Brussels Asked To Referee ‘Southern Question’

By Christopher Emsden
ITALY DAILY STAFF

In a shrewdly timed move in advance of Sunday’s elections, three top government officials went to Brussels Thursday to lobby the European Commission to accept their proposals to provide fiscal incentives for businesses operating in Italy’s poor South.
European Competition Commissioner Mario Monti, himself an Italian, had previously held a firm position, insisting that the tax benefits for the South were a clear violation of EC rules. But on Thursday he remarked that the proposals were “innovative” and “might help overcome past difficulties.” Lawmakers have been vexed for decades by how to spark economic growth in an area where jobless rates hover around 23 percent and youth unemployment soars above 58 percent.
In the single European market, the economic rules have changed, especially since the European Court of Justice ruled in 1994 that Italy’s past tax breaks for the South “distorted competition” and amounted to illegal subsidies. The EC ordered Italy to phase out existing programs by 1999. But these days, Italy’s age-old “southern question” is directly linked to Brussels, and those skilled in the art of navigating the EU bureaucracy stand to reap political capital at home.
Prime Minister Massimo D’Alema, campaigning in Calabria for Sunday’s regional elections, said Mr. Monti’s remarks constituted “an important step” for the South. He said the advances could be undermined if the center-right opposition came to power with its “purely fantasy ideas.” Politicians from across the spectrum have all indicated they support targeted tax breaks for the South, and all have criticized their adversaries’ plans as likely to be rejected by Brussels. Hence it was a sweet coup when Mr. Monti, after meeting with Finance Minister Vincenzo Visco, Labor Minister Cesare Salvi and Cabinet Under-secretary Enrico Micheli, said he viewed their plans in a broadly favorable light. Leaders of the center-left coalition have repeatedly stressed in their electoral campaign that the governments of the past four years have been successful at finding their way through labyrinthine EU law and politics. Italy had an unprecedented impact in last year’s agricultural budget talks and last year former Prime Minister Romano Prodi was named to the EC presidency. On Thursday, European Regional Commissioner Michel Barnier praised Italy’s “excellent and rapid” drafting of projects to use the 22 billion euros — 42.5 trillion lire — in “structural” funds that the South is eligible for over the next seven years. While those funds were approved last year, past Italian governments have been notoriously inefficient in coming up with plans to use the development money. Now the government is eager to push through more measures to encourage private investment in the South.
The plans that the three government representatives were pushing in Brussels included extending a program granting roughly 18 million lire in tax credits to companies for each worker they hire in the region and a renewal of a scheme allowing firms that reinvest profits in job-creating expansion in order to avoid corporate taxes. While EU law bans differential tax rates between regions, exceptions can be made in instances where fiscal programs are concretely linked to job creation in areas of high unemployment.
The government hopes that its new proposal, few details of which have been revealed, will be the ace up its — and the South’s — sleeve. The plan entails allowing companies that “emerge” from the area’s vast underground economy to be classified as “new” companies, thereby eligible for tax breaks for the jobs they “create.” Italy has already tried to lure off-the-books firms gradually into the legal economy by waiving payroll taxes, for instance. The EC is likely to notice that people listed as “new hires” had already been working for some time in the underground economy. Mr. Monti said he had yet to see details but that the latest proposal was “innovative” and his office would work to develop the plan with Rome. The Brussels meeting represented “fruit ripe for the picking,” said Gianni Principe, a labor policy expert for the left-wing CGIL union, Italy’s largest. He praised the government’s efforts to combat unemployment, including a recent decree allocating 600 billion lire in tax breaks to companies and public sector offices that take on part-time workers. “We can’t help but be happy,” said Mr. Principe. Tax breaks allow companies operating in the South to defray the high costs of labor mandated by national contracts. Those contracts demand similar wage criteria regardless of whether the worker lives in Bolzano, where unemployment is under 3.0 percent and productivity is high, or Enna, in Sicily, where it is above 32.0 percent and productivity is low. Most economists, and the EC, are urging Italy to reform its labor laws, allowing employers to take on workers without promising them lifetime employment and — in what touches a more delicate chord — allowing salary levels to differ according to local productivity rates. Business leaders claim they pay 30 to 50 percent more in labor costs per standard unit of production in the South than in the North, and direct their investments accordingly. Union leaders, who blast the idea of regionally differentiated pay rates as a step backward, insist that tax incentives are the right way forward. “They are just looking for a convenient alibi so they can postpone what can no longer wait,” wrote Francesco Giavazzi, a professor at Milan’s Bocconi University and a member of Mr. D’Alema’s economic advisory council, in Corriere della Sera. Sooner or later, he said, nationally negotiated wage contracts would have to be abolished.
He noted that companies inevitably appreciated all tax break but were short-sighted in accepting them. Neither politicians in the center-left nor
center-right, he said, were willing to support the unpopular issue of loosening wage standards.