Will Italy’s New Prime Minister Fall as Fast as He Rose?

Matteo Renzi, the leader of the center-left Democratic Party (PD), is about to fulfill his greatest ambition and become Italy’s new prime minister. At 39, he will go down in history as the youngest man to have ever held the post in Italy, a major achievement in a country whose political establishment is dominated by aged politicians.

His youth is a key factor behind Renzi’s astonishing rise. He has used it to convey a message of freshness, resolve and, above all, change: of people, politics and policies.

Renzi has undoubtedly scored a major point on the first account. He became a political force only recently, in late 2012, when he lost an internal election for the PD leadership to Pierluigi Bersani, a seasoned politician who had the backing of the party establishment. But then, despite leading in the polls for months, the PD fared so poorly in the February 2013 general election that Bersani was forced out. Renzi seized the opportunity and last December overwhelmingly won a second election to lead the PD. He is now presiding over a generational turnover within the party.

The change in leadership has not gone hand-in-hand with a change of politics, though. It was not a resounding electoral victory that delivered Renzi the premiership, but an inner party maneuver. The PD leadership pulled the rug out from under distinguished party member Enrico Letta, the outgoing prime minister. In so doing, Renzi broke his often repeated promise that he would loyally support Letta and never accept the premiership without a popular mandate. He is now premier although he is not even a member of parliament.

So far, Renzi’s record is one of a shrewd, ruthless and energetic politician who cares little for ideology and much for public opinion. In reverting to party machinations, Renzi knew he would lay himself open to his critics’ accusation that he is no different from the ‘system’ he supposedly wants to overhaul. Why has he then taken a decision that risks fatally undermining his claim to be an agent of change?

Renzi maintains that the Letta government’s agenda did not match the scale of the political and economic challenges confronting Italy and that, in the current circumstances, he had no choice but to personally take on the responsibility to push forward an ambitious reform plan.

To his credit, he has good arguments to support the claim that he could not go back to the voters. Italy’s electoral law, which is based on a fully proportional system of distribution of parliamentary seats, is universally recognized as deeply flawed. With polls consistently pointing to an electorate evenly split between the center-left, the center-right and the anti-establishment Five Star Movement, there is no chance that snap elections could deliver a solid majority to any of them. Moreover, the power to dissolve parliament in Italy resides with Giorgio Napolitano, the 89-year-old President of the Republic. The elderly statesman has made it a point of honor to foster political stability to protect the country from the peril of markets again losing confidence in Italy’s ability to service its debts. The last time that happened, in summer 2011, the yield on Italy’s bonds skyrocketed. Now, it is at its lowest in eight years, an achievement that neither Napolitano nor Renzi want to jeopardize. A further argument against snap elections is that the new government would hardly be operational when Italy takes on the presidency of the European Union (EU) in the second half of 2014.

Renzi is aware that Italians are anything but pleased with the manner in which he has been handed the prime minister office. For the Italian people to forgive him his sins, he must keep his last, and most important, promise. He must reform Italy.

His most immediate goal is to reform the electoral law so as to ensure that any winning coalition will always have enough seats to govern. Linked to the electoral reform is a constitutional overhaul that would make the executive accountable to the Chamber of Deputies only (currently, a vote of confidence in both the Chamber and the Senate is required and all laws must be voted on by the two houses). 

While ambitious, this reform pales in comparison to Renzi’s plans for the labor market, the government administration and the tax system. To stimulate labor demand, Renzi aims to make it easier for companies to hire and fire young workers (particularly in the research and innovation sectors) by injecting more flexibility into the system and reducing payroll taxes. His next step would be to increase the efficiency of the public administration, which he intends to achieve by aligning the rules that regulate the public sector with those in force in the private sector as far as flexibility, working hours and internal mobility are concerned. Finally, Renzi plans to reduce the income tax for both businesses and families (while increasing the tax on financial benefits).

Undoubtedly, there is a strong case for reform in Italy. Unemployment figures are tragically high, hovering around 12.7 percent (and 40 percent for the young). Public administration is both inefficient and overly costly, providing an unfriendly environment for doing business (the World Bank has ranked Italy 65th out of 189 countries on that account). And the tax burden is among the heaviest in Europe. However, all the changes proposed by Renzi involve significant social costs, meaning that the government will face immense opposition from various constituencies. Given that Renzi will rely on the same, fractious left-right majority that supported Letta, it is hard to see how he can achieve the degree of cohesion necessary to achieve his plans.

On top of these political problems, Renzi will be confronted with Italy’s structural weaknesses: a huge public debt (133 percent of the GDP, the world’s third largest) and nearly non-existent growth (a miserable 0.1 percent in 2013’s third quarter ended a two-year long contraction). Renzi will also have to reckon that Italy’s eurozone membership involves a helping hand from EU institutions and partners, notably a European Central Bank’s commitment to keeping interests rates low, an EU-wide plan to restructure banks in distress and a reduction of current surpluses run by countries such as Germany. In addition, to finance the tax reform proposed by Renzi, Italy will need the EU to be more lenient concerning the 3 percent deficit limit by which all eurozone members are bound. This means Renzi will have to tilt the balance in the EU debate against the austerity-driven approach championed by Germany. Due to its massive debt and chronic economic underperformance, Italy hardly commands the credibility to win this fight.

Renzi has a firmer grip on the PD than Letta, and a larger following too. He is also a smarter politician. In that sense, he has a better chance to reform Italy than his predecessor. But he has taken a huge gamble with a very weak hand: he has to overcome enormous structural handicaps with an unruly government coalition and insufficient popular legitimacy. His lightning-fast rise to power has taken many aback. But few would be surprised if he were to fall from power with equal speed.