HOW DO THE DECK CHAIRS LOOK HERE?

The Italian situation: Clarification and a prediction (Alberto Alesina Francesco Giavazzi, 13 September 2011, Vox EU)

As Italy's Prime Minister Silvio Berlusconi announces a new austerity bill based on tax rises, this column argues that the country's leaders are in denial - it is as if they are trying to take aspirin to hide the symptoms of pneumonia. The authors predict that, with the current political class in power, Italy will soon enter another recession and, eventually, another crisis.

Under pressure from the bond market and the European Central Bank, Italy has adopted a budget that implies a sharp shift in fiscal stance.

The primary surplus is projected to move from 6% in 2011 to close to 0% in 2014, with half of the adjustment happening next year.
The size of the shift meets the conditions the ECB had set on 11 August 2011 in order to continue buying Italian government bonds.

The composition is, however, quite different from what the ECB suggested.

The adjustment relies almost exclusively on tax increases rather than spending cuts.
The bill does not include pro-growth measures - deregulation, privatisations, etc - that the ECB has called for as a critical component of the policy shift.

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