The failure of the Prodi administration

By: Wolfgang Munchau

A little over a year ago, I made a forecast that unfortunately turned out to be correct. I predicted that the government of Romano Prodi, the Italian prime minister, would fail to bring about a necessary economic transformation. I remember well the enormous amount of goodwill Mr Prodi had received at the time.

I also remember that Mario Draghi, the governor of the Bank of Italy, expressed some cautious optimism about the new government’s reform programme. Last week, when Mr Draghi spoke at the Bank of Italy’s annual meeting, he appeared to be far more downbeat. He criticised the government for focusing too much on raising taxes and not enough on cutting spending. He urged it to pass the pension reform bill and was deeply critical of Italy’s system of corporate governance and political interference in banking.

I would add to this long list of criticisms the Italian government’s failure to address the problem of the public sector. Many public sector employees never turn up for work – and yet are fully protected against dismissal under their work contracts. Public sector productivity, to the extent that this can be measured, is among the lowest in the European Union. Instead of sorting this problem out, the Prodi government last week concluded a pay agreement with the public sector trade unions that essentially protects the main restrictive practices.

Apart from some eye-catching but token reforms, such as the deregulation of notaries, pharmacies and petrol stations, Italy has summarily failed to undertake the reforms it needs to raise productivity growth, which Mr Draghi has rightly pinpointed as the key issues to secure Italy’s long-term prosperity.

In many respects, the past year would have been the ideal time for reform. There was a new administration and a cyclical upswing. But the Prodi government has missed its chance and is now reforming less and less. The whole political apparatus now seems to be preoccupied with intra-coalition crisis management and the creation of a new political party on the left, whose president is going to be none other than Mr Prodi.

So why has the Prodi reform agenda failed? The first reason is well-known: Italy is run by a rainbow coalition of the left with a wafer-thin majority in the Senate.

Second, Mr Prodi is probably not the right man for the job. He is a round-table, consensus politician. The trouble is that if you want to sort out Italy’s most pressing economic problems, you will invariably have to incur some opposition.

Third, I question whether Mr Prodi was wise to appoint Tommaso Padoa-Schioppa, a former member of the European Central Bank’s executive and a highly regarded economist, as his economy minister. Mr Padoa-Schioppa is not a politician, lacks his own political power base and is totally dependent on Mr Prodi for anything he does. At a time when Mr Prodi himself is getting weaker, it is becoming glaringly obvious that Italy does not need a technician at the Treasury but a political fixer – the kind of finance minister Carlo Azeglio Ciampi, the former Italian president, used to be during the 1990s.

One step the left could take within the present legislative term would be to select a new leader, perhaps Walter Veltroni, the formidable mayor of Rome. This would not solve the problem of the Senate majority, but a new leader might bring some renewed energy and focus to the job.

In the long run, Italy needs a new political system – one that does not produce rainbow coalitions. This is partly a technical question, partly a political problem. Some Italian pundits favour the German system, which requires parties to have at least 5 per cent of votes to secure parliamentary representation. This would undoubtedly sort out the problem of small-party proliferation but would not necessarily produce strong governments. Germany itself is a good example.

Others favour the French electoral system, with its two rounds of voting. This system produces clear winners but not necessarily strong governments either. Ultimately, I believe that the crisis of Italian politics is not primarily technical, but political.

My preferred solution for the short term would be for the reformers of the centre-left and the centre-right to form a grand coalition, limited to one or two years, with a specific mandate to undertake a small number of targeted reforms: in the public sector, including the education system; pension reform; further reductions in the structural deficit; and further liberalisation. I know, the Italian system is not geared up for grand coalitions, but for the moment this is probably the only constellation that would get the job done. It would be imperative that such a coalition be headed neither by Mr Prodi nor by Silvio Berlusconi, or any other ex-prime minister.

It is easy to dismiss all this as politically unrealistic. But the alternative scenario is undoubtedly worse. Over a period of 10, perhaps 15 years, Italy’s economic decline will become unbearable. It is high time that Italy starts to listen to Mr Draghi.

 © Financial Times Limited 2007

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