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Italy – The Situation So Far

Heading in a better direction?

Where is Italy going at the moment?  The country which was very close to financial and social collapse after too many years in the hands of Silvio Berlusconi and other lackluster politicians is now being run by a technocrat government led by Mario Monti.

Monti and his technocrat cabinet, along with the support of most of Italy’s major political parties on both the left and right of Italy’s political spectrum, are trying to introduce the reforms past Italian governments had been promising for years, but never got round to delivering.

Before trying to reform Italy, Monti had to move exceptionally fast to sort out Italy’s finances.  This he did.  The benchmark for Italy’s economic health which is the difference between the return on 10 year German government bunds and Italian government bonds, otherwise known as the spread, indicates that Italy’s public finances are now in a much better state of health.

To rein in Italy’s out of control finances, Monti extended the austerity measures the Berlusconi government had been forced into introducing by pressure from Europe and beyond.  The potential default of Italy’s economy was a prospect which worried many.

Although the prospect of Italy defaulting has fallen greatly, the country’s economy is still not heading in the right direction.

Is Italy Going in the Right Direction?
Is Italy Going in the Right Direction?

Tax Pain

One of the more painful aspects of the austerity measures both Berlusconi and Monti introduced has been a range of tax increases including a property tax – the IMU – which is likely to hit Italy’s agricultural sector very hard indeed.  No kind of transitional system appears to exist to phase in this tax, so agricultural businesses are likely to have to find substantial sums which some, in view of the economic downturn, may not have.  This is what Tuscan businessman Ray Lamothe told me in a recent telephone conversation.  Agri businesses in Tuscany are concerned and some may well just call it a day.  One consequence of businesses giving up will be unemployment, another will be reduced levels of tax income for Italy’s government.

While businesses in Tuscany and elsewhere may hope for support from Italy’s banks, assistance is unlikely to be forthcoming.  Italy’s traditionally cautious banks tend to offer credit only to those who do not really need it.

VAT Pain

Another aspect of the austerity measures is that of VAT being increases.  An increase in the VAT rate from 20 to 21 percent has already occurred, and another, which will push VAT to 23% is on the cards for Autumn 2012.  The VAT increases will most likely harm the cashflow of smaller and weaker businesses in Italy.  Making VAT payments in Italy is difficult because many Italian businesses, especially larger ones, and Italy’s public sector are very slow payers.  Debt will mount and it is conceivable a number of small businesses will shut down as a result of this additional burden.

It is predicted that the autumn VAT hike will cost families of three in Italy an more than €400 a year.

Anti-Evasion Measures

Monti is working to ensure Italians pay their tax dues, and the clamp down on tax evasion is steaming ahead.  There have already been noises from the Monti government along the lines of using the extra tax income to reduce Italy’s tax burden.  What Monti also wants to do, is to move Italy away from direct taxes to more indirect taxes – a shrewd move in a country where tax evasion is considered by many to be essential to business survival.

It is still too early to understand whether the anti-evasion measures will produce the desired effect and probably far too early for the government to even consider lowering tax rates.

By the time this does become feasible, Monti’s government may well be history and Italy, alas, may well fall back into the hands of the political parties which caused the mess by perennially brushing Italy’s tax evasion issue under the carpet, may be back in charge.

Old Guard Meddling

There are, unfortunately, signs that the political old guard is still meddling in what could be viewed as a struggle to save face and their skins.

Monti and his government have been attempting to introduce many wide ranging reforms, but Italy’s many little interest groups lobbied the old guard very hard and certain reforms such as the way Italy’s taxi system runs, how pharmaceutical products are distributed and sold, as well as how lawyers bill their clients, have been substantially watered down.

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Employment law reforms are due by the end of March, but whether these will achieve their aim of freeing up Italy’s stagnant employment market remains to be seen.  While Monti is continuing to prod the politicians from the all-party coalition into supporting this reform, he is meeting with resistance.

It was such resistance which may have prompted Monti’s minister for Cooperation and Integration, Andrea Riccardi, to commented that Italy’s politics was disgusting.  The disgusted, or disgusting, depending on one’s viewpoint, complained vociferously at being labeled disgusting.  Some even called for Riccardi to go.  But Riccardi has a point – Italy’s political classes do not have the best interests of Italy at heart.

Italy’s Traditional Political Class Looks Bad

The speed and breadth of the work Monti and his team are ploughing ahead with is making Italy’s traditional political class look very bad indeed.  Italians will be asking themselves just why Monti is able to do what other politicians have been promising, but were never able to achieve.  “Why is Monti succeeding where the others failed?”, will be another question Italians will be asking.

There is no sign Italy’s politicians have decided to turn over much of a new leaf in the interests of making Italy work.

The impression is that now the spread is back under control, Italy’s left and right would dearly love to remove Monti before he really does make them look utterly incompetent.

Monti must be expecting attacks from all directions and one hopes he is ready to fend them off.  That Monti is no fool is clear.  Last week, he made a comment which appeared to be a form of warning to Italy’s politicians.  It is as if Monti is expecting “assassination” attempts to occur.

Corruption Scandal Rocks Italy’s Left

Meanwhile a corruption scandal involving the left leaning Margherita party is causing fermenting.

The protagonist of this scandal, one Luigi Lusi is an Italian senator who appears to have removed around €30 million from party funds and used the money to fund house purchases and luxury vacations including a trip on the Orient Express.  Lusi is claiming that his misuse of public funds is merely the tip of an iceberg and that if he speaks, a real can of worms will open – and that revelations could spell the end of Italy’s center-left.  The future is not looking bright for the Margherita mob or for Italy’s center-left.

Corruption Allegations Rock Italy’s Right

It’s not just the left which is writhing in the face of allegations of corruption, senior members of the supposedly anti-corruption Lega Nord party are being investigated in connection with a kind of corrupt cartel.  This corruption ring allegedly involves politicians from Berlusconi’s PdL party, as well as the Lega Nord crowd.  The Lega people have closed ranks and maintain that their man is as clean as a whistle.  Doubts, though, will remain and the Lega grassroots are reputedly unhappy that their party is becoming as mired as all the others in corruption scandals.

Reforms that Revolt Berlusconi

Last week, Berlusconi’s successor, Angelino Alfano refused to participate in discussions which were to look at reforming Italy’s national television broadcasting service RAI and justice reforms.  Alfano claimed that such reforms were not priorities.  This is true – the last thing Berlusconi wants is for RAI to become more efficient and present a challenge to his own Mediaset empire.  Berlusconi would also be unhappy if justice in Italy became faster and more just as this may well damage his often less than transparent business interests.

In the end?

How will it all end?  A very good question.  It is possible that the political old guard, both left and right, will form an alliance and do their utmost to bring Monti’s rule to a swift end before he does the same to them.  Alternatively, Monti may succeed in causing Italy’s politics to clean up its act.

Monti, though, does not have much time to do what needs to be done.  In his favor is his proven ability to move exceptionally fast and this may well wrong-foot those who would like to see the back of him.

Italy is either going to progress massively or it is possible that it will end up back in the hands of those who almost destroyed the nation.  Time, and the skill of Mario Monti, will tell.

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Italy image by NuclearVacuum

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