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Merkel and Renzi, or who is fooling whom?

March 23, 2014

Published in ‘New Europe’ Print and Digital Editions

Renzi MerkelItaly has a new Prime Minister, Mr. Matteo Renzi, the third or fourth after the beginning of the economic crisis. But this time is different; not only because the new PM is the youngest-ever person to occupy this position in Rome, but also because he made a strong departure from his predecessors, promising a U-turn in tax policies and reforms. In fact, he promised a 10 billion euro tax cut for low-paid workers, and a 2.4 billion euro reduction in corporate taxes.

These proposals mark the most significant departure from the severe austerity policies that the country has implemented since the start of the economic crisis in 2008, and send a clear signal that South-European countries do not wish to go on any more with the programs imposed by the IMF, the European Commission, and the European Central Bank.

This sound marvelous but the question to ask is how is he going to finance such policies, without hurting Italy’s public finances and compromising its euro membership. No problem, says Renzi, “there will be no overshooting the 3-per-cent ceiling, none whatsoever,” referring to the budget deficit limit as a percentage of Gross Domestic Product (GDP) demanded by EU austerity regulations. He insists that his plans do not mark a return to Italy‘s old spendthrift ways, and contends that they will be financed with deep cuts in public spending, and an acceleration of long-needed structural reforms. According to Renzi, these measures represent the best way to revive the eurozone‘s third-largest economy after nearly two decades of zero to low growth and high debts.

Problem is that at least two of Mr. Renzi’s predecessors, Messrs. Monti and Letta, also tried hard to implement reforms, but mostly failed. Let’s take for instance Italy’s labor regulations. Every Italian entrepreneur knows that he’s going to run into problems once he hires more than 10 employees, as he will have to submit an annual self-assessment to the national authorities explaining every possible safety and health issue to which his employees might be exposed, (including stress caused by or related to age, gender, and racial differences). He also must outline all precautionary measures to prevent risks, name employees in charge of safety, and hire the services of a doctor. If by chance the company grows and the entrepreneur has to hire more than 15 employees, more trouble is coming. Now, he has to face national unions representatives with whom management must consult on a variety of issues, ranging from gender equality to new technologies. By the time the company hires more than 50 employees, it has to employ at least 7 percent of disabled people, while hiring more than 100 employees gives rise to the obligation of reporting detailed gender dynamics, with names in each production unit, functions and levels of responsibility, promotions, transfers, reasons for recruitment etc. And on top of all this, is the famous Article 18 of the Italian labor code that practically bans employees layoffs, regardless of the severance offered. Mr. Monti, a previous PM who enjoyed strong political support from the EU, fought against it and lost the battle.

It’s interesting to note that all these protections and obligations boil down to a cost of around 48 percent from the average Italian salary according to the OECD… Still Mr. Renzi, insists that he’ll manage to deal with the reforms, and more to that he assures that the positive impact of such reforms will outweigh the cost of his promised tax cuts. And Mrs. Merkel, the German Chancellor, who met with him last week in Berlin declared that she was “very impressed” with Mr. Renzi’s plans; “Italy’s willingness for structural change is a message we welcome with open arms” she said.

She also received as a gift from the Italian Prime Minister a signed shirt from Mario Gomez, the German striker who plays for Renzi‘s home team of Fiorentina. Maybe this can explain her enthusiasm for Mr. Renzi’s reforms. However, the question remains: who is fooling whom in this story?


From → Views & Opinions

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