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The Italian economy - Can Berlusconi get away with it this time?

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Introduction

Can Berlusconi get away with it this time? Introduction Italy has a diversified industrial economy with roughly the same total and per capita output as France and the UK. The Italian economy is divided into a developed industrial north, dominated by private companies, and a less developed, welfare-dependent agricultural south. Most raw materials needed by industry and more than 75% of energy requirements are imported. Over the last ten years Italy has tried to maintain a strict fiscal policy in order to meet the requirements of the Economic and Monetary Unions. The European Monetary Union is built on strong fiscal discipline foundations. The budgetary autonomy of EMU's members is subject to the constraints of the Maastricht Treaty and the Stability and Growth Pact. The Maastricht, and later Amsterdam, Treaty sets rules with regards to, among others, budget deficits, public debt and inflation as requirements for joining the euro as single currency. The current government of Silvio Berlusconi has initiated numerous short-term reforms trying to meet the Treaty requirements and improve competitiveness and long-term growth. Italy has moved slowly on implementing needed structural reforms, such as lightening the high tax burden and overhauling Italy's rigid labor market and over-generous pension system, because of the current economic slowdown and opposition from labor unions. ...read more.

Middle

Redundancy remains constant low and is expected to increase in the next period. We also see a dramatic drop in long-term interest rate, much in the same period as a rise in deficit rate around '94 - '96. High public spending, low interest and increased export are boosting the Italian economy in the early '90's. Question remains how shallow this recovery is. Unemployment and public dept are still on a high level. Lowering budget deficit might be just window dressing to the European partners. Berlusconi's promises to the Italian voters (pan et circense) have different effects on de budget deficit rate. Cutting taxes is without other sources of income bad news to the deficit rate. We can only expect a growing public dept to keep the current expenditure pattern. Especially when increasing pensions is the next promise in line. To create new jobs a low tax policy to incentive the corporate market is needed. A reformed and simplified tax program has been introduced. Again, this has an impact on Italy's treasure box. This has to be compensated otherwise. Both initiatives to reduce crime and to start new major infra projects need to be paid for. Unless the community is willing to trade off, the Italian government will pick the check, again. ...read more.

Conclusion

Berlusconi's programme takes care of at least part of the needed reforms. But these investments need to be paid for and that is why economic recovery is in contradiction with cutting taxes. Besides letting go of his promise to cut taxes, Berlusconi should look for more creative solutions. If he would involve the business environment in some of his projects, he could very well save money. A measure that has proven successful in some European countries is the privatisation of infrastructure through concessions. If a company builds a tunnel and then gets a long-government contract to exploit it, the government need not spend its -full- budget on the tunnel and can reallocate the funds. Conclusion Berlusconi's measures all executed at the same time will turn out to be disastrous for Italy's economy. Berlusconi has to invest in a better economic climate and foster creativity to pay for the needed structural reforms. And he has to let go of the idea of cutting taxes. His voters won't be happy, but it is history revisited. Remember who else said the famous words: "Read my lips: No higher taxes." We're sure Berlusconi can save him self from this treacherous situation. He has proven to be a successful escape artist before. 1 See OECD Paper on budget balance and 'one of measures', p. 71/73 2 See also Brakman & Garretsen 'Weersta de lokroep van lage belastingen' in NRC 16-09-04 ?? ?? ?? ?? 1 ...read more.

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