Monti’s Budget Ax Leaves Renzi on Hook for Italian Pension Money

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The Renzi Recovery? Italy Shows Signs of Growth

Italian Prime Minister Matteo Renzi’s steps toward economic recovery are being hindered by a dispute over pensions from the early days of austerity.

On April 30, the Constitutional Court in Rome struck down a measure by former premier Mario Monti at the end of 2011 that stopped inflation-linked increases for retired higher earners. Past and future payment claims might total as much as 19 billion euros ($21.7 billion) before taxes are deducted.

It leaves Renzi with a difficult balancing act between placating his country’s elderly and respecting the budget deficit goals agreed to with the European Union. The 40-year-old leader will need to wrestle with the dilemma just as his country’s economy shows its first growth since 2013, though as bond yields rise across the euro region in defiance of the European Central Bank’s quantitative easing program.

The 2011 freeze “was a flaw within a wider effort to fix things in a hurry,” said Cesare Mirabelli, 72, a former president of the Constitutional Court, himself affected by the decision taken by his judicial successors last month. “Even in exceptional circumstances, such as they were in 2011, it would have been wiser to use the scalpel rather than the ax.”

The high court’s pronouncement couldn’t have come at a worse time for Renzi as Italy’s hoped-for exit from a record-long recession is finally in sight.

Monday Meeting

Until last month, Renzi and Finance Minister Pier Carlo Padoan had hinted the government would use any extra funds for tax cuts or rebates that would fuel the economic recovery and help bring the unemployment rate down from 13 percent.

Extra spending and tax revenue will now have to be devoted to pay retirees affected by the overturning of the Monti-era freeze on inflation increases for pensions of more than about 1,400 euros a month. Padoan said on Thursday the government intends to “respect the guidance of the ruling, but at the same time to minimize the impact on the budget.” The cabinet will discuss the pensions issue on Monday.

The government will intervene in the coming weeks and months to “restore a portion of this money,” Renzi said on Friday in a radio interview with state broadcaster Rai. “These days, we always find ourselves having to solve problems caused by others.”

The Treasury set targets last month to trim Europe’s second-biggest debt, which rose in March to a record 2.18 trillion euros, and keep the deficit within the EU ceiling of 3 percent of gross domestic product this year.

“No question, this complicates the formulation of a credible budget for next year, aimed at reducing the deficit,” said Riccardo Barbieri Hermitte, chief European economist at Mizuho International Plc in London.

Inflation Rate

On the plus side, Italy’s inflation rate will help keep a lid on the potential upward adjustments in the future. European Union-harmonized consumer prices fell 0.1 percent in April from a year earlier, statistics agency Istat said Wednesday.

“The bad news is that the government now has to find some billions to pay relatively well-off retirees who didn’t receive their automatic inflation adjustments,” said Francesco Galietti, founder of research firm Policy Sonar in Rome. “The good news is that inflation now is low, so the prospective costs of the change are modest.”

Italy’s 10-year benchmark bond, which rose in the first quarter as the ECB passed quantitative-easing measures, started falling last month because of anxiety over Greece’s fate. The yield climbed almost 90 basis points from an all-time low on March 12 and was at 1.80 percent on Friday.

The yield exceeded 7 percent when in November 2011 when Monti replaced Silvio Berlusconi with the task of stemming surging borrowing costs and avoiding a default.

The changes to the pension system a month later were a cornerstone of Monti’s so-called “Save Italy” austerity decree. It included raising the retirement age and extending to all new pensioners the principle of stipends based on contributions rather than their final salary.

It was the last of several changes to the pension system introduced by successive governments starting from the early 1990s. The budget plan Renzi’s cabinet passed on April 10 described it as key to “medium-to-long term sustainability.” Within three weeks, the court ruling put that in question.

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