See your article or advertisement in the KWR International Advisor. Currently circulated to 10,000+ senior executives, investors, analysts, journalists, government officials and other targeted individuals, our most recent edition was accessed by readers in over 60 countries all over the world. For more information, contact: KWR.Advisor@kwrintl.com

Italy in Recession

By Andrew Novo

Following the lead of the United States, the Italian economy dipped into recession in the beginning of August after posting negative growth for the second quarter of 2003. More recently, France and Germany have joined the ever-growing list of nations suffering economic contraction. In Italy, as in many other countries, the recession was an expected phenomenon based on consequences from the war in Iraq and “a poor international climate.” Shrinking exports due to a strong euro and decreased tourism have not helped matters and the outlook among most economists in Italy, and throughout the world, is for little or no growth for the rest of the year. Once again, the Berlusconi government is forced to deal with an economically challenging situation at a time of increasing political volatility.

Over the past summer, Berlusconi’s coalition, Casa delle Liberta, suffered a defeat in local elections in Friuli-Venezia Giulia (a region in the northeast) to the opposing left-wing L’Ulivo coalition. More significantly for Berlusconi’s government, the incumbent candidate for the regional council, from the Prime Minister’s own Forza Italia party, did not run. Instead, the Lega Nord, the right-wing coalition partner of Forza Italia, insisted that its own candidate, Alessandra Guerra, stand for election. Guerra was defeated. Violent recriminations within the Casa delle Liberta resulted in threats from the leader of the Lega Nord, Umberto Bossi, to pull out of the Prime Minister’s coalition. At the end of August, Berlusconi and Bossi have been at odds again, this time over the issue of reforming Italy’s pension system.

Italy’s weakened economic position has further complicated matters between the Prime Minister and his separatist northern ally. With Italy’s monetary policy governed by the European central bank, the Berlusconi government is left to make due with fiscal policy in order to bring about a return of economic growth. During his 2001 campaign, Berlusconi promised tax cuts and decreased government spending, the latter objective to be achieved primarily through a streamlining of the turgid and wasteful Italian bureaucracy. The federal tax cuts put forward in the 2003 and 2004 budgets came about through the creative bookkeeping of Finance Minister Giuliano Tremonti in the face of skepticism and concern from the European Union which is wary of Italy’s burgeoning deficit. The federal tax cuts (in excess of five billion dollars) will be countered by decreased government transfers to local governments. This will result in increased local taxes. The net gain for Italian citizens will be minimal.

In keeping with his platform of reform and decreased government spending, Berlusconi has most recently set his sights on reducing the bloated Italian pension system. The Prime Minister hopes to tighten the budget by decreasing government spending in this area. However, this measure has stoked the smoldering embers of contention with the Lega Nord. Berlusconi’s announcement of his desire to raise the retirement age from fifty-seven to sixty years of age by 2010 has met with staunch opposition from the Lega Nord. The Lega draws considerable support from voters who retire on pensions at fifty-seven after thirty five years of work. Eighty percent of such government pensions are received by people in the north. The issue draws important battle lines. If Berlusconi chooses to proceed with his pension plan it could well cost him the support of the Lega, which has already withdrawn from cabinet activities in the wake of the June election defeat. It should be remembered that differences over pension reform caused the withdrawal of the Lega Nord from Berlusconi’s first government in 1994 resulting in its collapse. It seems that history is repeating itself – a dangerous proposition for the Berlusconi government. If the withdrawal of the Lega induces an exodus of the extreme right from the Casa delle Liberta, the Prime Minister will no longer hold a majority in the Italian parliament.

Further complicating the situation of ifs and ands is the present recovery of the American economy. Just as Italy followed America into recession, it will likely drag itself out on the coat tails of the United States. If this happens swiftly enough, the pressure to cut government spending by reforming the pension system will surely dissipate, the voices denouncing Mr. Berlusconi will soften and the Prime Minister will ride the recovery into the re-election campaign.