Research Dept. News
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Monthly Report, num 291 - May 2006
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European Union - Italy
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Italy: a turn to the left
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Narrow victory of centre-left coalition seems very slim for making major reforms needed in Italian economy.
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After the narrow victory of the centre-left coalition that brought it a majority in both the House of Deputies and the Senate, the challenge now for the government to be led by Romano Prodi is to lift Italy out of its economic slump (in 2005 growth was only 0.1%, one of the worst in the Euro Area). What solutions will Il Professore come up with? In spite of the confusion of messages put out during the election campaign, some points in his programme are worth mentioning.
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Economic plans of new government not very clear although they appear to lean toward combination of fiscal austerity and raising competitiveness.
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The model which the left coalition has mentioned as a reference is that of Scandinavia with its virtuous combination of innovation, competitiveness and the Welfare State. While the prescription being put together by the centre-left to achieve this is quite unknown at this point, some specific factors have been put forward. These involve a reduction of 5% in unit labour cost (to be financed from the public purse), moderate tax cuts, the incorporation of new budget control measures and a programme to encourage those over 50 to stay in the labour market. The big doubt is whether a country electorally divided in two is able to maintain a process of economic reform of some such importance.
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At least the new government finds itself in the best situation for some months. It should be remembered that in the fourth quarter of 2005 the Italian economy grew by 0.5%, its best rate since the last quarter of 2004. This moderate recovery came through the foreign sector which made the first positive contribution to the change in the GDP since the third quarter of 2004. On the other hand, the slowdown in private consumption, investment and public consumption brought about a further easing off in domestic demand.
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Some improvement seen in recent months but this fails to remove picture of economy in bad shape.
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The indicators for the first quarter suggest a continuation of these trends. Retail sales, which were up by 1.5% year-to-year in February, indicate a contained rate of household spending while the increase in exports (more than 14% year-to-year in February) confirms that the level of foreign sales continues to be good. This is helping industry which, following two years of decreases, has begun to regain ground. Industrial production in February rose to 3.1% year-to-year, the highest level since the far-off month of January 2001. Finally, we should mention that inflation in March did not follow the downward trend seen in other European economies and held at 2.1% year-to-year.
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