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The Italian dynamo 

7 July 2014 By Hugo Dixon

Matteo Renzi is on a roll. The Italian prime minister is a brilliant politician. His youthful dynamism has bought him time with his people, the markets and the European Union to carry out the immense job of reforming Italy. But he has yet to show he can execute. He now needs to, because even his time will run out.

Renzi has had a good four months in the job after he pushed aside his predecessor Enrico Letta. His emphatic victory in the European Parliament elections gave him a legitimacy that the murky manner of his ascension lacked.

He is in the astonishing position of dominating not just the left of Italian politics, from which he comes, but also the centre – as well as being popular with the right. The latter is in disarray as Silvio Berlusconi’s career has disintegrated. Meanwhile, Renzi has managed the feat of portraying himself as anti-system, despite being prime minister. This has undercut the appeal of Beppe Grillo’s protest movement. Renzi looks like he’ll stay in the job for three years and maybe many more.

He has also turned his charms on Europe. He has succeeded in simultaneously forging a good relationship with Germany’s right-wing Angela Merkel and being seen as a champion for the European left. Renzi brokered a deal at last month’s EU summit giving countries more fiscal flexibility provided they stick within the euro zone’s budget rules.

There is a new word to denote what could be an important emerging partnership at the heart of Europe: Merkenzi. Barely two years ago, when Nicolas Sarkozy was president of France, people spoke of Merkozy. But Francois Hollande’s standing is so low that nobody today would dream of talking about Merkollande.

Italy, where I spent part of last week, took over the EU’s six-month rotating presidency on July 1. Renzi therefore has a critical role during a period when the EU’s priorities for the next five years will be set and a team will be chosen to work alongside Jean-Claude Juncker as European Commission president.

Italy is talking about some of the right priorities – such as advancing the single market in services, and free trade negotiations with America. But Renzi is also advocating a scheme for euro zone states to guarantee each others’ bonds. Given German opposition, he is wasting his breath.

Meanwhile, the Italian premier’s decision to push Federica Mogherini, his foreign minister, to become the EU’s foreign affairs supremo may be misguided. While she would probably do the job extremely well, it is more important for Italy to have a top economic post and really work on generating jobs and growth in Europe.

Indeed, jobs and growth are Italy’s two main weaknesses. The economy is barely growing and unemployment is still rising. The country doesn’t just suffer from 43 percent youth unemployment; many of those in work are underemployed or not paid a living wage.

There’s no silver bullet. But part of the answer has to come from the European Central Bank: it needs to push euro zone inflation, which is stuck at a worryingly low 0.5 percent, up to its target of just under 2 percent; it also needs to get the euro down – something that would help exporters in Italy and elsewhere.

But Renzi also needs to change much at home. Top of the list is probably civil justice. What deters foreign investors most about Italy is that rules are often not obeyed and it’s hard to get redress. Then there’s tax evasion, a labour market that is still too restrictive, a bloated bureaucracy and a political system that makes it hard for anybody to govern. Unless all this is changed, Italy won’t be able to emerge from its two decades-long funk.

To be fair, Renzi is on to all these problems. And it looks as if he will be able to change the political system, after cutting a deal with Berlusconi. For some, this is a pact with the devil, which somewhat muddies the new premier’s overall message, since Berlusconi is guilty of tax fraud and has been abusing the justice system for years. But Renzi has not condoned this behaviour; his deal-making is acceptable realpolitik.

A bigger worry is that Renzi is stretched. Business leaders complain that he doesn’t have a strong enough team to execute his ideas and that the ideas themselves are not fleshed out in adequate detail.

Another concern is that Renzi may think he is doing so well that he becomes complacent. He doesn’t just enjoy the support of the people; Italian bonds and shares have performed well since he took office. After all, portfolio investment is very different from investment by industry. It is the latter that creates jobs.

What’s more, financial investors are notoriously fickle. Renzi’s stock is now riding high, helped by the protective blanket thrown over all the euro zone periphery by the ECB. But Italy’s debt is forecast to hit 135 percent of GDP this year by the European Commission. If it keeps rising or there is some external shock, the country could be tipped back into crisis.

Renzi needs to keep this risk in the front of his mind and take appropriate action. That means launching a more ambitious privatisation programme to cut debt, as that would buy him time with investors if the markets get wobbly. It also means building a stronger executive team around him. Above all, it means staying a young man in a hurry.



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