Mini revival helps outlook for Italian jobs

Date: 04/06/1998

By Alison Cottrell

IF A recent survey is to be believed, 45&percent; of Italians are, or were until questioned, unaware that the euro is going to replace the lira.

The markets have, however, been free of such doubts for some time, as the narrowing gap between Italian and German interest rates has indicated.

The Bank of Italy is well-practised in the art of procrastination, but in 1998 both it and the markets know in which direction it is heading.

Italian interest rates are, for the first time, being robbed of most of their domestic risk premium and, with short-term interest rate policy tailored in 1998 to the needs of a more sluggish Germany, the potential benefits to Italian consumers and businesses of German-level mortgage rates are obvious.

April saw the facts of life under the single currency being brought home all too clearly to domestic banks, via the 4.9&percent; mortgage rates being offered by interloper Abbey National.

Italian home-buyers have never had it so good, nor Italian banks had it so uncertain.

Recovering domestic activity is helping to take the sting out of the phased withdrawal of the government's car-purchase incentive scheme, although the impact of the latter is nevertheless still evident in orders and output releases.

Italian businesses are reporting a weakening of activity over the second quarter of this year. Consumer sentiment, by contrast, rose in April to a three-month high on the back of a sharp drop in unemployment-related fears.

A recent monthly survey found that 21&percent; of respondents expected a fall in Italy's unemployment rate, up from only 14&percent; in March - an important sign for the revival of retail and service sector activity over the coming months.

The Rome government, which viewed an average jobless rate of 12.3&percent; of the labour force as a major blot on the country's economic landscape, will welcome the news that the unemployment picture itself now appears to be improving. January 1998 saw the rate ease back to 12.2&percent;, down from 12.4&percent; in October last year.

Less welcome, however, is the fact that this national improvement has not until now been accompanied by any narrowing of regional disparities.

The north of the country, where the bulk of Italy's exporting and private-sector industry is based, opened 1998 with 6.5&percent; of the workforce unemployed, down from 7.1&percent; in early 1997. Moreover, the number of jobs rose by 1.1&percent; year-on-year.

In central Italy, home to the country's small businesses clustered in strategic groups, the unemployment rate stood at a higher 10&percent;, but was nevertheless down from the 10.6&percent; of the first quarter of 1997, and with 0.7&percent; jobs growth.

In the south, however, joblessness was both higher and heading in the opposite direction: up to 22.4&percent; from 21.8&percent;, and with a 0.4&percent; year-on-year contraction in the total number of jobs.

The Refounded Com- munist Party, upon which the government relies for parliamentary support, has called on Prime Minister Romano Prodi's administration to increase spending to reverse this social and economic blight.

Prodi's government, however, is finding the problem no easier to solve than has any other Italian administration of the past 50 years.

The 'trickle-down' theory, by which recovery spreads throughout the economy, has never (yet) been translated well into Italian.

Central to the Communists' demands is the 35-hour working week.

Legislation to introduce this is currently being put through the Italian parliament by a supremely unenthusiastic government.

Prodi's coalition has ensured that the shorter week will not actually be compulsory until 2001, and will be introduced on an experimental and voluntary basis in the interim.

Meanwhile, the centre left has consolidated its lead in the opinion polls and has a good chance of being able to govern after the next elections, either without the far left or with whatever centre parties emerge from the fluid political spectrum between Prodi and far-right leader Gianfranco Fini.

It is not too difficult to imagine an Italian government two years from now deciding that the 35-hour-week experiment has not been a sufficiently convincing success, and brushing the legislation quietly under the carpet in favour of a more grass-roots approach to establishing working hours.

In the much nearer term, and with the single currency summit out of the way, Italian politics risk becoming rather rowdier once again because of a constitutional quirk.

Elections cannot be held in the last six months of a presidential term, and President Oscar Luigi Scalfaro is preparing to step down in March 1999.

Expect a few games of bluff and much blustering, especially from Refounded Communist leader Fausto Bertinotti, before October's 'closed season' arrives.

On the strength of the current opinion polls, however, Prodi can probably feel safe enough to put his earplugs in now.

Alison Cottrell is chief international economist at Paine Webber International (UK).