Elections 2006 and The Italian Economy

Well, Italy seems to be having difficulty resolving its political future. It is too early yet to really be clear about what will be the final outcome of the April 2006 elections. At the time of writing Romano Prodi and his centre-left opposition are claiming victory, but the degree of uncertainty is still huge.

First thing Tuesday morning the outcome is still in doubt, and those who were sceptical about the early exit polls were right to be so. As I say, Prodi is now claiming victory, but this is being challenged vigorously by the Berlusconi camp. The margin is wafer thin for the lower house (the Chamber of Deputies, or 'Camera'), with Prodi's having 49.80 per cent of the vote as compared to 49.73 per cent for Berlusconi's House of Freedoms (a difference of a mere 25,000 votes). Naturally calls for a recount abound. The position of the Senate is still in doubt. There is currently a one seat difference between the camps (in favour of Berlusconi) but six more seats based on overseas votes are still to be allocated.

Wikipedia have a substantial entry on the elections themselves, and another on the Italian parliament, which may prove useful in understanding things if the final out come is ultimately a 'hung' parliament.

New Economist had a worthile post on Berlusconi at the end of last week, focussing on how, as the Economist said, "the winner must face up to the fact that Italy's economy is in dire need of reform".

He also quotes a New York Times article which made the following perfectly valid points:

But Italy's economic growth was even slower than the disappointing rate shown by many European countries......Italy's real gross domestic product in the final quarter of 2005 was just 1.6 percent above the figure for the second quarter of 2001, when he won the election. It was well below the average for countries using the euro, which was 5.7 percent.

Even that growth has come because the government has been willing to run budget deficits. Households are spending for consumption at a rate just 1.7 percent above the rate when Mr. Berlusconi was elected. But the government consumption number is up 6.9 percent.

All this means that Italy, on a relative basis, is becoming poorer. In 2000, its G.D.P. per person was 2 percent higher than the average of all 25 countries now in the European Union. Last year it was 2 percent below that average. On that per person basis its economy was 24 percent larger than Spain's in 2000. Now the margin is 15 percent.

The slow growth has come as Italy has struggled to stay competitive, both within Europe and abroad. Italy used to periodically regain its competitive position through a sometime violent currency devaluation. But now that it is in the euro zone, that is impossible.

Since Mr. Berlusconi took office, Italian inflation has run above that of other European countries, and he has taken to blaming his opponent this year, Romano Prodi, for allowing the country to join the euro at a euro-lira exchange rate that was too high.

Italian exports have risen, but not as fast as imports, and the current-account surplus that Italy enjoyed before the last election has turned into a deficit.

Mr. Prodi, a former Italian prime minister and former president of the European Commission, has ridiculed Mr. Berlusconi for making new promises after failing to keep promises he made five years ago.