Italy fights a brutal battle to reform itself

published 31 October 2014

"Nobody ever said that reforming Italy would be easy," says Gideon Rachman on FT.com. "But Matteo Renzi, the Italian prime minister, is going through a series of brutal tests this month as he fights on two fronts, in Brussels and Rome."

The tussle with Brussels is budget-driven. At the latest European Union summit, Italy was hit with a demand for an additional EU budget contribution.

At the same time, the EU is threatening to reject the country's own budget for overspending. This combination of demands "must strike Italians as sadistic or surreal or both".

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That's not to say that the Italian budget, unveiled in mid-October, doesn't raise a few eyebrows, says The Economist. It's distinctly expansionary, promising "at least €4.7bn in extra spending and €18bn in tax cuts".

Even allowing for plans to cut other spending and reduce tax evasion, there will be "a shortfall of €11bn that will reduce the downward trend of Italy's deficit".

Renzi is betting that this will pay off by boosting growth, but "for the leader of a country with debts expected to hit 137.5% of GDP this year, [he] is playing a high-stakes game".

Still, the prime minister is probably hoping that a generous budget will secure popular support for crucial long-term reforms.

The central pillar of these is a new labour law that would make it easier for firms to hire and fire staff. This might reduce the country's high youth unemployment, but the changes are opposed by trade unions, who staged demonstrations in Rome over the weekend. There is no guarantee that the government will be able to push them through.

It doesn't help that 39-year-old Renzi is "better at announcing reforms than delivering them", says Hugo Dixon on Breakingviews. He is surrounded by inexperienced colleagues and "all key decisions have to go through him".

This centralisation is an understandable reaction to Italy's "stifling bureaucracy" and "vested interests", but it creates bottlenecks: "One senior official says that the only way to get through to the prime minister is to send him a text message, as requests to his office get bogged down."

Investors need to hope that the prime minister's "boundless energy" andbetter support from the rest of the EUwill ultimately see him through."There is no Plan B that wouldn't tipboth Italy and its neighbours into a severe crisis."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.