As Spanish bond yields have surged, Italy is struggling to stay out of the spotlight. The yield on Italy’s ten-year debt has jumped by 0.6 of a percentage point in three weeks. The European Central Bank’s (ECB) cheap loans encouraged Italian banks to buy Italian debt, lowering yields, but foreign buyers stayed away, says Guy Dilmore in the FT. Now no more cheap ECB money is in the offing, while the new government’s honeymoon is ending.
The government passed an austerity package and hopes to balance its budget by 2013 after a deficit of almost 4% in 2011. Prime minister Mario Monti has also begun to liberalise the service sector. But trade union opposition has watered down another key measure: reform of Italy’s sclerotic labour market.
Firms with over 15 employees cannot get rid of staff without risking legal proceedings that can last years. A judge can force the firm to rehire the worker, paying out the lost earnings in compensation. This makes companies loath to hire. The government had hoped to end the courts’ ability to order reinstatement, but the final draft still allows for it. “The inflexibility of labour… has only been scratched”, says Nicola Marinelli of Glendevon King Asset Management.
A further worry is that structural reforms will take time to boost Italy’s growth and thus help it work off its debt pile, worth 120% of its GDP.
In the meantime, the same vicious circle threatens both Italy and Spain: recession and austerity lead to higher borrowing and fewer tax revenues, necessitating more austerity, which deepens the downturn. “Welcome back to the crisis,” says Wolfgang Münchau in the FT.