Business Outlook: ITALY
ITALY: NEW FACES, SAME AGENDA
After the ouster of Prime Minister Romano Prodi, Italy's 56th government since World War II will try to salvage some semblance of policy continuity as the Jan. 1 dawn of the euro nears. To complicate matters, economic growth will be modest, at best, at a time when policy priorities are shifting from euro-related goals to a domestic need for faster growth and more jobs.
New Prime Minister Massimo D'Alema, head of the ex-communist Left Democrats, Parliament's largest party, hopes to forge a workable coalition mainly with the centrist Democratic Union for the Republic (UDR), along with other potentially antagonistic parties. The hope is to move Prodi's center-left government closer to the center, and marginalize the Refounded Communist party. The RC, Prodi's antithetical ally, withdrew its support for him over his 1999 budget cuts, toppling the government on Oct. 9. However the new coalition may be just as unstable as the last.
As part of the quest for continuity, D'Alema will retain several of Prodi's cabinet ministers, including Treasury Minister Carlo Azeglio Ciampi, and the new government should pass Prodi's previously rejected 1999 budget with little change. Also, D'Alema will create a ministry for constitutional and electoral reform. Reform efforts are part of the UDR's conditions for support.
D'Alema inherits an economy that is expected to show slow but steady growth averaging about 2% both this year and next. Weaker global growth will hit exports and hurt domestic confidence, spending, and hiring. However, domestic demand will receive support from a shift to less restrictive fiscal policy and lower rates. Also, lower rates will cut government debt service, allowing more fiscal leeway.
In fact, with political stability restored and with inflation below the Bank of Italy's 2% target, a rate cut is imminent. The BOI is under pressure to merge Italy's official 5% rate with the expected 3.3% euro-area level. However, 2% growth will do little to reduce joblessness, still above 12%.By JAMES C. COOPER & KATHLEEN MADIGANReturn to top
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