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Forza Matteo

2 February 2015 By Hugo Dixon

Matteo Renzi’s position has been strengthened by Italy’s presidential election. The prime minister persuaded the electoral college, made up mainly of parliamentarians, to choose Sergio Mattarella – against the wishes of Silvio Berlusconi, the media magnate, former prime minister and up to now Renzi’s quasi-partner.

The weekend’s success probably allows Renzi to accelerate reforms of the economy, the political system and the judiciary. He mustn’t waste the chance, as Italy is living on borrowed time.

Since seizing power last year, Renzi, leader of the centre-left Democrats, has been relying on an uneasy pact with Berlusconi, the much-diminished leader of the centre-right Forza Italia. The two are not in a formal coalition, but Berlusconi has supported Renzi on many key issues.

The Italian prime minister has needed his rival’s support partly because he does not have enough votes in the Senate, the country’s upper house, to push through an essential constitutional reform – the removal of the Senate’s power to bring down governments. That change is important because in the current system it is hard to govern the country without elaborate deals.

Renzi also needed Berlusconi’s help because many parliamentarians from his own are more left wing than he is. The centrist premier could not rely on them to support various reforms, especially those that aim to liberalise the economy.

The government’s alliance with Berlusconi has infuriated left-wing parliamentarians, who view it as a pact with the devil – partly because Berlusconi beat them in three elections and partly because of his poor ethics, including a tax fraud conviction.

Renzi’s nomination of Mattarella as president, a largely ceremonial post, simultaneously united his own party and divided Berlusconi’s. In the process, he reinforced his authority.

Although Mattarella is a centre-left politician, he has kudos with the Democrats’ left wing because he resigned from a government in 1990 after it passed legislation favourable to Berlusconi’s media interests. That principled stand also explains why the media tycoon didn’t want him.

Berlusconi seems to have hoped Renzi would fail to secure Mattarella’s election because enough dissident Democrats would object in Saturday’s secret ballot. In the end, however, the Democrats united.

Even worse for the ageing tycoon, many of his own parliamentarians supported Mattarella. They are frustrated because Berlusconi appears to be more interested in sorting out his own legal and business problems than in providing a dynamic vision which could bring the centre-right back into power.

There is one potential blemish on Renzi’s victory. He still needs Berlusconi to push through legislation, especially to finalise the Senate reform. If the pact between the two men is irreparably damaged, the premier could yet rue his Machiavellian manoeuvres.

But Renzi still appears to have Berlusconi over a barrel. The prime minister can both damage his quasi-ally’s media interests and help him with his legal problems. The older man also seems in thrall to the premier, seeing him as his political heir – a charismatic figure who will do whatever it takes to secure power.

So how will Renzi use his strengthened authority? The government promises to accelerate reform with new measures to improve the country’s weak educational system and inefficient civil service. It also says it will focus more on implementing existing reforms and will complete the constitutional measures.

Mattarella’s election should help Renzi improve the civil justice system. Currently, long drawn out court processes deter investment. As a former judge, the new president may be able to coax his erstwhile colleagues into dropping some of their objections to the proposed changes.

Renzi’s track record on reform has been mixed. In his first months as premier, he was criticised for announcing plans but doing little to implement them. He ignored many recommendations of a review on how to rein in public spending, because they might give him political problems.

Renzi also gave low-income voters a cash giveaway, a move that looked like a thinly disguised bribe. And his eye-catching reform of the labour market was diluted: it didn’t apply to either existing contracts or the public sector.

After years of stagnation and recession, Italy’s GDP should increase again this year. But that won’t owe much to the government’s own efforts. The European Central Bank’s quantitative easing programme, which will involve purchasing huge amounts of government bonds, has already boosted Italian export potential by driving down the value of the euro and cutting the state’s interest bill on its vast debt. The plunge in the oil price has also been a boon for the Italian economy.

But this boost will be only temporary. It is vital that Renzi uses the breathing space to press on with reform to address Italy’s three big economic ills: high unemployment, virtually no growth and government debt that is nearly 140 percent of GDP.

With the ECB spraying so much liquidity into the market, bond investors are currently not concerned about any of this. But there are risks on the horizon: in the short run, the possibility that Greece will blow up, which might raise doubts about Italy; and longer term, the possibility that the rest of the euro zone recovers and interest rates rise while Italy is stuck with a stagnant economy, which could make its debt-load unsustainable.

Renzi’s big victory gives him a big opportunity. He must not waste it.


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