Renzi's reforms leave Italian economy and voters flat

September 28, 2016 6:17 AM EDT

Italy's Prime Minister Matteo Renzi speaks during a news conference with foreign press in Rome, Italy, February 22, 2016. REUTERS/Alessandro Bianchi/File Photo

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By Crispian Balmer

ROME (Reuters) - Prime Minister Matteo Renzi logs the progress of Italian government projects on big sheets of paper, keeping track of everything from work on a long-delayed motorway to simplifying the notoriously complex tax code.

"My priority is achieving results. That is the only reason for being here," he said recently in the gilded rooms of Palazzo Chigi, the center of Italian government.

But for all this attention to detail, he has failed to end years of endemic economic underperformance, disappointing many who had bought into his image as a "Demolition Man" out to vanquish the vested interests that have dragged Italy down.

After 2-1/2 years in power, Renzi can point to some achievements - such as liberalizing rigid labor rules, granting legal protection to same-sex couples and offering a series of small-scale tax cuts to workers.

Nevertheless, recovery from deep recession has stalled, with zero growth recorded in the second quarter of 2016 - the joint lowest reading in the 19-nation euro zone - and efforts to end a deep-rooted banking crisis failing to take wing.

The sense of letdown felt by some voters helps to explain why Renzi is struggling to sell his most ambitious reform yet, a complex revision of the Italian constitution.

Italy will vote in a referendum on Dec. 4 on the overhaul, which Renzi says will bring much-needed political stability by emasculating the Senate, stripping the upper house of its power to bring down governments and stall legislation.

The 41-year-old prime minister has promised to quit if he loses the ballot, but public opinion is turning against him and almost all surveys now show the 'No' camp is ahead, meaning his short reign could be about to end.

"Very few people understand what this constitutional reform is all about, so the majority of people will be voting simply for or against the government," said pollster Renato Mannheimer, who this week put the 'No' vote at a commanding 55 percent.

"Renzi's reforms are not winning people over," he told Reuters. "The economic situation is hurting him, the recovery isn't there, Italy is doing worse than other European countries and people are growing increasingly pessimistic."


The reform most identified with Renzi is his 2015 Jobs Act, which made it easier for firms in the private sector to hire and fire employees. More than half a million jobs have been created since the law was introduced and the European Central Bank said last week it had "helped spur renewed employment dynamism".

However, the rate of growth has slowed as incentives to encourage hirings have been cut. Labor Ministry data show a year-on-year fall of 29.4 percent in new contracts for regular, open-ended employment in the second quarter of 2016.

Another reform that has been praised by economists, but has been slow to bear fruit, is a 2015 banking shake up, aimed at strengthening Italy's army of cooperative lenders and consolidating the fragmented financial sector.

It has given rise to just one merger to date, although more consolidation is expected if market conditions improve.

"We have been waiting for this reform for 20 years," said Lorenzo Codogno, the Italian Treasury chief economist from 2006 to 2015, who now heads consultancy firm LC Macro Advisors.

"Unfortunately the market situation is very fragile, but with a bit of luck the banking sector will look totally different in two or three years' time," he said.

Separate efforts to help banks offload billions of euros of bad loans are also struggling, leaving Italy's third largest lender Monte dei Paschi di Siena in desperate need of new funds to stay afloat.

Other reforms have created more problems than solutions, including a complex new code for public procurement. This is designed to boost transparency, but includes 220 norms and has caused much uncertainty in ill-prepared public offices.

"It is possible that resulting delays to public tenders is one of the reasons GDP came to a standstill in the second quarter," said Codogno.

Another part of the overhaul of the public administration could cost the state money, economists say.

The legislation looks to boost productivity by offering bonuses, but this is hard to police in the state sector. The prime minister's own office already runs a rewards scheme and everyone in the economics department won a full bonus last year.

A separate reform of state broadcaster RAI was meant to cap annual salaries at 240,000 euros ($268,800), but loopholes allowed the director general to earn 650,000 euros last year.

"I cannot explain that reform in political or economic terms," said a government adviser who was not authorized to speak to the media. "Often I think ministers have rushed through reforms simply to make themselves look busy."


Renzi recruited economist Roberto Perotti in 2014 to identify cuts to public spending but he left a year later, complaining his recommendations were falling by the wayside.

While Perotti says it is too early to judge many of Renzi's reforms, such as his Schools Act, he believes the government should have done more to rein in costs.

"Where they have really failed is on the budget. They don't realize that if you want to decrease taxes you have to decrease public spending, and this year's budget is all about increasing total government spending," he told Reuters.

Indicating he would stick to this path, Renzi said on Tuesday he was sharply raising the planned 2017 budget deficit for the second time in five months, regardless of concerns in Brussels.

Renzi has cut some taxes since 2014, including on primary residences - one of the few that was very hard to evade. But critics say he should have used the limited funds at his disposal to reduce corporate taxes to lift competitiveness.

According to a comparative study this year by the CGIA business association, total taxation of corporate profits in Italy stands at 64.8 percent, compared with an EU average of 43.6 percent - the highest tax take in the 28-nation bloc.

Moves to liberalize access to professions such as pharmacies, notaries and taxis, have also failed to make headway, stuck in parliament for the past two years as the government avoids conflict with powerful vested interests.

"There is much less competition in Italy than elsewhere in Europe and this is an area where we are still awaiting a more courageous and ambitious move," said Andrea Goldstein, managing director of the independent Nomisma economic research firm.

Renzi has had to govern with a center-right/center-left coalition that does not have full control over the Senate, meaning he has not been able to rule with a free hand, and perhaps explaining why some reforms have fallen flat.

He argues that his constitutional overhaul, coupled with his 2015 electoral reform, will enable future election victors to implement their manifestos in full.

"If the referendum passes, the reform would speed up significantly the lawmaking capability of parliament," said Codogno. "So maybe it will be left to the next government to really deliver reforms that Italy needs."

(editing by David Stamp)

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