Wolfgang Munchau and the 2007 Budget

Wolfgang Munchau has another article today on the 2007 budget (behind the firewall). The title of the article is, in itself, revealing enough: Instead of reform, it is Italian politics as usual. Now even if you cannot actually access the full article, if you are a regular reader of IEW you will not find it hard to imagine which the issues are that have lead him to the conclusions he has drawn (and here).

Now we should also constantly keep in mind Hans's point, that nothing about this budget is yet final, and nothing will be until it is voted and passed into law at the end of the year, but still the initial impressions, as Mumchau indicates are not promising. The budget appears to be a horse-trading compromise which may (and only may, in the best of all possible circumstances) deliver the results which its architects hope for, but it will not address and rememdy the underlying structural issues which have lead public debt in Italy to its current sorry condition, and thus it provides no guarantee that further credit downgrades will not be forthcoming.

Instead of reform, it is Italian politics as usual

Last week, two credit rating agencies downgraded Italy’s sovereign debt to the same level as Botswana’s. The move by Standard & Poor’s and Fitch is more than a reaction to the centre-left government’s first budget after April’s general election. It is a sign of frustration with where Italy’s coalition is headed. After a short period during which the country appeared to recognise the urgency of its economic plight, we are now back to politics as usual in Rome. S&P lowered Italy’s long-term credit rating from AA- to A+, complaining that Romano Prodi, prime minister, is as inclined to muddle through as his predecessor was. Unfortunately, they are right.

Mr Prodi and Tommaso Padoa-Schioppa, finance minister, appear to have prioritised two goals in the difficult budget negotiations: to survive politically and to push the headline number of Italy’s deficit below 3 per cent of gross domestic product. There is a reasonable chance they will meet both targets. The coalition is shaky, but not about to collapse and the deficit is projected to fall from 4 per cent of GDP this year to 2.8 per cent in 2007. The bad news is how this has been accomplished.

Incidentally, there is just one other issue, Wolfgang Munchau, I know, is not really a macro economist, but I wouldn't be anything like as sanguine as he appears to be that "there is a reasonable chance they will meet both targets". The first to some extent depends on the second here, and the second depends on the outlook for the global and EU economies during 2007, a small detail which is currently far from clear, but I wouldn't be quite as optimistic as Munchau appears to be about growth in Italy in 2007. Also, assuming Hans to be right, and that there may well be some hard political battles out in front over the actual details of the budget then the political artithmetic may not be as stable as it currently appears. Trapped between the ratings agencies and the left of his coalition, that is where I would say Prodi is right now, and whether there is a navigable course to be steered between the two is just what we are about to find out.