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Tremonti rejects calls to open Italy’s fiscal taps

January 21, 2009 Leave a comment Go to comments

tremontiGiulio Tremonti, Italy’s finance minister, begins an interview pointing out that Italy has the world’s third largest public debt, after the US and Japan.

Some can increase their deficit and debt. We cannot,” he says, noting the fiscal stimulus packages of France, Germany and the UK. “We are obliged to be very conservative. Our philosophy is to be careful.”

Widening spreads between German government bonds and Italian are a concern but aides point out that interest rates have fallen even further to all-time lows, and that Italian treasury bill auctions have seen increased coverage recently. Aides dismiss speculation of a possible default within the EU.

Even if Mr Tremonti had the means to spend he argues he would resist. “I’m absolutely sure any kind of stimulus is useless in any case.”

Italy’s answer is best quality spending of available resources on infrastructure and social subsidies, from a pool of €100bn of EU funds allocated for 2007 to 2012.

Eugenio Scalfari, veteran commentator and founder of the centre-left daily La Repubblica, says Mr Tremonti is “profoundly tormented” by the fear that Italy will fail on international markets — in competition with other big borrowing governments – to raise the funding necessary to keep government going.

Greece and Ireland, without support of the IMF, even risked falling out of the euro system, Mr Scalfari said in his weekly column. “Italy is still far from that threshold, but the danger is not imaginary. It exists and it is concrete.”

Economists Tito Boeri and Pietro Garibaldi, writing for Lavoce website, criticise Mr Tremonti for taking the path of “inertia”. “Italy will be the only main European country standing still in front of a recession,” they write. According to their analysis the fiscal “stimulus” package announced by the government last November – which Mr Tremonti said contained €5bn in new money – was actually a contraction.

The centre-right government that came to power last May with a promise to reduce the fiscal burden had actually increased it through inventing a series of ineffectual ad hoc measures in an attempt to increase subsidies to the poorest, Mr Boeri writes in a separate commentary.

Mr Tremonti, who smiles when it is suggested he is a lone voice in defending fiscal probity, says it is “useless” working on private demand or Keynesian-style financing when the problem lies in a crisis of faith in the financing system.

One solution he suggests is the “bad bank” solution, an ad hoc vehicle with a 50 year timeframe to isolate toxic assets. Reports in the US suggest the incoming Obama administration is considering such an “aggregator bank”.

The minister says it was an excess of private debt that triggered the crisis, and notes that Italy, despite its large public debt equal to about 104 per cent of GDP, has one of the lowest rates of private debt in Europe.

The Italian situation is “not so bad”, he says. “Our structure is stronger than you assume,” he argues, pointing to large numbers of families without personal debt, and 4m entrepreneurs and small businesses.

The Italian banking system is “quite strong”, he adds, and the 38m people living in the industrial north of Italy are among the richest in Europe. The deficit of the south of Italy is a “deficit of social structure”, an absence of civil education where the ruling classes cannot spend wisely.

In other countries governments were obliged to finance banks. In Italy it is the opposite, they don’t want public money. We are trying to push public money into the the banks to avoid a credit crunch.” Small banks were increasing lending but larger ones were resisting.

Italy’s other major asset, Mr Tremonti says, is a strong government. Although opinion polls show Prime Minister Silvio Berlusconi’s star is fading, the centre-right coalition is in far better shape than the centre-left opposition.

On Monday, the European Commission also predicted that Italy’s economy would shrink by 2.0 per cent in 2009, marking a second year of contraction in the worst post-war period. In November the commission had forecast zero growth for 2009.

The commission said it expected Italy’s public debt to rise to 109.3 per cent of GDP in 2009, and the budget deficit to increase to 3.8 per cent of GDP from an original forecast of 2.6 per cent.

Published on the Financial Times on January 21 2009

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