Italian officials are reportedly lobbying for an adjustment in European debt and deficit rules which would exempt stimulus spending from tight fiscal restraints. The news follows location elections in which Italy’s main conservative and social democratic parties saw heavy losses.
Newspaper La Repubblica reports that Rome seeks to discount “virtuous investments” from European deficit rules. Countries in the eurozone are prohibited by treaty from running deficits that are higher than 3 percent of gross domestic product. Italy, like other euro countries in the periphery of the continent, is struggling to rein in spending to meet its short-term fiscal targets amid slow or even negative economic growth.
The Italian government had to slash its growth forecasts last month. It was previously predicting a .4 percent contraction in the economy but now expects to see negative growth of 1.2 percent. The International Monetary Fund is even more pessimistic and has said that Italy’s economy will shrink by 1.9 percent in 2012.
Italians’ support of austerity appears to be dwindling. Painful tax increases, pension cuts and labor market changes have fueled mounting opposition to Prime Minister Mario Monti’s technocratic leadership.
The former European commissioner was appointed in November of last year to save Italy from a Greek style debt crisis. Since putting public spending on a more sustainable trajectory, Monti has shifted his emphasis to improving Italy’s competitiveness and boosting growth. But the sense of purpose and unity that came with his rise last year has dissipated.
In March, Monti’s government was forced to delay labor market reforms that would have lifted restrictions on a number of professions and made it easier for companies to lay off workers. Italy’s largest trade union and the left-wing Democratic Party were both angered by a cabinet proposal to remove the obligation on the part of businesses to rehire workers that are deemed by court to have been wrongfully fired.
Because Italian workers tend to appeal layoffs, labor decisions are often mired in years of legal battles in the nation’s notoriously slow legal system.
The Democratic Party has otherwise supported Monti’s reform agenda, including a raise in the retirement age, and slipped just mildly in the polls on Monday. Former prime minister Silvio Berlusconi’s right-wing Il Popolo della Libertà (“The People of Freedom”) and the separatist Lega Nord, which used to partner with the conservatives, were decimated.
In none of the major cities where there were elections, including Genoa, Palermo and Parma, did right-wing candidates make it into the second voting round. Lega Nord retained control of Verona but lost majorities in towns across its stronghold of Lombardy.
In spite of their poor performance in the polls, the conservatives are not expected to withdraw their support of Monti’s cabinet. Early parliamentary elections could only cost them more votes.
The rank and file of the party are growing restless, increasingly voicing either opposition to austerity measures or complaining that Monti isn’t making enough of an effort to rein in the power of Italy’s labor unions.
For now, cooler heads prevail. Party chief Angelino Alfano insists that he will not pull the plug on Monti’s government. “We didn’t decide on the basis of this result to pull our support because we are a responsible party,” he told journalists in Rome. Responsibility is exactly what the party lacked in Berlusconi’s days though and why Monti had to replace him.
With a €1.9 trillion debt, the equivalent of 120 percent of gross domestic product, Italy’s main challenge is not to adhere to a deficit cap next year but to reduce spending in the long term. Its economy is too big to bail out. If Italy falls, the survival of the single currency union could be at risk.