Thursday, June 30, 2011

Much Ado About Nothing or Very, Very Little: Katharsis is Greek, not Italian.

The Greeks have a word for it and they seem to be in the middle of practicing it. Catharsis is the dramatic liberating moment of a tragedy which allows the survivors to pick themselves up and start again. But that does not happen in Italy.
Last week we were supposed to have one of those moments, a verifica or reckoning with the truth between the government coalition allies (which passed with hardly a murmur) and today we have economics minister Giulio Tremonti’s much-heralded budget package being presented to the Cabinet. There have been plenty of leaks so we don’t know exactly how it will look (and obviously, even less what it will look like when it’s been through the Parliamentary wringer). It is at least partially a response to the EU’s demand that Italy balance its budget by 2014.
According to what we do know about it (and if there are dramatic changes, I will do an update this evening), its subtitle could be “never do today what can be put off till tomorrow”. In a €47 bn measure, less than €2 bn will be cut this year, €5 bn next year and €20 bn each in 2013 and 2014. Guess what? Elections are due in 2013. So if the plan is passed in approximately its present form, it will only start hurting when a new government is in place. If ever there was a poisoned chalice…
Tremonti promised swingeing cuts but in the name of “collegiality” and less subtly, under threat of the sack, he has produced budget which tickles rather than slashes, at least for the first two years.
Most of the measures are gentle and designed to hurt unidentified, indirect or small and unpopular categories. In the first group are those who will not replace civil servants who retire (only police and firemen will be replaced), tho’ those remaining will certainly know that they have more work to do. In the second, are cuts to the regions and municipalities so that they rather than national government will look bad as they cut services (and more than half of them are centre-left anyway). And in the third is a proposal for a financial transaction tax, higher taxes on SUVs and some cuts in payments to politicians (there is a rising tide of disgust at how much politicians milk the taxpayers; this might just be the fuel for the next revolution).
There is the usual claim that tax evasion will be reduced; VAT will be reorganised and Tremonti hopes to bring in some money with a flat rate payment to resolve disagreements between taxpayers and the revenue, a sort of mini-amnesty. Distinctly unpopular is the plan to increase health service charges but with a nod to the Northern League, there will be no fines for exceeding milk quotas and with another to an important Berlusconi support group, women’s pensionable age will not start being raised to 65 until 2020 to be completed in 2034.
The opposition have called it a joke and a time bomb which they will have to defuse. Antonio Di Pietro has put forward his own alternative budget which might even get a look in rather than be mere rhetoric as yesterday the government lost two important divisions in the Chamber showing that they are even more divided than ever. But the opposition is hardly more united or clear in what path to take. Umberto Bossi has not guaranteed the Northern League’s support so the tension continues there.
It is the very weakness of the government that holds it together. Both League and PdL know that they would lose heavily in early elections; for all his vaunted fiscal courage and rigour, Tremonti is not prepared to resign yet and Berlusconi cannot fire him without incurring the wrath of the EU and the markets both of which see Tremonti as the only barrier preventing a Greek meltdown.
At the end of the day – today but also all the days between now and the passage of the bill – it is Europe and the markets which matter. The spread between German and Italian bonds is growing so if Italy really does go down the Greek road, it would be a disaster not just for Italy but for the euro and European institutions.
Catharsis is still to come.

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