Italians' euro enthusiasm useful tool for D'Alema

It seems that every morning you open your post these days in Italy, it contains instructions for life in the Brave New Euro World. Banks, insurance and investment companies and many others besides are all keen to inform us that, as and of January 1st, all transactions will be calculated in euros. In this same euro-spirit, too, the Milan stock exchange recently announced that from January 4th all real-time pricing will be expressed in euros.

So, then, with inflation at a 29-year record low of 1.7 per cent, with interest rates (the euro-wide rate is 3 per cent) at a level not seen since the late 1950s, with the 1999 budget deficit/GDP ratio forecast for 2.1 per cent and with the lira seemingly stabilised at 990 to the deutschmark, Italy would seem more than ready for the January 1st euro-launch.

Its qualification for the 11-state start-up of monetary union, too, is one in the eye for those sceptics who said it could never happen in a state that as recently as 1992 had 5.3 per cent inflation and a 9.7 per cent deficit/GDP ratio and whose national currency has spent much of the 1990s on a roller-coaster ride on currency markets.

As Italy boldly steps forth into the euro world, it is curious to reflect that missing from the scene will be the man who, more than most, fashioned the sharp turnaround in public finances that enabled Italy meet the convergency requirements. Romano Prodi, elected prime minister in April 1996 on a monetary union ticket, was surprisingly ousted from office in late October, following the withdrawal of parliamentary support by his allies (but not coalition government partners) Rifondazione Communista.

In theory, Mr Prodi's exit from office should change little. For a start, the government which succeeded him not only relies on the same centre-left forces which supported him but also, critically, still includes former Bank of Italy governor, Carlo Azeglio Ciampi, in the all important Treasury Ministry.

Secondly, Mr Prodi's successor as prime minister, Democratic Left president, Massimo D'Alema, was quick to immediately stress the continuity between his government and that of Mr Prodi, saying in his initial programme speech: "We have a responsibility to pursue the good policies of those who went before us . . . The imperative of this government will be to not interrupt the improvements made to public finances and the economic and financial strategy laid out by Romano Prodi, policies which allowed us join European monetary union."

Mr D'Alema backed this statement by re-proposing the very 1999 Budget that had brought down Mr Prodi, a budget containing £5.8 billion worth of deficit cuts. It was indicative, however, that the D'Alema budget also contained an addendum of measures to cut labour costs and fight a nation-wide unemployment level currently running at 11.9 per cent. In his government programme speech, too, Mr D'Alema had chosen to remind us of his communist past, claiming that only the left "knows how to balance competition with equality" and adding, "citizens must know that the degree of civility of a country is not based on its GDP but on the number of people employed and on the quality of social assistance".

With 1999 growth forecasts for the economy ranging from 2.1 per cent (OECD) to 2.5 per cent (the government), Mr D'Alema will face a difficult task as he tries to steer a middle course between remaining faithful to the new-found fiscal rectitude which got Italy into the euro and the need to kick-start a sluggish economy. More specifically, he will face pressure from his own ex-communist, ex-working class electorate to find ways of combating an unemployment crisis that touches as high as 25 per cent in the south and which has already led to regular street protests in the cities of Naples and Palermo.

The appointment of labour activist and mayor of Naples, Antonio Bassolino, as Labour Minister in the new D'Alema cabinet says much about the direction his government may take as does a three-day conference in Catania, Sicily, early this month aimed at defining 100 development projects which could become eligible for an estimated £48 billion worth of EU structural funds and government grants between 2000 and 2006. The recent repeal of a 21-year-old law banning women from working factory nightshifts also indicates a government willingness to deregulate Italy's of times inflexible labour market. (A recent Merrill Lynch study comparing the labour markets of 10 European countries and the US concluded that Italy had the highest payroll taxes - £21 in taxes, pension and health benefits for every £20 of wages - as well as the highest "firing" costs and the lowest use of part-time workers.)

As he steers his difficult path between the need to increase the competitiveness of the Italian economy and the need to safeguard at least some key elements in the Italian welfare state, between his own political links to the trade union movement and the increasingly strident demands of Confindustria (the employers' confederation) and between fiscal rectitude and employment incentives, Mr D'Alema finds himself in a position similar to that of several of his senior European partners. The Italian Prime Minister has one advantage, however, and it is the strong pro-Europe enthusiasm of the Italian people. It could be that in 1999, he may be forced to lean heavily on that resource.