An Italian déjà-vu

The European Commission published today its country-specific recommendations, in the context of the European semester. The leitmotiv, in the case of Italy, is clear and simple:  “limited progress” on almost all the six country-specific recommendations adopted last year by the Council. This year, the recommendations for Italy are increased to eight, none of which will look new to the eyes of the informed observer. It is an “Italian déjà-vu”, in which the Commission points again to the longest-lived and thorniest issues that affect the Italian economy, holding growth back and raising concerns about public finances. The challenge for the Italian government will be to realise that commitments, without implementation, are not worth enough to regain the credibility that Italy need, to be able to play the role it wishes to play in Europe.

Public Finance is confirmed to be the longest-lived thorn in the side of the Italian economy. The Commission acknowledges the importance of the fiscal effort enacted in 2011/2012, which allowed the headline deficit to remain stable at 3% of GDP in 2013 despite the dismal state of the economy, and projects the deficit to decline to 2.6% of GDP in 2014 and to 2.2% in 2015. However, important doubts are casted on the reliability of the Italian government forecasts behind the budgetary strategy in the stability programme and therefore on the feasibility of the commitments. The Italian stability programme foresees the achievement of a balanced structural budget in 2016, while aiming at compliance with minimum structural adjustment required by the new rules on debt reduction, over the period 2013-2015. The objective of a balanced structural budget was actually supposed to be achieved in 2014, but it has been postponed. The fiscal path has in fact been re-calibrated on the bases of severe economic conditions and to take into account the effort needed to implement planned structural reforms (the so-called “structural reform clause”). The structural adjustment foreseen by the government would amount to 0.2 percentage points of GDP in 2014 and 0.4 percentage points in 2015, allowing Italy to comply with the debt reduction rules over the transition period. But the Commission’s assessment is far from reassuring, on this point. The macroeconomic scenario underpinning the budgetary projections of the Italian government is found to be “slightly optimistic” and “the achievement of the budgetary targets is not fully supported by sufficiently detailed measures, in particular as of 2015”. Less optimistic than the Italian government, the Commission projects structural adjustment to reach only 0.1 percentage point of GDP in 2014, as opposed to a minimum of 0.7 percentage point of GDP needed to comply with the debt benchmark in 2014. As a consequence, Italy is recommended to make additional effort and reinforce the budgetary measures for 2014, in the light of the emerging gap relative to the debt reduction rule.

The problem is not only in the data, but also in how the data are produced. In casting doubts about the reliability of the macroeconomic projections used by the Italian government, the Commission stresses another very important point, i.e. the fact that projections “have not been endorsed by an independent institution”, as it would instead been required in the context of the Two-Pack. The reason for this is to be found in the slow development of Italy's fiscal framework and implementation of the Two-Pack requirements. The board of the parliamentary budget office, which will act as independent Fiscal Council in Italy, was in fact appointed only at the end of April 2014, i.e. after the stability programme adoption and definitely too late to endorse the underlying macroeconomic projections.

The debt trajectory in the stability programme depends heavily on the implementation of the government’s privatisation plan and – unsurprisingly – on economic growth, whose sluggishness represents perhaps the riskiest and longest-lived threat to the Italian fiscal commitments. And it is exactly on the drivers of growth, that the Commission points the finger at two other Italian unresolved (and to some extend tabooed) issues, i.e. structural reforms in the fields of labour and product market.

In 2013, Italy was recommended to ensure the effective implementation of the labour market and wage-setting reforms and to take further action to foster labour market participation, especially of women and young people, and improve public employment services. However, the Commission assesses limited steps in this direction, with the Italian labour market still segmented and characterized by an especially low participation, at a time when unemployment reaches 12% and 40% among the young. Some measures have been already taken. The previous government presented in June 2013 an incentive scheme aimed at increasing youth employment by favouring the hiring of young people on a permanent basis. In March 2014 the new Italian government has proposed a plan for a “Youth Guarantee Initiative”, worth EUR 1.5 billion, which should offer young people (between the ages of 15 and 29) the possibility of using a network of customised services on training, employment orientation and opportunities. A decree was passed in May 2014 with the objective to increase flexibility on the use of temporary contracts, in particular by allowing temporary their renewal up to five times and for a maximum duration of three years, and by removing the (previously compulsory) obligation to justify explicitly of renewal. At the same time, the decree introduces a safeguard by limiting to 20% the share of temporary contracts in the total number of permanent employees in firms with more than 5 workers. The apprenticeship contract has also been reformed in several waves, starting in 2012. The take-up of this contract type had already been very limited, also due to an existing obligation to convert apprenticeship into open-ended contracts before hiring new apprentices. This obligation has been relaxed in the decree passed in March 2014, together with other features of the apprenticeship contract. The Commission welcomes these measures that go in the direction of introducing flexibility in the labour market, but it also warns that other measures need to follow, to enhance the take up of permanent contracts and avoid the risk of exacerbating labour market segmentation. The Italian national reform programme includes several measures aimed at reforming the labour market including the streamlining of existing contractual forms; active labour market policies; unemployment benefits and tackling disincentives to work. The Commission is cautious on the plan, stressing that “while many of the proposed actions appear adequate to address Italy's labour market challenges, their effectiveness will depend greatly on their design and subsequent implementation”. If it sticks to its ambitious – which foresees implementation of almost all the measures planned before end-autumn – the government will be tested very soon, as will its resilience to the pressure that typically emerges around any proposed reform of the Italian labour market.

At the same time, growth is held back by remaining bottlenecks to competition in areas such as professional services, insurance, fuel distribution, retail and postal services, where untouchable reserved areas of activity or concession and authorization schemes persist. The Commission stresses in particular that while having progressed in improving product market regulation over the last 15 years, Italy suffers even in this field from a deficit of implementation. The government also plans to act in this field, but the strategy is somewhat less clear (and the pressure is likely to be even stronger). Among the other things, the national reform programme foresees the adoption by September 2014 of the Annual Law for Market and Competition, a law that the government is required to draft each year taking into account recommendations by the Italian Competition Authority (but that has never been adopted previously).

Overall, while not being the harshest the Commission assessment seems to be oscillating between cautious optimism and mild disappointment, depicting a country that hangs perilously in balance on a thin red line. In what feels like déjà-vu, all the issues raised are very long-lived and unresolved ones, on which promises and commitments have been uncountable over years and governments. Even the Commission seems to acknowledge this, in stressing that “thorough and swift implementation of the measures adopted remains a key challenge for Italy, both in terms of addressing existing implementation gaps and preventing the accumulation of further delays”.

Will this time (and this government) be different? As already noticed, the European election have endowed the current Italian government with an unprecedented pro-European endorsement at home, which constitute the first necessary requirement for Italy to be able to play an important role in Europe. The second requirement, which is even more crucial for ambitions to be successful, is credibility. And credibility, in the case of Italy can hardly go without a good dose of self-awareness. It should be acknowledged that the diseases affecting the Italian economy are very well known, by now. In earnest, it should be acknowledged that they have been known for years if not decades. What is still missing is the will to practically cure them. At present, PM Renzi’s government enjoys positive consideration and trust because of the perceived character of novelty. What he should do, to secure the credibility that he unquestionably needs in Europe, would be to go even more radical and dare venturing into the traditionally forbidden territory of structural reforms, to do something that Italian government have not been traditionally very keen at: turning promises into facts.