Reforms to lift Italy out of economic crisis begin

ITALYS Senate has passed a first reading of a hotly contested constitutional reform bill. Picture: Contributed

The bill, aimed at transforming the upper house into an unelected body and drastically reducing its legislative powers, requires many more months and perhaps a popular referendum in order to become law.

Prime minister Matteo Renzi said the Senate overhaul – aimed at ending the kind of parliamentary stalemate left after a deadlocked election last year – is necessary to enable any government to push through effective reforms.

The fact the bill has cleared its first hurdle in parliament after weeks of bitter resistance from opposition parties will free to respond to mounting calls for economic reform.

The long battle over the bill saw nearly 8,000 amendments tabled.

Data this week showed the eurozone’s No 3 economy unexpectedly fell back into recession in the second quarter, contracting for the 11th time in the past 12 quarters and laying bare the scale of the challenge facing the government.

On Thursday, European Central Bank president Mario Draghi, in unusually direct comments, said Italy had not done enough to reform its labour market, bureaucracy or judicial system, resulting in an unfavourable climate for investment. The economy is now expected to post little or no growth this year, compared with the government’s official forecast in April of a 0.8 per cent expansion, offering no hope to the millions of unemployed Italians and  creating negative repercussions for strained public finances.

Mr Renzi came to office in February promising swift and comprehensive action to pull Italy out of a slump that has lasted more than a decade.

However, progress has been slow and his signature achievement so far remains a tax break for low earners. Plans for a broad reform of rigid labour market rules have been put back to 2015 at the earliest.

Mr Renzi said he agreed with Mr Draghi’s comments and they were not a criticism of his government.

In a television interview on Thursday, he insisted his economic strategy was sound and would eventually lift Italy out of crisis.

“Calmly, serenely, we are taking this country by the hand and pulling it out of the crisis,” said Mr Renzi, who has promised to turn the economy around over the next 1,000 days.

Analysts are increasingly questioning whether Italy can afford such a gradualist approach, echoing calls from opposition parties for a switch in focus from long-term constitutional reforms to the immediate problems of the economy.

Financial markets, calmed for months by Mr Draghi’s pledge to protect the euro, have been increasingly twitchy, with the risk premium on Italy’s ten-year government bonds widening by more than 20 basis points over their safer German counterparts since the start of the week.

Riccardo Barbieri, chief European economist at Mizuho, said in a research note yesterday that Mr Renzi’s honeymoon is over. He forecast the economy would shrink by 0.2 per cent this year and urged a re-think of Mr Renzi’s reform agenda in the report titled “Italy cannot wait 1,000 days.”