Renzinomics has started, says JP Morgan AM’s Toschi

Italy’s recently appointed centre-left prime minister, Matteo Renzi, has begun to provide some of the details of his ambitious package of stimulus measures to address the structural issues in the Italian economy, Maria Paola Toschi, Global Market Strategist, J.P. Morgan Asset Management

The first measures announced include tax reductions and some initial steps towards labour market reform.
On 12 March, Renzi announced the following new tax measures:

• Personal tax cuts for people earning less than €1,500 a month, at a total cost of €10bn

• A 10% reduction in payroll tax for private companies.
These cuts will be financed by public spending cuts (not yet detailed) and savings from the decline in Italy’s borrowing costs, but also by a tax increase from 20% to 26% on financial gains (excluding government bonds). Renzi has assured European officials that the 3% deficit-to-GDP limit will be maintained despite the tax cuts.

For now, Renzi has presented limited proposals for labour market reform, including simplifying rules around short-term contracts to encourage companies to restart hiring. Further measures to increase labour market flexibility will come in a comprehensive proposal expected by the end of the year. With the Italian unemployment rate still high (12.3% at the end of 2013) and increasing, these reforms will be a priority for Renzi.

In addition, Renzi is trying to accelerate the payment of €68bn of debt arrears owed by public entities to private suppliers, with a targeted completion date of July. If he is successful, this flow of fresh money will provide liquidity to small and medium enterprises, who are still finding it difficult to secure lending from banks, and who risk being squeezed by a lack of availability to credit.

Other measures announced so far include a 1,500 reduction in the number of so-called “blue” cars (chauffeur-driven cars used by politicians and state officials)-a very small step towards a downsizing of the public administration machine; a €3.5bn programme of investment in school buildings; and a scheme of guarantees to support the launch of small businesses.

Earlier this week, the lower house of parliament approved a new electoral law designed to strengthen the power of coalition governments and end the structural instability of the Italian political system. The law introduces a majority premium for any coalition of parties that achieves at least 37% of the vote in a general election. It also includes a minimum vote share threshold for smaller parties to enter parliament, to avoid excessive fragmentation.

The first pillars of Renzinomics, if approved by parliament, could have important investment implications, potentially reinforcing market confidence in the rapid re-launch of Italy-one of Europe’s largest economies, but one in which the recovery is still very fragile and where the introduction of structural reforms has been very limited. That Italian government bond yields continued to fall after the recent political transition suggests investors are so far convinced that the new government will be successful in accelerating reforms, contributing to the recovery of the eurozone.

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