9bn worth of in­vest­ment for our coun­try, but it gives us a high­speed link to Europe.”

The loom­ing bud­get stand­off also poses an acute dilemma for the Euro­pean com­mis­sion, the guardian of EU law, which re­jected Italy’s draft spend­ing plans in a historic mo­ment last month. For long-serv­ing EU of­fi­cials, the power to re­ject the bud­get of the third-largest econ­omy of the eu­ro­zone makes a lot of sense – un­til it ac­tu­ally has to be used.

The com­mis­sion is seen to be in a lose-lose sit­u­a­tion: if it re­jects the bud­get again, of­fi­cials fear it will pro­vide am­mu­ni­tion for the League’s anti-EU cru­sade be­ing led by the deputy prime min­is­ter, Mat­teo Salvini. But al­low­ing the plans to pass would send a mes­sage that the EU’s com­mon-cur­rency rules do not mat­ter.

The de­ci­sion to let France and Ger­many off the hook in 2003 for break­ing the eu­ro­zone’s fiscal pact is judged to have been a hugely dam­ag­ing mis­take that poi­soned re­la­tions be­tween large and small eu­ro­zone mem­bers. So far, the other 18 mem­bers of the eu­ro­zone have backed the com­mis­sion against Italy, but that has done noth­ing to ease the wran­gling.

In front of the cam­eras, EU min­is­ters and of­fi­cials have taken a soft­lysoftly ap­proach, but be­hind the scenes there is anger about Rome’s spend­ing plans. One se­nior Euro­pean source said the fight with the EU was po­lit­i­cal, and ac­cused Italy’s govern­ment of mis­lead­ing its pub­lic by sug­gest­ing eco­nomic bounty was around the cor­ner.

Italy’s bud­get “is not only a mis­take, it is a lie”, the source said. “What Salvini wants to prove is that he is not stick­ing to the rules.” The source be­lieves the Ital­ian govern­ment is seek­ing to em­u­late the eco­nomic pol­icy of the US, but that it lacks Amer­ica’s struc­tural eco­nomic strengths, such as high pro­duc­tiv­ity and high em­ploy­ment rates.

The EU’s Rome-watch­ers take lit­tle com­fort from the fact that Italy’s ris­ing bond yields may prove a more ef­fec­tive sanction than de­ci­sions by Brus­sels tech­nocrats. “You can get away with a cri­sis un­til the mo­ment the mar­kets say enough is enough,” said a se­nior EU official.

As crunch time ap­proaches, Pasini is urg­ing Ital­ian lead­ers to take heed of busi­ness con­cerns. “Firstly, Europe is es­sen­tial for Italy and its in­dus­try. I hope our politi­cians un­der­stand this and that we don’t reach a point where the coun­try be­comes iso­lated,” he said. “Se­condly, we hope they mod­ify some of this bud­get.”

‘I’m afraid to in­vest right now as there is no fu­ture vision. All we have is pop­ulism, and you don’t de­velop with pop­ulism’ Gior­dano Riello, en­tre­pre­neur

Emanuele Cre­maschi/Getty

A mo­tor­cy­cle show in Mi­lan last week. Italy’s re­cent pros­per­ity looks to be in jeop­ardy.

Reuters

ABOVEDeputy prime min­is­ter Mat­teo Salvini is on an anti-EU cru­sade.

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