Instability ‘may freeze’ Italy’s reforms

Italian prime minister Enrico Letta - to resign today

Italy, beset by yet another government crisis, cannot afford political instability at a time when it needs to make its economy more competitive, the chairman of eurozone finance ministers said yesterday.

Dutch finance minister Jeroen Dijsselbloem told a Reuters eurozone summit that political turmoil could hamper the single currency area’s recovery by paralysing decision-making and freezing structural economic reform in Rome.

Italian prime minister Enrico Letta yesterday said he would resign today, with Democratic Party leader Matteo Renzi expected to be appointed head of government within days.

“I don’t think Italy can afford that and I don’t think any country can really afford that,” Mr Dijsselbloem said.

The eurozone’s third largest economy sold the highest planned amount of bonds and paid the lowest three-year yield yesterday.

The European Commission expects Italy’s economy to return to growth this year with a 0.7% rise after two years of contraction. Public debt, seen peaking this year at 134% of the economic output, is more than double the EU’s ceiling.

Italy’s main business lobby accused Mr Letta’s government last month of failing to help the economy and demanded a cut in public spending and easing in taxation and labour rules.

To make Europe more competitive, Mr Dijsselbloem said, EU institutions had to change their approach to granting more time to fix budgets deficit and debt overruns in return for promises to reform.

“If you want more time to deal with your budget, fine, but then you have to do more in terms of reform.

“The commission should be much tougher… and the conditions should be you have to move forward reforms X, Y, Z within A, B or C months, within a limited amount of time you have to show results of reforms because otherwise I will hold you to your budget obligation.”

EU economic and monetary affairs commissioner Olli Rehn on Monday said the EU may in future demand proof of reforms first before granting governments more time to reduce excessive budget deficits.

The commission assumed new powers last year to review member states’ budget plans before they are adopted by national parliaments.

The aim is to raise a red flag before it is too late and prevent a repeat of the turmoil of the past four years.

“Even to my surprise the mechanism works,” Mr Dijsselbloem said. “The peer pressure, the possibility of the commission stepping in and putting sanctions on a country, the mechanism is working. The next step for me would be to have a connection between budgets and reforms.”

- Reuters


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