Italy’s medium term public finance plans, recently approved by the Government and submitted to the peer review of the European Semester, show the deficit declining steadily, to almost zero in 2014, and the public debt starting to fall again, after the new peak caused by the recession. These targets are believable. It will be one of the most important achievements of this Parliament that public finance has been guided firmly in spite of many pressures to the contrary and that Italy has managed to avoid being caught in the European public finance crisis. Equilibrium in 2014 will require another large austerity programme at the beginning of the next Parliament. But on the need for fiscal austerity there is a wide consensus, and it can be safely assumed that consolidation will be pursued whatever the outcome of the next elections.

However, fiscal restoration will happen in a context of slow economic growth. Realistically, the Government forecasts that the GDP growth rate will increase only marginally, reaching just 1.6% in 2014. There is no illusion that the private sector will pick up with vigour the slack left by public demand. Current data show that in spite of low interest rates, moderate wage rises and a substantial recovery of exports, economic activity already struggles to return to its pre-recession level. The struggle may even intensify. Pressure for a pre-emptive recapitalisation of banks, a pressure to which the largest Italian banks have now started to yield, will lead to a more selective lending policy while Italian borrowers are still handicapped in the capital markets. Large economic sectors, especially public works and construction, are directly affected by public savings, and the rise in commodity prices has hit cash flows.

Fiscal austerity rules out costly reforms. The biggest reform legacy of this Parliament will be fiscal federalism, that is, a decentralisation of revenue raising which is meant to happen at no extra cost to the Treasury. The main parts of this complex reform have already been passed by Parliament; the rest should follow between now and the autumn. Other reforms in the pipeline, such as a personal income tax overhaul, a reorientation of regional policy, new incentives to R&D investment and justice reform, are also meant to happen with no extra costs.

The Government means to implement these and other reforms during the remaining two years of this Parliament. Having successfully fought off the challenge of his former ally Gianfranco Fini, Prime Minister Berlusconi has managed to rebuild a Parliamentary majority, which has withstood several tests. Meanwhile, the opposition is as ineffective as ever. There is, therefore, a reasonable chance that his Government will last until 2013, and that it will carry out its programme, in spite of the judicial pursuits against Berlusconi and of the intrinsic difficulties of managing a more articulate majority.

© 2011 Europrospects Ltd.