Jan. 21 (Bloomberg) -- Italy’s borrowing costs may rise if next month’s election fails to produce a stable government, Finance Undersecretary Gianfranco Polillo said in an interview.
Under Prime Minister Mario Monti, who raised taxes and overhauled pension and labor laws, the yield difference between Italian and German 10-year bonds has fallen by more than half to 261 basis points. Opinion polls indicate that the coalition led by the Democratic Party may fail to win a majority in both houses of parliament, which would make the country difficult to govern.
“The question is whether we will be able to form a government able to guarantee stability,” Polillo said in an interview in his office in Rome Jan. 18. Should political forces fail to agree on a reform agenda “the spread and Italian risk” will increase, he said.
Democratic Party leader Pier Luigi Bersani has said he will seek the support of Monti and his allies even if he wins a majority in both houses of Parliament in the Feb. 24-25 vote. Still, Bersani’s main ally Nichi Vendola has called for reversing some of Monti’s policies, and Union of Centrists leader Pier Ferdinando Casini, one of Monti’s main supporters, has deemed an alliance with Bersani “science fiction.”
Bersani striking a deal with Monti would also rile the party’s union base, which has widely criticized the premier’s austerity drive and demanded changes to the country’s pension and labor laws.
“The real threat is not Vendola,” Polillo said. “The real problem is represented by the CGIL and the Fiom” labor unions. Everything depends on whether the next government will be able “to convince the CGIL to rediscover its reformist spirit,” he said.
A possible post-election alliance between the centrists and Bersani has partly reassured investors the next administration won’t undo Monti’s efforts and will respect the fiscal commitments made to the European Union. Still, Italy may need at least 9 billion euros ($12 billion) in additional budget measures in 2013 to meet its deficit targets as the worsening recession hurts tax revenue and fuels unemployment costs, Polillo said.
The Bank of Italy last week cut its forecast for the economy, predicting a contraction of 1 percent this year compared with a previous forecast of a 0.2 decline, saying the global slowdown and weak domestic demand were choking growth. That will make it harder for Italy to meet its goal of a 2013 deficit of 1.6 percent of gross domestic product, Polillo said.
Italy is still on track to meet its target to balance the budget in structural terms, or excluding the effects of the recession, this year, he said. The government probably missed its overall deficit target of 2.6 percent of GDP last year, Polillo said. The Bank of Italy said Jan. 18 the deficit in 2012 was about 3 percent, a prediction Polillo said was reasonable.
Italy has three possibilities to fill the 9 billion-euro gap, Polillo said. The next government can cut public spending, seek more revenue through fighting tax evasion or just let the deficit in 2013 run above 2 percent of GDP, he said.
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