Italy's Renzi prepares for stormy autumn

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Renzi appears to be heading for a period that will make or break his premiership. Photo: AFP
11:55 CEST+02:00
In a sign of how good a summer it has been in Italy, coastguards are threatening holidaymakers with fines for bagging beach spots by parking deckchairs and towels overnight.

From Sicily to Venice, the "no-vacancies" signs are up and sunlounger spaces are thin on the sand as the country's holiday resorts operate at full capacity for the busiest week of the year.

Prime Minister Matteo Renzi, whose own vacation destination is a closely-guarded secret, must wish the same could be said for the rest of his country's flagging economy.

Weighed down by sluggish domestic demand and a bad debt-laden banking sector's inability to finance investment, the eurozone's third biggest economy ground to a standstill in the second quarter of 2016.

For Renzi, the surprise stalling of a recovery that had been progressing slowly since early 2015 could not have come at a worse time.

The centre-left leader has staked his political future on a constitutional reform referendum scheduled for November.

And with the economic slowdown complicating a 2017 budget to be drafted by mid-October, the centre-left leader appears to be heading for a perfect autumnal storm that will make or break his premiership.

The 41-year-old former mayor of Florence admitted last week that he had made a mistake in making the referendum personal by vowing to quit if voters reject his proposed reforms of parliament and the electoral system.

But analysts are united in saying it is too late to prevent the vote being effectively a referendum on Renzi's two and a half years in office.

And despite his success in driving through labour market reforms, the worsening economic outlook means voters' verdict is in the balance.

Polls suggest the referendum outcome is too close to call, increasing the pressure on Renzi to come up with a budget that will get voters back on side at the cost of a clash with Brussels.

Economic Development Minister Carlo Calenda made it clear at the weekend that the government plans to ignore EU guidance on the deficit by unveiling an expansionary package.

Calenda spoke out after data published on Friday showed the Italian economy failed to grow between the first and second quarters of this year.

Analysts say the government will now have to follow the IMF by revising downwards its forecasts of growth of 1.2 percent for this year and 1.4 percent in 2017, with knock-on effects on its deficit reduction plans.

"I can't hide the fact that the room for manoeuvre is tight," Calenda said, revealing talks with Brussels on how to stimulate investment were already under way.

Calenda implied the 2017 budget deficit will be allowed to run higher than previously planned, possibly up to the three percent of GDP ceiling enshrined in the eurozone's rules.

The Commission has set Italy a deficit target of 1.8 percent for 2017 - an adjustment it says is necessary to reverse the upward trend in the country's huge debt, which hit a record of just under 2.25 trillion euros ($2.51 trillion) in June.

"We have already obtained a lot of flexibility, we intend to ask for more, the maximum possible, but always within the rules," Calenda said.

Renzi has already floated elements of a possible reflationary package.

These include pension increases for the poorest pensioners and an anti-poverty programme funded from the 500 million euros of annual savings projected to arise from one of the cornerstones of constitutional reform: the abolition of the lavishly financed Senate.

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Renzi has also mooted bringing forward income-tax cuts planned for 2018 to next year in a bid to appease voters frustrated by years of falling real incomes.

A senior EU official familiar with Italy's negotiations told AFP that Renzi would be able to twist arms in Brussels because of concern about the implications of him possibly losing the referendum and acting on his pledge to step down.

"Better the devil you know! If Renzi goes, who knows who will replace him," the official said on condition of anonymity.

A Renzi departure would be expected to lead to early elections which, current polls suggest, could be topped by the populist Five Star Movement.

Riding high after recently winning control of city halls in Rome and Turin, the movement founded by comedian Beppe Grillo officially supports a referendum on an 'Italexit' from the eurozone.

Although it has not emphasised that commitment of late, the prospect of it coming to power would send shockwaves across Europe in the wake of Britain's vote to leave the EU.

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