Renzi's Day

The Chamber of Deputies approved the electoral reform bill that Renzi and Berlusconi had negotiated before Renzi squeezed out Letta to become Prime Minister of Italy. The bill goes to the Senate now.

That Renzi got the lower chamber to approve the bill is a minor victory, after all he enjoys a majority. There was some fear that, under Letta, the more than 200 amendments would have bogged down the process. In response to the Constitutional Court criticism of the previous electoral system, foisted by Berlusconi a new electoral system was created. It raises the threshold for parliamentary representation by a party and coalitions. Many small parties might not qualify, and this will make parliament less fragmented. It also provides a run-off mechanism that would kick in if no party/coalition secures 37% of the popular vote.

In order to secure approval of the bill, Renzi was forced to decouple it from his other pet political issue--strip the Senate of its legislative authority--turning it into an unelected body with local government representatives.

Assuming that the Senate passes the political reform, the Senate continues to run under the previous electoral law, as the Constitutional Court ruling long applied to the lower house. An election now would be chaotic and it may take a better part of the year before the Senate reform (and the necessary constitutional changes) can be implemented.

Later today in Italy, Renzi is expected to unveil more of his 100-day program. He claims that between spending cuts, lower debt service costs and increased revenue, he has 20 bln euros to fund reforms. There is some skepticism over his figure and the EC warned yesterday that tax cuts should not be predicated on uncertain projections of future revenue. It once again put Italy on its economic watch list (last week), citing Italy's high public debt and weak external competitiveness.

Renzi intends to use half of his calculation of his means. He is expected to announce a cut in the persona income tax (Irpef) for low wage earners. (I had incorrectly confused this with a social security tax on the original version of this post) for low wage earners. Business sought a cut in the regional tax (Irap), but the signs from Rome are that the pressure will likely be rebuffed.

The government is expected to make it easier to hire and fire workers in the first couple years of employment and extend unemployment benefits, with some reforms of the program. As part of the labor reforms, Renzi is expected to propose a tax break for new hires.

In addition to labor market reforms, Renzi is expected to unveil new initiatives to pay debts of the central and local governments. Italian governments owe businesses roughly 60 bln euros and have been chastised by the EU for not addressing these quicker. In addition to the lack of access to capital and the economic weakness, the government's lack of payment only exacerbates the pressure on small and medium businesses.

Renzi is also expected to unveil fresh initiatives for schools, proposing to spend some 1.6 bln euros on modernizing school buildings, which can also act as a little stimulus for local economies.

A source of savings for the government is the lower debt servicing costs. As if on cue, today, the Italian government sold one year bills at a record low interest rate of just below 60 bp. It also sold, for the first time in 4-years new 10-year inflation-linked bonds. The break-even was 1.06%.

Many observers, like ourselves, find Renzi's claim to do in three months what Italy has not achieved in 30 years to be incredulous. Yet there is much hope for his success.

Renzi's Day Renzi's Day Reviewed by Marc Chandler on March 12, 2014 Rating: 5
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