It wasn’t long ago that Matteo Renzi was the King Midas of Italian politics. At just 39, he rose from being mayor of Florence to becoming Italy’s youngest-ever prime minister. Such was his popularity that in the 2014 elections for the European Parliament, he secured the largest vote share ever gained by a left-of-center party in Italy. Many international leaders fell for his mixture of charisma and bravado: Barack Obama chose him as guest of honor for his final state dinner at the White House, shortly before stepping down as U.S. president.
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Over the last 15 months, however, Renzi has lost his magic touch. His bid to change the Italian constitution was overwhelmingly rejected in a referendum. He immediately resigned as prime minister, but secured a new term as party leader. However, even this success now looks short-lived: The coalition around Renzi’s Democratic Party is fading in the polls ahead of Italy’s forthcoming general elections, and looks set to come third, behind both the anti-establishment Five Star Movement and the center right, led by a resurgent Silvio Berlusconi.
Renzi’s glory days may well be behind him. This doesn’t mean, however, we should dismiss all of the ideas he brought to the fore. His economic program, for example, is more realistic than that of any of his main rivals. For a country with structurally slow growth and a towering public debt, this is no small feat.
Let’s be clear: The bar here is pretty low. Renzi is promising to cut the deficit more slowly than the current Italian government plans to do — not what you want to hear during an expansion in a country that has chronically overspent in the past. But he has abandoned more radical plans for lifting the deficit up to 2.9% of gross domestic product. And compared to Berlusconi’s promise of a largely unfunded “flat tax” or the Five Star Movement’s pledge of an equally implausible “basic income,” his deficit-reduction plan is at least more realistic.
More promisingly, Renzi is actually targeting scarce resources at the group which most needs it: families with children. A study by the International Monetary Fund, recently presented in Rome, shows that the real median disposable income of the over-65s in Italy is well above where it was in 2007. For the 25-54 age group, it is more than 10% below that level. Paolo Sestito, an economist at the Bank of Italy, noted during the presentation of the report that “absolute poverty for households with minors has increased approximately fourfold since the crisis.” One reason is that only 4% of all social spending goes to the under-40s, while most goes to senior citizens, often via overly generous pensions.
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Most political parties in Italy are trying to lure the gray vote. For example, the League, an ally of Berlusconi’s party, has pledged to abolish Italy’s flagship pension reform, which was passed at the height of the sovereign debt crisis. According to Tito Boeri, president of INPS, Italy’s social security institute, unwinding this reform just by backtracking on the rules deciding the retirement age would cost Italy 85 billion euros ($105 billion), or 5% of GDP. Berlusconi wants to double guaranteed minimum pensions to 1,000 euros, which would also be expensive.
Renzi wants to cut the tax wedge on wages (a combination of payroll taxes and social security contributions) to 29% from 33, which would encourage companies to hire more, lowering unemployment. He is also planning to introduce a tax credit for low-income families with children, and an income support scheme for poorer under-30s who leave home. Of course, the numbers involved are small and will do little to address Italy’s enormous problem with generational inequality. However, at least Renzi has his priorities right when it comes to economic policy-making.
It is very unlikely that Renzi’s plans will be sufficient to turn around his electoral prospects. Even if his Democratic Party were to end up in government, it would have to form a grand coalition which would dilute Renzi’s program. Still, it is refreshing to see a party that grasps that Italy’s main economic challenge relates to its impoverished youth. Renzi may have lost his Midas touch, but hopefully others will recognize the common sense of his ideas.
— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.