Italy’s old guard watches with concern as coalition government undoes reform efforts

Reform and debt reduction efforts in Italy are at risk of being undone by its new populist coalition government, the country’s former minister of economy and finance and Italy told CNBC on Wednesday.

“It is essential that Italy continues the path of fiscal consolidation, putting debt on a clear declining path and at the same time finding some room for supporting growth, especially supporting public investment,” Pier Carlo Padoan said.

“I hope, I’m convinced that Mr Tria will continue on this path,” he said, referring to Italy’s new economy minister Giovanni Tria.

Despite Padoan’s quiet confidence, Tria said Tuesday that Italy would not adopt measures to narrow the budget deficit in 2018, as requested by the European Commission, and that it is also ready to increase next year’s deficit target, Reuters reported.

For 2019, he said the current goal to reduce the deficit to 0.8 percent of gross domestic product (GDP), from 1.6 percent this year, appeared “too drastic,” the news agency added.

Speaking at a parliamentary hearing, Tria, a former economics professor, is reported to have said “the government doesn’t have the intention of adopting corrective measures for this year.”

The plan could jeopardize any attempts to reduce Italy’s large debt pile, of 132 percent of GDP, second only to Greece’s in the euro zone.

Aside from Italy’s spending plans, the new coalition government — made up of the populist, anti-establishment Five-Star Movement (M5S) and right-wing Lega party — approved a draft bill earlier this week, known as the “Dignity Decree,” which aims to water down labor reforms put in place by Padoan and the previous administration. The new government says this has allowed a boom in short-term employment contracts and has given workers less security.

The M5S-Lega government also wants to make it harder for employers to fire staff or rollover temporary contracts.

“I am concerned that the strong reform effort that has been achieved over the past legislature could be undone, not only in terms of fiscal policy and budget, but also in terms of labor market reforms and banking sector reforms — which the current government has announced it would tackle, and in some cases began to undo with the recent decisions on the so-called ‘Dignity Decree,'” Padoan said.

He put the current government’s election success down to fears over migration and the sense that “poorer segments of the population have felt left behind.” Another large part of the coalition’s success was its promises to tackle migration, create jobs and end austerity measures that are encouraged by Italy’s euro zone neighbors.

Padoan said the amount of money needed to implement such promises was massive. “You immediately see that the amount of money needed to implement all those reforms is simply unsustainable, it could be several dozen billion euros, which is absolutely inconsistent with any continuation of the fiscal adjustment path.”

He added that the parties would either “tone down” their proposals or there would be “additional political instability in the country.”

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