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Draghi Takes Aim at Italy as Recession Scars Euro Area

August 08, 2014

Draghi Takes Aim at Italy as Recession Scars Euro Area

Ailverware and crystal in the window display of a store in Milan, Italy. Photographer: Alessia Pierdomenico/Bloomberg

Mario Draghi says Italy can only blame itself for its third recession since 2008.

The European Central Bank president singled out his country’s lack of structural reform after data showed the euro-area’s third-biggest economy unexpectedly contracted last quarter. The comments in Draghi’s monthly press conference came a day before Italian Prime Minister Matteo Renzi won a key vote in his drive to remake the country’s political system.

“I keep on saying the same thing, really -- I mean, of reforms in the labor market, in the product markets, in the competition, in the judiciary, and so on and so forth,” Draghi, the former Bank of Italy governor, said in Frankfurt yesterday after keeping ECB interest rates unchanged at record lows. “These would be the reforms which actually have and have shown to have a short-term benefit.”

The remarks on his homeland are blunter than normal, adding to the contrast with countries such as Spain that have engaged in more structural adjustments. They increase pressure on Renzi to turn around an economy that threatens the 18-nation euro area’s nascent revival.

“Draghi made a strong call for structural reforms, noting that there is now ample evidence to suggest that countries that have reformed their economies are showing a stronger economic performance than the rest of the euro zone,” said Riccardo Barbieri, the London-based chief European economist at Mizuho International Plc. “This sounds like a strong rebuttal of the approach taken by Italy’s new prime minister.”

Senate Vote

Renzi took a step toward recasting Italian politics today as the Senate approved his government’s marquee bill to rein in the chamber’s powers. The bill, which still needs to be approved by the Chamber of Deputies and then make a second run through both houses, would end the Senate’s equal status within the Italian legislature. That system has made it difficult to pass laws, hindering reforms that could boost the economy.

Italy ranked 65th out of 189 countries globally in the World Bank ease-of-doing-business survey released in October, lagging behind St. Lucia, Belarus and Fiji. The highest-ranked euro-area nation, Finland, was 12th.

“I agree completely with Draghi,” Renzi told the La7 television channel yesterday. “If it’s a dig, I’m having a dig too. What the ECB president said is sacrosanct; we need to put Italy back in order to make it more competitive.”

More Flexible

Draghi’s comments on Italy have become more frequent this year, and he said last month that rumors he’ll leave the ECB early to become Italian president are unfounded. His term as head of the central bank is scheduled to end in 2019.

Renzi, the country’s fourth prime minister since 2011, promised wide-ranging reforms of the economy and political system when he came to power in February through parliamentary maneuvering. The 39-year-old has announced changes aimed at making the labor market more flexible, speeding up the justice system and making public administration more efficient.

Even so, the Bank of Italy last month lowered its economic growth forecast for this year to 0.2 percent, less than a third of its previous prediction.

When Italian second-quarter gross domestic product data were announced on Aug. 6, showing a surprise contraction of 0.2 percent, the euro dropped to $1.3333, the weakest since November. The single currency traded at $1.3397 at 12:55 p.m. in Frankfurt today.

Low Investment

Draghi, 66, indicated that the lack of reforms scares off investors, citing Italy’s “significantly low” level of private investment. He said that while that’s true in the euro area as a whole compared with other parts of the world, it can be attributed in part to inadequate structural reforms.

“Certainly it’s not the cost of capital, because interest rates, nominally and real interest rates, have been low and in some parts of the euro area are negative, have been negative for quite a long time,” Draghi said. “The general uncertainty that the lack of structural reforms produces is a very powerful factor that discourages investments.”

The ECB kept its benchmark interest rate at 0.15 percent yesterday and held the deposit rate at minus 0.1 percent, and Draghi reiterated that borrowing costs will stay low for an extended period. Policy makers announced an historic package of stimulus measures in June to fight the threat of deflation.

Political Risk

A more-complete picture of the state of the currency bloc will be available on Aug. 14 when GDP reports are released for the euro area along with those for Germany and France, the region’s biggest economies.

Risks remain on the downside, Draghi said, citing political tensions including the conflict in Ukraine and sanctions against Russia. While the ECB refrained from announcing further measures, Draghi reiterated that policy makers are unanimous in their willingness to deploy unconventional measures, including quantitative easing, if needed. The ECB will also hire a consultant as it intensifies work on a potential purchase program for asset-backed securities.

“Progress on the reform agenda has a particular significance” for the ECB, said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London. “At some point in the next six to nine months the Council may be forced to decide whether it is willing to launch a broad-based asset program, and at that point, the question of the political response to loose monetary policy will loom large.”

(An earlier version of this story corrected the year in the first paragraph.)

To contact the reporters on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net; Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon, Fergal O’Brien


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