October 01, 2014
This is an exceptionally busy news day for the eurozone with a whole number of stories that would normally quality as our lead – another fall in headline inflation, and details of the ABS programme. But for us, the latest fiscal plans of Italy and France take centre-stage. Both countries will fail to comply with the fiscal compact when it becomes active in 2016.
Italy yesterday unilaterally, and without consultation, postponed the fiscal compact goal of a primary budget balance by one year until 2017, citing exceptional circumstances. Italy will, of course, not reach that goal in that year either because the adjustment gap is simply too big. The acknowledgement came in the medium-term budget plan for 2014-2016, approved by the cabinet yesterday. The growth forecast for this is -0.3%, and +0.6% in 2015 (quite funny how they keep on producing these forecasts year-in, year-out, always wrong). Despite the recent statistical revision of GDP – to include illegal activities such as drug dealing to arrive at the widest conceivable definition – the deficit-to-GDP forecast is now at 3% for this year, and at 2.9% for 2015 – the latter number being premised on the rather optimistic growth forecast for 2015. Without the revision, a big deficit overshoot would have been certain this year, and it is still possible, given the dynamics of Italy’s continued recession. The main impact of the revision has been on debt to GDP, which will now reach 131.7% under the new measure (as opposed to approximate 138%). But more important the actual numbers is the debt dynamics. The rate is forecast to increase to 133.4% in 2015 – and this is all based on a growth forecast likely to prove too optimistic – as they do every year.
As Federico Fubini pointed out in his column in La Repubblica, the fiscal compact is simply not enforceable in Italy. Fubini wonders, probably correctly, whether Germans will feel once again betrayed by southern European unreliability. He writes that Matteo Renzi, when he took office, underestimated the fragility of the economy. He said the poor economy now provides impetus for economic reform. Renzi is not only willing to abandon the Art 18 of the labour code, that protects workers from dismissal, he also wants to push for a system of regional, or enterprise-level wage bargains, similar to the German system. But as Fubini concludes, Italy can no longer solve its problems on its own. Angela Merkel will need to act too.
There was also some alarming data on unemployment out yesterday. While the headline unemployment rate is a little lower, what is politically unbearable is the rise in youth unemployment from 43.2 in July to 44.2% in August, the worst proportion since 1977; as Corriere della Sera notes.
In that meantime, Renzi is trying to isolate the rebels inside his own party – led by former PM Massimo D’Alema, and Pier Luigi Bersani, Renzi’s predecessor as PD general secretary, two heavyweights who are joined by a number of other well-known former party lieutenants. Renzi said yesterday whenever D’Alema opens his mouth, his own approval rating increases by one percentage point. “If D’Alema did not exist, we would have to invent him,” he said – a comment unlikely to be misunderstood as a peace-making overture. La Repubblica quotes one of his aides as saying that the dissidents will only have 7 or 8 votes in the Senate, even less than on constitutional reform – so the labour reforms are very likely to pass.
But Renzi’s victory comes with a price. As ANSA reports, Renzi appears to have given some ground to the rebels. His government may present an amendment to increase the number of exemptions. The original proposal would still have protected workers in case of discrimination, but not if they are subject to disciplinary action.
Tobias Pillar, the Rome correspondent of Frankfurter Allgemeine, watches the situation in Italy with the eye of an eagle, and sends dispatches with a growing degree of alarm. In a commentary, he writes today that Renzi’s reforms are essentially meaningless, as workers will always be able to make a case of discrimination, thus falling under the exemptions.
Today’s briefing constitutes a small number of important stories. Italy and France are both on target to bust the fiscal compact provision of a structural balance in 2016; both headline and core inflation fell in September; the ECB is to propose the inclusion of Greek and Cypriot ABS in the private-asset purchase plan; Greece has begun post-bailout talks with the troika; the Greek banks got concessions from the ECB to help them pass the stress tests.