Like Captain Ahab searching for Moby Dick in Herman Melville’s classic 1851 whaling novel, Tommaso Padoa-Schioppa, who read the book this summer, feels he is still living that atmosphere. “Chasing billions of euros for the budget is like chasing the whale,” says the Italian minister of economy and finance, flashing his utterly engaging, toothy smile.
Whether the white whale represents salvation or hubris is something readers of the book, and observers of the convoluted and continuing negotiations over the Italian budget, have to decide for themselves.
Mr Padoa-Schioppa, a career technocrat and one of the fathers of the euro, has been heavily criticised for his 2007 budget by rating agencies, members of his own government, pensioners, owners of small and medium-sized businesses, the middle class, big business, plus a host of commentators, both foreign and national.
“It achieves the right aim – reduction of deficit – using the wrong means – increasing taxes instead of reducing expenditure,” says Daniel Gros, director of the think tank Centre for European Policy Studies. Surely, then, if even a former member of the board of the European Central Bank cannot do better, Italy will never be able to pull itself out of the muddy constraints of high debt and low growth?
“Yes it will. Under this government,” says Mr Padoa-Schioppa, with certitude. “We recreated a primary surplus of 2% of GDP for 2007, which will reach 5% in 2011.”
Maastricht compliance
Mr Padoa-Schioppa, a 66-year-old father of three who studied at the Massachusetts Institute of Technology, is adamant that the deficit will fall to 2.8% of GDP in 2007, meeting the Maastricht criterion, from the estimated 4.8% this year, while structural reforms are on the agenda for next year. The government’s target is for Italy’s debt-to-GDP ratio to fall to less than 100% at the end of its term in 2011, from 107.6% this year.
Standard & Poor’s, instead, on October 19 lambasted the budget in a report, cutting the country’s rating to A+ from AA-. The rating agency said the budget would lead to net increases in spending as a share of GDP, that the government is unrealistic in its goals for reducing tax evasion and the savings that can be generated from reform of the civil service, and that an opportunity for meaningful reform has been squandered while the “upfront
tax-and-spend concessions to the reform-sceptical members of the centre-left coalition have effectively reduced the bargaining power of the modernisers in the cabinet”.
It believes the budget deficit will be above 3% of GDP in 2007 and the government debt-to-GDP ratio will barely decline to 105.7% by 2010.
Deflecting criticism
The gulf between Mr Padoa-Schioppa, an intellectually rigorous economist who spent eight years on the six-member executive board of the European Central Bank, and a host of reputable opponents is surprising. He even managed to avoid criticism during his tenure as head of Consob, Italy’s securities supervision agency, often a political minefield.
One measure that has caused an outcry among economic commentators and the rating agencies is the classification of certain funds worth about €5bn as government revenue rather than a debt to be repaid. The funds, held by companies in reserve for employees’ severance pay, will now have to be transferred to the state pension system by Italy’s 23,000 biggest companies. However, Amelia Torres, spokeswoman for Joaquín Almunia, the EU commissioner for economic and monetary policy, has said that according to the information from the EU’s statistics agency Eurostat, that specific operation had been properly classified in the budget.
The International Monetary Fund, in the conclusion of its annual review of the Italian economy, noted that the measure was legal, albeit with a tone of disapproval: “These transactions may reduce the deficit in an accounting sense but not in an economic one.”
Mr Padoa-Schioppa has also faced censure over a number of tax increases, with critics alleging they hit the middle class disproportionately. Luca Cordero di Montezemolo, president of Confindustria, the employers’ body, said the budget appeared written by the extreme left with the approval of a major trade union, the Italian General Confederation of Labour.
Seated in the back of his official Lancia car, on the way home from a debate on ethics and markets at the University of Chieti near Rome, Mr Padoa-Schioppa remained remarkably serene in the face of all these attacks. But after all, this is a man who convincingly asserts that he does not believe in opinion polls and insists people may not like the budget but they understand the necessity for it.
Divided parliament
Although an admirable stand, it is worth noting that the coalition government of nine disparate parties ranging from the centre to communist hardliners has a one-seat majority in the Senate and may not make its full five-year term, with the budget being open to amendment until the end of December, the deadline for its passage by Parliament. This will involve a lot of negotiation – something the long-standing member of the Group of 30, an influential body of leading international financiers and academics, believes he is adept at, having had a lot of experience in his career at the top of his elite calling.
It will also involve a better job of communicating with the public than has been done so far by the government of prime minister Romano Prodi – especially as the press has now tarred the white-haired minister as too left-wing, chipping away at his image and credibility as a figure above politics.
(Some of them should have been at the university debate, where Mr Padoa-Schioppa sounded about as orthodox as could be, answering a question with the statement that the main aim of a company is to produce profits at the end of the year and that he did not believe in keeping a company afloat if it was losing money.)
Bach-loving Mr Padoa-Schioppa believes the triptych underpinning the budget – growth, fiscal adjustment and equity – has been satisfied by, respectively, public investment including in the field of research, the reduction of debt and, finally, social programmes aimed at the poorer members of society allied to anti-tax evasion measures.
He is looking to generate €4bn in revenue from the clampdown on tax evasion and disagrees with those who argue the number is optimistic. “We have done more technical work than the rating agencies. I think we are very conservative in our estimates,” he says.
Tax evasion was an issue during the debate with Archbishop Bruno Forte of Chieti-Vasto, although unlike many Italians, both the eminent theologian and the minister agreed on its nefariousness.
Mr Forte said he could not understand how people could doubt that tax evasion is unethical and not paying taxes is a grave sin. To laughter from an audience made up of students, professors, pensioners and the great and the good from the region, he went on to say: “Having taken confession from many, none have confessed to tax evasion.”
Tax evasion
Mr Padoa-Schioppa’s view on tax evasion, a national sport in Italy, is that consciences will mature, so that those who evade taxes will no longer be admired but condemned at some point in the future. He drew an analogy with insider dealing, noting that in his boyhood using inside information to deal in shares was acceptable, while it was “now a crime against the market, and the market is a public good. In the same way you should not throw rubbish on the street”.
This idealism explains his accepting the poisoned chalice of the job of minister of economy in Italy, a country with the third largest debt in the world.
“I have a certain passion for public service. It would not have been right to refuse,” he says. “But I hesitated a lot. I was not driven by the ambition to be a minister. I was fearful of the enormous public exposure and loss of anonymity.”
It is too early to tell whether he will succeed or not. He has been dealt the worst possible hand one could have as an economy minister: dire public finances allied to a fractious, divided government. What will help, though, are the qualities which, according to him, make up Italy’s unique selling point – creativity, flexibility and an ability to cope with a degree of disorder – and which are also present in this upstanding man.
Karina Robinson
