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Draghi urges Italy to accept reform

May 31, 2010

By Guy Dinmore and Giulia Segreti in Rome – published May 31 2010

Mario Draghi, governor of the Bank of Italy, warned on Monday that the sovereign debt crisis in Greece risked damaging the growth outlook for Italy and urged Silvio Berlusconi’s centre-right government to take the opportunity to implement structural reforms.

“On many other occasions we have addressed the question of structural reforms. The crisis makes them all the more urgent,” Mr Draghi told the bank’s annual shareholders meeting.

“The explosion of the Greek crisis could change the outlook,” he said, noting that at the start of 2010 it was estimated that the Italian economy, the third largest in the eurozone, would return to “modest growth” this year after contracting 6.3 per cent in 2008-09. He issued no new GDP growth forecast, however.

Mr Draghi also paid unusual attention to the issue of corruption, a particularly sensitive issue for the prime minister following the resignation of his minister of industry amidst a probe by the judiciary into suspected issuing of government tenders in exchange for cash and favours.

“Corrupt dealing between private agents and general government, in some cases encouraged by organised crime, is widespread,” Mr Draghi said, noting that Italy was sliding down international rankings.

Referring to the government’s 24.9bn euro deficit-cutting package for 2011-12, which Giorgio Napolitano, head of state, signed into law on Monday, Mr Draghi said careful monitoring of the measures was needed to ensure they achieved the objectives of reining in public spending.

The austerity package, which has been described in outline but not yet made public, has been welcomed by international institutions, but with the caveats listed by Mr Draghi, notably a lack of structural measures and a risk that an already fragile recovery will be further weakened

“The fall in GDP, the burden of financing the public administration; the costs imposed by tax evasion and corruption become even more unsustainable; stagnation destroys human capital, especially among the young,” Mr Draghi said.

The austerity package includes pledges to crack down on tax evasion which Mr Draghi said cost the state more than 30bn euros or two points of GDP a year in unpaid value added tax alone.

He urged the government to “rethink the scope and structure of government, rationalise resource allocation and reduce waste and duplication between different entities and levels of government”.

“A reform plan covering the entire public sector is needed,” he said. He urged the government to apply sanctions against entities and local governments that did not guarantee efficient use of resources including taking over those that “fail to guarantee essential services”.

Mr Draghi presented a grim assessment of the lack of economic progress in Italy. In the decade before the international crisis erupted, he said, labour productivity rose by just three per cent in Italy against 14 per cent in the eurozone. Italy’s GDP grew 15 per cent, against 25 per cent in the eurozone. Employment rates were 7 percentage points below the European average.

But he also described Italy’s strong financial points with household wealth, net of debt, among the highest in the euro area, while household debt ratios were among the lowest and that of companies below average.

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