Will Italy's Prime Minister Be Around Much Longer?

Letta is in an untenable situation, stuck between bad politics and a sinking economy.

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Enrico Letta.jpg
Italian Prime Minister Enrico Letta makes a statements with Greek Prime Minister Antonis Samaras, not seen, at the Maximos Mansion in Athens, Monday, July 29, 2013. Letta, who is visiting Athens, described the deadly coach crash which occured in Avellino on Sunday night and left at least 37 dead as a "dramatic moment" for his entire country: "The tragedy, the victims and their families, and dramatic situation of the rescue - it's a moment that has deeply touched our nation," Letta said after talks with Samaras.

New Italian Prime Minister Enrico Letta seems different. In less than three months since taking office he has taken some unconventional steps (short-term reforms) to reduce the Italian public debt. He started by cutting his own salary and that of his ministers, approved a bill to stop public subsidies to political parties, and gave tax breaks to employers who hire young people and to homeowners who made eco-friendly enhancements.

In addition, he wants to sell more than 1 billion euro of state-owned property to boost privatization. Last but not least, he initiated a payback of 40 billion euros that the government still owes to its business creditors.

But the question of whether this is enough for the third largest economy in the Europe Union to grow out of its problems is easy to answer: No, it is not. An even more basic question is: "Can the grand coalition which the young Prime Minster Letta rules over survive the many economic and political hiccups the country is facing?"

[See a collection of political cartoons on the European debt crisis.]

What are the economic hiccups? Italian gross domestic product was negative throughout 2012 and has remained so during 2013. Currently, Italian gross domestic product (in real terms) is hovering around the same level as it was in 1999. While Italy has managed to stabilize its budget deficit, its public debt is now over 130 percent of GDP and still increasing. At the beginning of July, Standard & Poor's downgraded Italy's credit rating yet again and announced that the next time Italy could go straight to junk status.

This is, in part, because the hard austerity measures that Italy has to undertake have not happened. Italy needs desperately to regain competitiveness against its neighbors like Germany. Letta has not ventured to take on long-term economic reforms, i.e. austerity measures, because of their unpopularity. Letta's hesitation is really a product of the fragile political coalition, which in all probability would not agree on labor market reforms and market liberalization. Thus future growth and employment conditions in Italy seem bleak.

Instead, Letta is focusing on a long-term constitutional reform plan to ease the lawmaking approval process. Italy has a complex lawmaking system that gives equal power to both the upper and lower house of parliament. Letta has an ambitious plan for a political overhaul by 2015 that requires bipartisanship.

Perhaps this is not the right time to focus on such a long-term constitutional reform, given the fact that in less than three months the Letta government has risked being overthrown twice and the economy is nose-diving. The pressing need to revitalize the stagnant economy is getting more urgent with each passing day, but Letta's hands seemed tied. Thus, his government charges ahead with short term, newspaper headline garnering reforms. This will not save his coalition government in the long term.

[Read the U.S. News debate: Who Is Handling Its Debt Crisis Better: United States or Europe?]

Adding more pressure to the Italian coalition government are two outstanding political hiccups that are outside of Letta's control. First are the issues of the ever-resilient Silvio Berlusconi (the previous prime minister) and his sex crime convictions and tax fraud cases. At the end of July, the Supreme Court will review Berlusconi's tax fraud case, which might end with a five-year ban from political office. This might lead the fragile government coalition to fall apart, because Berlusconi's PdL party might walk out.

The second problem is interior minister Angelino Alfano's involvement in deporting the wife and child of a Kazakh dissident, apparently at the behest of that country's president. Why is the matter important? Because of Italian interests in Kazakhstan's oil and gas fields, it seems politically motivated. If there is a no-confidence-vote on the interior minister's involvement, it might lead to a coalition problem as well, because Alfano is Berlusconi's right-hand man.

New elections are the last thing Italy needs. Letta is in an untenable situation because any real action will cause the Italian coalition government to fall apart. Unfortunately no one can help him. The question now is whether he will go as quietly as he came into office, leaving Italy in a state of governance inertia.

Scheherazade Rehman is a professor of international finance/business and international affairs at The George Washington University. You can visit her homepage here and follow her on Twitter @Prof_Rehman.

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