By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
Matteo Renzi’s Plan A is to push through domestic reforms, hope the European Central Bank manages to get inflation ticking up, and keep his fingers crossed the Italian economy stops shrinking. But if this fails, a mega wealth tax, debt restructuring and/or exit from the euro beckons.
When Julius Caesar crossed the Rubicon in his bid to take control of Rome, he is reputed to have said “alea jacta est” (the die is cast). Matteo Renzi, soon-to-be Rome’s new master, has also rolled the dice. In doing so, he is taking big risks. Given Italy’s mess, one can only pray that his gamble pays off.
A weekend pact between Matteo Renzi and Silvio Berlusconi offers new hope to Italy. The constitutional reform deal between the leader of Italy’s largest party and the leader of the opposition addresses one of the country’s biggest problems: its ungovernability. Now Renzi, who runs the centre-left Democratic Party, needs to put his energy behind key economic reforms, especially jobs and public spending.
Italy seems continually condemned to disappoint. The economy has barely grown in 20 years. The younger generation is languishing without opportunity: youth unemployment stands at 41 percent. So many chances to reform the country have been wasted – and many by Silvio Berlusconi, who was finally expelled from the Senate last week after being convicted of tax fraud.
Italy’s new prime minister, Enrico Letta, is making the best of a bad job. After February’s inconclusive election, it looked like Italy’s dysfunctional political system might drag the country further into the abyss. There was a risk that nobody would be able to form a government, new elections would be called and that even these would end in a stalemate.
The austerity debate misses half the point. It is true that governments, especially in the euro zone, shouldn’t chase an austerity spiral ever downwards. But they can’t just sit on their hands. They must drive even harder for structural reforms.
Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.