Rome’s war against “lo spread” isn’t over

September 18, 2012

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Italians must feel like Hercules fighting the hydra. “Lo spread”, the difference between Italian and German bond yields, hung over Italy’s economy and politics for more than a year. Now, just as the European Central Bank’s promise of bond-buying seems to have calmed markets, the government says it wants to fight another “spread” – the productivity gap.

Italy’s sagging productivity and competitiveness isn’t a new topic. Nominal unit labour costs rose on average 2.3 percent each year between 1999 and 2011, well above the euro zone average of 1.6 percent. Now Rome is in danger of getting left behind even peripheral states. Eurostat reckons unit labour costs will rise 1.7 percent this year in Italy, whereas they are falling steeply in Spain, Portugal and Greece. A spate of industrial crises – including fears of a retrenchment by Fiat, and the closure of a smelting plant in Sardinia – has stoked public debate.

One topic that is gaining traction is wage and contract bargaining. Both the International Monetary Fund and the European Commission want the country to do more to encourage businesses to set their own labour contracts, instead of depending on national or industry-wide agreements. That should increase flexibility and align wages with real productivity. There are precedents; Fiat used workforce referenda to create its own contracts, in spite of opposition from the country’s oldest union. However, an agreement in 2011 to encourage firm-level bargaining has had limited effect, and the government wants unions and employers to come up with a new deal. The prospect that the IMF may one day dictate tougher terms, if a bailout becomes necessary, should help.

Contract bargaining is part of the picture. Italy’s many small companies need support to improve technology and compete on a global scale, but state resources are limited. Companies also struggle under a stifling tax burden and complex bureaucracy. The public sector too needs to be made more competitive and efficient, and local services need to be opened up to competition.

The good news is that the government has made growth and competitiveness a matter of urgency in the last months of its mandate. But with bond yields now back at tolerable levels, there is a risk that the pressure to reform ebbs over time, particularly after next year’s election. “Lo spread” may return.

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