Political Economy: Letta’s Challenge: Be Monti, but Bolder

Italy’s new prime minister, Enrico Letta, is making the best of a bad job. After the inconclusive election in February, it looked as if Italy’s dysfunctional political system might drag the country further into the abyss. There was a risk that nobody would be able to form a government, that new elections would be called and that even these would end in stalemate.

In the end, a grand coalition was formed involving Mr. Letta’s center-left Democrats, Silvio Berlusconi’s center-right People of Freedom and Mario Monti’s centrist group. Putting together such a coalition was itself an achievement, given that the Democrats and Mr. Berlusconi hate one another and that the Five Star Movement, led by the comedian Beppe Grillo, refused to make deals with anybody.

Even after the coalition was formed, largely as a result of pressure from Giorgio Napolitano, Italy’s respected octogenarian president, there was not much hope that it could achieve anything. But Mr. Letta has been quietly getting on with changes. Part of the explanation is that he is an intelligent, modest consensus builder, rather than a charismatic figure with a big ego.

Moreover, none of the big beasts of Italian politics, notably Mr. Berlusconi, are in Mr. Letta’s cabinet. The prime minister, who is not even leader of his own party, keeps a fairly arm’s-length relationship with the political leaders. This gives his government a semitechnocratic flavor, not vastly dissimilar to the Monti government that it replaced.

The worry is that these qualities could be a source of Mr. Letta’s ultimate undoing. Although he is popular now, the same was true of Mr. Monti in his honeymoon period.

Mr. Letta has yet to prove he can push through, let alone sell, any really tough changes.

That said, Mr. Letta’s first steps have been promising. He has started to clean up the corrupt political system. Ministers, including Mr. Letta himself, now receive only the salary of a single member of Parliament, rather than the double salary they used to get. The state will also stop funding political parties: In the past decade, it gave them €2.5 billion, or about $3.3 billion, of which only €500 million was documented.

Mr. Letta has also begun to unblock Italy’s civil justice system, which has been a blight on business and has deterred foreign investment. Cases get gummed up in the courts for years. This gives the offending party in a dispute a perverse incentive to threaten to call in the courts. This month Mr. Letta announced a bill that aims to cut the backlog of four million cases by hiring assistant magistrates and forcing mediation.

Tougher challenges lie ahead. The most immediate is how to square Mr. Berlusconi’s insistence on scrapping a property tax and a planned increase in value-added tax with the need to keep the deficit below 3 percent of gross domestic product, as agreed with the European Commission.

These taxes should not be scrapped at all. Insofar as Rome can cobble together any money, it should be cutting high taxes on labor to bring down Italy’s youth unemployment rate, which has shot up to 40 percent as a result of the recession. Italy faces a lost generation: Some of the most talented young people are leaving the country, while many of the rest are stuck at home with few prospects.

To be fair, Mr. Letta is trying to combat youth unemployment by cutting labor taxes for youngsters and is badgering other European leaders to put on the fast track a Europewide plan for funding jobs for those leaving school. He also plans to remedy one of the mistakes in Mr. Monti’s labor overhaul, under which companies cannot offer people more than one fixed-term contract. This led to lots of people being kicked out of work.

That said, Mr. Letta’s hope of creating 100,000 jobs from these measures seems too modest, given unemployment of 3.1 million. Bolder measures are needed to cut wages and make Italy more competitive.

Mr. Letta should have two other priorities. First, he should begin Italy’s long-stalled privatization program. The state’s debt is expected to end the year at more than 130 percent of G.D.P. and may jump higher if Rome needs to plug a capital shortfall in some of the country’s banks as part of the European Central Bank’s push to clean up lenders’ balance sheets. Liquidating Italy’s vast asset portfolio is one of the few ways of bringing debt down.

Second, Mr. Letta must change the defective electoral system. He has already secured preliminary agreement on solving the biggest problem — the need for governments to secure majorities in both houses of Parliament — by reducing the Senate’s power. That power was what made forming a government after the election in February so hard. But there is no agreement yet on another defect: the ability of party leaders, rather than the people, to pick individuals as members of Parliament.

The risk is that Mr. Berlusconi’s judicial problems could set off another political explosion before Mr. Letta makes much progress. The former prime minister has only one appeal left in a tax evasion case. If he loses that appeal, scheduled for early next year, he will no longer be able to be a member of Parliament. He might then force a snap election in the hope of winning it and so provoking a constitutional crisis.

Mr. Letta might, therefore, be tempted to steer clear of any changes that antagonize Mr. Berlusconi. But there is no point in continuing as prime minister if he reaches the point where he cannot make progress in tackling Italy’s deep-seated problems. That was Mr. Monti’s error. Mr. Letta should have the courage to be different.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/06/24/business/global/24iht-dixon24.html?partner=rss&emc=rss