1. Italy: An internal instability story Fabrizio Ghisellini LSE, 30-31March 2006

2. Italy: An internal instability story Internal Stability Pact: the Italian way Some unpleasant budgetary arithmetics April 11th :the agenda

3. Legal framework:geological layers Continuous emergency: No time for reforms No human resources Political tensions ISP as a last minute control variable Italy: An internal instability story Internal Stability pact: the Italian way.1

4. “Since its introduction in 1998, the Internal StabilityPact has been subject to substantial amendments on almost an annual basis. Surprisingly, however, the principles governing the Internal Stability Pact remain significantly different from the rules of the EU Stability Pact. In fact, the main obligation of local authorities is not based on an expense/GDP ratio but on a simple limitation of public expenditures, essentially a prohibition of expenditures exceeding certain thresholds.” ©Squire, Sanders & Dempsey L.L.P Italy: An internal instability story Internal Stability pact: the Italian way.2

5. “Thanks to the smart setup of the ISP for 2006, my municipality is now able to run a much bigger deficit and fully fund the local art festival.All I have to do is to forego a robust chunk of my budgeted revenues in exchange for a smaller amount of due expenses on goods and services.” The Mayor of X, Decemmber 2005 Italy: An internal instability story Internal Stability pact: the Italian way.3

7. Italy: An internal instability story Some unpleasant budgetary arithmetics.1 Expenditure side: even with NO real growth of social needs (schools, roads,transportation,etc.), HIGH correlation with nominal GDP growth Revenue side : LOW correlation with nominal GDP growth –60% (real estate tax,etc.) lagged/piecewise function of cycle –Decreasing AND unpredictable transfers

8. Local authorities: actual core current balances and virtual stabilizing transfers(2001 expenditure=100)

9. Actual vs.stabilizing transfers (2001=100)

10. Towards unsustainability: aggregate current balances of local authorities with more than 5000 residents

11. Dispose of meaningless/harmful legislation unduly penalizing local authorities (i.e. prohibition of debt rollover) Introduce agreed direct,transparent,medium-term caps on debt dynamics Provide for LABGI-style reforms capable of making local budgets structurally sustainable Last but not least, change the approach : local authorities should be partners in value creation Italy: An internal instability story April 11th :the agenda