Morgan Stanley's Vicenzo Guzzo on the probablems of selling pension reform.
In a surprise move, earlier this week, Italian Labor Minister Roberto Maroni opted not to attend the planned meeting with the representatives of the three confederate unions, CGIL, CISL, and UIL. The meeting took place as scheduled, but it was effective downgraded to a technical roundtable with the experts of the ministry, defying the expectations of the unions, which were ready to oppose some of the issues at stake on more political grounds. Since then, events have taken a sharp turn for the worse. Union leaders are now threatening industrial action, which eventually could lead to a general strike. A decision will be taken on May 14. Along the same script played by their French peers (see Showdown in France, May 6, 2003), are the Italian unions about to stage a day of general strike? Is the proposal of a reform of the pension system going to clash with public opinion and shake the foundations of the governing coalition, repeating the painful experience of 1994-95? Will a wave of social unrest once again swamp any restructuring attempt and prove Europe's intrinsic inability to reform? These and several other questions must be crossing the minds of international investors at a time when the Euro economy appears to be pinned between an overvalued currency and restrictive fiscal conditions.
The reform of the Italian social security system pivots on the proposal of channelling future flows of severance payments (known as TFR or 'Trattamento di Fine Rapporto'), currently sitting on the balance sheet of Corporate Italy, into pension funds, enhancing the scope of a second privately funded pillar. Companies, which so far have benefited from this free source of cash flow, worth nearly €13 billion a year, would be compensated by a reduction in social contribution rates of up to five percentage points (dubbed “de-contribution”). Closed funds, whose affiliates belong to a given industry or sector, and open funds, whose subscription is available to all workers, would be subject to the same tax regime. Unions oppose three key points: they argue that any decision on TFR should be left to the worker rather than being mandatory; they are against the de-contribution model; and finally, they think that investment in closed funds should be encouraged through more aggressive incentives.
The government will probably have to make concessions in order to avoid a strike. Social security is a sensitive issue. The memories of the 1994-95 strikes, which eventually led to the collapse of the first Berlusconi government, are still vivid, and the cabinet will want to avoid the road of open confrontation. Yet a 14% pension expenditure-to-GDP ratio, one of the highest among the industrial countries; a stock of public debt well in excess of 100% of GDP; and a fully public-funded pay-as-you-go system together with poor demographic prospects are all compelling arguments for reforms even more ambitious than those currently being debated.
We do not think that the recent events have dented the stability of the government coalition, nor would we interpret them as a sign of a rejuvenated union front whose critical mass could weigh on other hot issues, such as the labor market. True, on June 15 Italian citizens will be asked to cast a vote in a referendum on the famous Article 18, a piece of legislation that up until last year forced large companies to re-hire those employees whose dismissal was regarded as unfair. But the referendum proposal, which goes beyond the original formulation by extending strong labor protection to small enterprises, is likely to fail, lacking the support of CISL UIL and the Democrats of the Left, the largest party of the center-left coalition. Even CGIL, which has always opposed labor market reform, appears split on the vote. The bottom line is that this is not 1995, and unions are far more fragmented than they were at that time.
Source: Morgan Stanley Global Economic Forum