Time for Excitement

By Rossi, Vanessa | The World Today, April 2008 | Go to article overview

Time for Excitement


Rossi, Vanessa, The World Today


The fate of one of Italy's most colourful and controversial politicians - Silvio Berlusconi is dominating this election campaign as it has most recent ones. But the real issue is how to conjure an exciting economic programme out of a very difficult economic climate, one that could convince voters of better times ahead.

iTALY IS ALL TOO FAMILIAR WITH POLICY STALEMATES AND government reshuffles. Although many Italians will shudder at the thought, just as many are expected to vote for the return of former prime minister Silvio Berlusconi. In spite of the latest twists and turns in faction-ridden politics, he is still favourite.

Changes to the electoral system, based on proportional representation, enacted late in the last Berlusconi government, have arguably further splintered the 'left' and made it even less able to hold together an administration.

In addition, debates about the control Berlusconi has over the media rage on. However, most commentators saw the fall of the Romano Prodi government as inevitable, indeed they may have been surprised at how long a fragile coalition held together. The falling apart of a coalition is widely viewed as simply a continuation of a longstanding Italian tradition.

OUTSOURCING

Unfortunately, the proportional representation system appears to serve the political class rather better than the country as a whole. Monetary policy has already been outsourced to a supranational bureaucracy in Frankfurt and many aspects of fiscal and social policy are also being regulated from Brussels. Continuing to outsource government functions is one way of offsetting ineffective coalition politics and unstable domestic administration. It certainly has attractions for hard-to-govern countries such as Italy.

The next administration needs to address both short term risks and longer term problems; success would deliver a big boost to the credibility of the current political system. The economy needs to be relaunched on a more exciting path.

'Exciting' sounds particularly optimistic relative to the low aspirations in both Italy and Brussels. Recommendations mostly centre on very mediocre economic growth - strongly stressing reform and raising productivity.

EURO SPECULATION

One of the first issues is the impact significant policy proposals might have on the country's finances and position in the Eurozone. Speculation over the euro stems from what is seen as a failing economy in need of desperate remedies - including the option to devalue, as in the past, to address deteriorating competitiveness.

Analysis suggests that leaving the euro would only mask rather than solve the problems - indeed it could create more difficulties because of potentially adverse financial market reactions. However, this does not stop speculation, especially among those who view the euro as misconceived.

Such speculation could have been quelled if Italy had been able to consolidate the much improved economic performance in 2006, when exports, productivity and gross domestic product (GDP) looked to be firing up. Sadly, the economy slowed markedly last year and, although this weakness was not all Italy's fault, the slowdown in Germany and the rest of the European Union (EU) being an important factor, little has been done to reverse the downtrend.

With the European Central Bank holding its interest rate at four percent and the euro flying high, Italy's position has become even worse, with no obvious means to offset the implied losses in competitiveness or avoid the slowdown in growth. Any efforts to gain a few percentage points of cost competitiveness can be dashed in just minutes of foreign exchange trading.

Given the magnitude of swings in the dollar/euro rate, chasing cost competitiveness looks like a mugs' game. Export strength needs to be based instead on non-price advantages. But the other message is that Europe cannot live by exports alone - more needs to be done to address the consumption deficit. …

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