New Italian PM Renzi calls EU's Stability Pact 'a stupidity pact'

New Italian Prime Minister Matteo Renzi has branded the Stability Pact rules for euro zone economies "a stupidity pact". -- PHOTO: REUTERS
New Italian Prime Minister Matteo Renzi has branded the Stability Pact rules for euro zone economies "a stupidity pact". -- PHOTO: REUTERS

ROME (AFP) - New Italian Prime Minister Matteo Renzi has branded the Stability Pact rules for euro zone economies "a stupidity pact". In comments that will have raised eyebrows in Brussels and Berlin, Mr Renzi defended his centre-left government's efforts to stimulate a stagnant economy with demand-led measures that will push Italy's budget deficit.

The deficit is currently forecast by the European Commission to fall to 2.6 per cent of gross domestic product by the end of this year. Mr Renzi calculates that his measures will push it up towards the 3 per cent ceiling permitted under the Stability Pact.

Mr Renzi, who has also vowed to shake up the labour market, made it clear he would like to be able to ignore the 3 per cent ceiling and spend his way out of the long and severe recession Italy has only just edged out of.

"We can't spend money because of the Stability Pact, which is a stupidity pact," Mr Renzi said during a late-night discussion programme on Italy's public broadcaster Rai Uno on Thursday. "I am the prime minister of a country which respects the commitments made to Europe but there is an even bigger issue: what is Europe's purpose? It is not to be a soulless collection of technocrats."

Mr Renzi, who took power last month after engineering an internal party coup against former premier Enrico Letta, has this week outlined a mini-stimulus package involving 10 billion euros (S$17.6 billion) worth of tax cuts for the poorest families, 3.5 billion euros of investment in school buildings and a 10 per cent reduction in a payroll tax paid by employers.

Liquidity in the economy will also be boosted by Mr Renzi's pledge that the state will clear 68 billion euros worth of unpaid bills to private suppliers by the end of the summer.

The detail of how all of this will be financed remains unclear, but Mr Renzi has said he intends to let the deficit rise from 2.6 per cent currently to close to the permitted ceiling - an approach that will inevitably involve a risk of breaching the upper limit and earning a rap on the knuckles from Brussels.

Mr Renzi has also pledged some cuts in state spending and a hike in capital gains tax, but no increases in income taxes for the wealthy.

The spending cuts will partly be achieved by taking a knife to Italy's bloated system of governance, abolishing one layer - the provinces - altogether, cutting the number of deputies in the lower house of parliament and replacing the 315 members of the Upper House Senate with representatives of the regions.

Mr Renzi has also pledged to trim the salaries of directors of public companies by 500 million euros a year, end the jobs-for-life culture in the public sector and make hiring and firing easier across the economy.

"For years citizens have seen prices and bills go up while their salaries have been frozen," Mr Renzi said. "For the first time, this government is putting money in the pockets of people living in the real world, instead of politicians."

Italy's economy has struggled relative to most its neighbours since the launch of the single currency in 1999, which removed the option pre-euro governments had of boosting demand through what were effectively managed devaluations of the the national currency, the lira.

Despite scepticism about the detail of the financing, economists generally have concluded that Renzi's stimulus-plus-reform approach might work better than the austerity-plus-tax-hikes enforced on recent Italian administrations as a result of the euro zone crisis.

Mr Holger Schmieding, an analyst at the private German bank Berenberg, said Mr Renzi faces a tricky task trying to push through his political and labour market reforms that will determine whether he is able to get the economy moving.

But Italy's youngest-ever prime minister has made a positive start.

"He is new, he is charismatic, he has momentum on his side - and because he is popular, he can threaten those who may want to block his proposals that they would stand to lose more from new elections than he might," Mr Schmieding said.

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