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Italians should know: Europe is watching! PDF Print E-mail
Oct 30, 2011 at 03:13 PM

Snide smiles about Berlusconi

A visitor would never guess it. On the surface, life continues here in its usual pleasant way. Here in Rome, people are enjoying a few days of mild weather sitting outdoors, drinking their aperitivi and chatting happily on their cell phones. Aside from the coastal areas of Liguria in the northwest, where floods last week caused disastrous mudslides that killed at least nine and caused vast damage to areas like the Cinque Terre, many Italians appeared more concerned about the recent death of  a young motorcycle racer than about their faltering economy and a financial mess that is threatening both this country and Europe as a whole.

Appearances, of course, can be deceiving. The number of young people who turned out for what was meant to be a peaceful march two weekends ago, indicated that many people gave little or no credence to Premier Silvio Berlusconi's repeated assurances that all was well here and that there is, instead, much to worry about. Years of sluggish economic growth has created an extremely worrisome situation and new statistics show that this September the rate of unemployment for young people between the ages of 15 and 24 climbed to 29.3%, up more than a percentage point since August and at its highest level - one out of three - since January 2004.  True, many of these young people could find work if they were willing to take the jobs their fathers and mothers held, such as short-order cooks, waiters, plumbers, house cleaners, strawberry pickers and so on; the jobs that ae now held by immigrants from other countries who don't turn up their noses at honest work. But it is clear, that Berlusconi will now have to stop with the pollyanna act for there is cause for real alarm. 

According to French president Nicholas Sarkozy, the agreement hammered out in Brussels earlier this week that will set new capital requirements for European banks, will rescue Greece from impending bankruptcy but will also save next-in-line Italy IF ..and it's a very big IF... the government of Silvio Berlusconi proves able to deliver on its promises to introduce important structural reforms.

In Brussels on Wednesday, Berlusconi presented his European counterparts with a letter of intentions setting a timetable for a variety of significant changes, including a balanced budget, liberalized labor laws, cuts in public sector expenditures, sales of state assets, and introduction of a 67-year age limit for old-age pensions.

Noticeably missing was an oft-proposed tax but never enacted on wealthy individuals (like Berlusconi) and the all-important reform of the broader work-related pension system, the latter vetoed strenuously by Umberto Bossi, a deputy prime minister who is the leader of the Northern League party without whose support the Berlusconi government would probably collapse.

This latter reform would be particularly significant for future savings. Not only is the retirement age in Italy still lower than in most other European countries, particularly where women are concerned, but Italy is one of the few (some say the only) developed countries where it is possible (depending on whether one has worked for at least 40 years, which included military service and university) to retire before the legal retirement age has been reached. The average age of people receiving old age pensions here is 56, and 58 for those receiving work pensions. Reportedly,over half a million of the people currently receiving pensions, were able to leave work before they were 50  Given today's life-expectancy, this means that the state is looking at paying pensions to most people for upwards of 22-25 years at a vast cost to society as a whole. Not surprisingly, the international financial markets seem not to take these promises seriously. Only one day after the letter was presented, a key auction of medium to long-term Italian treasury bonds known as BTPs produced the worst result since the introduction of the Euro a decade ago. with yields hiting six percent., a level at which it would make it very hard for a country to service its public debt, and which has already brought Ireland and Greece to the brink of default (ie.bankruptcy).

Since much of Italy's enomous debt (equal to 120% of the country's GDP) is in the hands of foreign banks, default could endanger the European banking system which is far more fragile than it's US countepart. Until now European banks have been required to hold lower reserves than American banks, meaning they could be less able than banks elsewhere to absorb losses from worthless government bonds. So who can blame them. The reforms Berlsuconi promised are the same reforms Italian pols have been nattering on about for decades without ever enacting them.

The Italian economy, the third largest in Italy, is far stronger than the Greek economy and Italy's budget deficits are smaller than those of Greece and indeed of many other countries. But, creditors (and investors) have had less and less confidence that Italy is going to take the requisite action. Particularly telling was the incident, several days earlier, at a joint news conference by Sarkozy and German chancellor Angela Merkel, when the two leaders exchanged amused glances in response to a question as to whether Italy could be relied upon. Many Italian politicians expressed indignation, including Berlusconi who said Italy did not need "lessons" from anyone. But that is clearly not the case. Indeed, it is likely that the only reason Italy move to really get its act in shape will be because it knows that Europe is looking over its shoulder.

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