Economy is real loser in Italy's political row

Italy’s political leaders must move quickly to resolve the country’s post-election gridlock if poll winner Romano Prodi is to kick-start the stagnant economy, analysts warned on Thursday.

“It’s not a good start for the new government,” said Bank of America economist Matthew Sharratt.

Italy faced a likely two months of “administrative paralysis” before a new government could be sworn in, he warned.

A recent recovery in consumer and business confidence could be erased if the stalemate is allowed to drag on too long, affecting predictions for economic growth of 1,1% to 1,2% for this year, said Raj Badiani, economist with Global Insight. “Obviously if the situation drags on, we could then see another year in which growth is close to zero,” he said.

However, Badiani said the economy is unlikely to be negatively affected in the short term if the political situation is resolved quickly.

Prime Minister Silvio Berlusconi is refusing to concede defeat for his centre-right government and has demanded a recount of votes, citing widespread voting irregularities after Prodi’s centre-left Union coalition was declared winner.

Prodi said on Wednesday he does not expect to be able to form a government until mid-to-late May.

The situation is complicated by the fact that Italy’s president, whose duty it is to swear in the new government, ends his seven-year term of office on May 18. Carlo Ciampi (85) has said he wants his successor to do the swearing in.

The first task of the new Parliament, which is due to convene on April 28, will be to elect the new president.
The Italian press feared drawn-out negotiations because of the Parliamentary divisions.

“The likelihood of the administration being sworn in before June is small because of the situation with Ciampi. So it’s likely there will be up to two months of administrative paralysis,” said Sharratt.

“Italy desperately needs some reforms to kick start the economy and even if it emerges from the present election-related issues, this will be unlikely to happen soon,” he said.

Sharratt also pointed to the nature of Prodi’s coalition—a disparate group including moderate Catholic and Communist parties—and his “very narrow” grip on power as an indication that progress to reforms will be slow.

“With Communists in a coalition which has up to 50% of the seats in the lower house, it’s incredibly unlikely that any significant reforms will be carried out on the labour market, on cutting back public expenditure and pension reform. So the outlook for Italy is ongoing paralysis,” he said.

Badiani also pointed to a pre-election pledge by Prodi’s Union coalition to repeal the 2004 pensions reform, introduced by Berlusconi amid a wave of labour union protests.

“They are threatening to remove that and that could create problems,” said Badiani.

“Even now, the system is still not completely sustainable as it is. Pensions are the big thing, partly because in Italy they’ve been so generous in the past. It’s a very delicate issue.”

“Italy’s inability to attract foreign investment is already a problem. So if the pace of reform of the labour laws, or the removal of red tape, becomes even slower than it already is, that will lead to problems for the economy.”—AFP

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