The Pensions Agreement

Really, far be it from me to deny relatively small quantities of money to relatively needy elderly people, but at the end of the day we have to ask ourselves can Italy afford this?

Italian Prime Minister Romano Prodi yesterday agreed to raise the amounts of the lowest pensions, paving the way for an accord with labor unions on changes to the welfare system. Men and women over 64, or about 3.4 million retirees, will be eligible for benefits stemming from 2.2 billion euros ($3 billion) put aside for this year and next, according to a statement from the Labor Ministry.

It is important to notice here that Italy spends 15 percent of gross domestic product on pensions, the highest in the European Union, and this proportion is now set to rise and rise. In addition economic growth is very sub par. So this is actually staggering:

Prodi's government and workers are now negotiating raising the mandatory retirement age gradually after unions rejected an abrupt increase. In the absence of an agreement on pensions, an existing measure adopted by the previous government would take effect and raise the age for men from the current 57 to 60 at the end of the year.

In other words this "sudden" increase (which was already thoroughly inadequate) is now going to be modified to introduce the change gradually. What we have here is a nation which is collectively in denial about the seriousness of the problems it faces, and a political system which is congenitally incapable of taking the bull by the horns.

Meantime the deficit clock is ticking away:

Italian Prime Minister Romano Prodi last week revised the government's 2007 deficit forecast to 2.5 percent of GDP from 2.3 percent, prompting Almunia to say today that balancing the country's budget by 2010 will be ``very difficult.''

``I have the feeling that in 2008 we won't see a very strong improvement'' in Italy's deficit, said Belgian Finance Minister Didier Reynders today. Bos said ``these are tough times for Italy.''

My feeling is that the downside risks to the 2007 growth forecast are growing by the day, and that we will be very lucky indeed to see Italy coming in with a deficit of below 3% in 2007.