World Economy

Italy Cracks Down on Short-Term Contracts

Labor and Industry Minister Luigi Di Maio says: People not only don’t have any (job) security to get married, they don’t even have any (job) security to book their holidays
Luigi Di Maio (L) and Interior Minister Matteo Salvini after the sworn-in ceremony at the Quirinal Palace in Rome on June 1.
Luigi Di Maio (L) and Interior Minister Matteo Salvini after the sworn-in ceremony at the Quirinal Palace in Rome on June 1.

Italy’s populist government approved a law that makes it harder to put employees on short-term contracts, the cabinet’s first legislative initiative after taking office last month.

The wide-ranging law, passed late Monday, includes plans to penalize some companies that leave Italy after receiving state aid, and limits gambling advertising on the internet, Bloomberg reported.

“With this decree we are seeking to demolish previous laws that increased job insecurity," Labor and Industry Minister Luigi Di Maio said during a press conference before the approval.

Markets took the passage of the decree in stride. The FTSE MIB benchmark stock index rose 0.7% in Milan, while the yield spread between Italian 10-year bonds and similarly dated German bunds narrowed three basis points to 231 basis points.

The final version of what is called the “dignity decree” was watered down from Di Maio’s initial proposal after pressure from Finance Minister Giovanni Tria to avoid burdening the country’s already tight budget.

According to law, companies that received state support to develop their business in the five years prior to the decision to move out of the country could be fined up to four times the amount of the aid.

Other initiatives include a limit on the number of times that employers are allowed to renew a short-term contract and adds new safeguards for workers.

The law still needs approval by parliament to become final.

Overhauling Labor Reform

Italy’s new anti-establishment government will change the labor reform introduced by the previous administration, Di Maio said, Reuters reported.

The legislation, introduced in 2015, made it easier for large companies to fire people and offered fiscal incentives for companies that hired permanent workers on new, less-protected terms.

Italy’s government was finally sworn in on Friday, ending months of political turmoil and the threat of a repeat election. But investors remain nervous, since the coalition promises to increase spending, slash taxes and challenge European Union fiscal rules, which would add to Italy’s debt pile.

“People not only don’t have any (job) security to get married, they don’t even have any (job) security to book their holidays,” Di Maio, 5-Star Movement’s leader said in a Facebook post.

Former prime minister Matteo Renzi pushed through the so-called Jobs Act in 2015, promising it would create jobs and end a situation where the vast majority of young people were employed via insecure short-term contracts.

But the reform was controversial. Big business cheered the tax breaks and the easing of firing restrictions. Unions said easier dismissal undermined basic workers’ rights.

Its results were also disputed. Employment has increased, but in the last two years most new jobs created have been the kind of temporary work the Jobs Act was supposed to deter.

Moreover, the rise in overall employment has been driven mainly by pension reforms by previous governments, which raised the retirement age, rather than more jobs for the young. Italy’s unemployment rate stood at 11.2% in April.

“If we want to strengthen the economy, we need to reduce the uncertainties and one of the reasons for the uncertainties is the Jobs Act,” Di Maio said. “The Jobs Act must be reviewed.”

Some economists have said that rather than the Jobs Act, Italy needed investment in education and technology and, as in Germany, closer links between schools, universities and companies to boost jobs.

Sovereign Bonds

Italy’s sovereign bonds, the worst performers in the euro region this year, have found one ally as investors come to terms with the country’s first populist government.

A hedge fund which oversees about €1.4 billion ($1.6 billion) is betting that Italian securities will fare better than their German peers as concerns over the existence of the shared currency are overdone.

“The Italian government had been perceived as aggressive on some themes but it’s become clear that it is very focused on the issue of immigration and it has turned out to be more pragmatic than investors expected,” said London-based Filippo Lanza, who manages two bond funds for Italy’s Hedge Invest Sgr. “The market was betting on an implosion of the European Union, which we see as highly unlikely.”

Lanza first entered a long position on peripheral euro bonds for the HI Numen Credit fund he manages from May 29, the day that Italy’s 10-year yields climbed to a four-year high.

The HI Numen Credit fund gained 0.9% in the past month and 5.4% this year, according to data compiled by Bloomberg. In contrast, Italian debt has handed investors a 2.6% loss this year, Bank of America Merrill Lynch indexes show.

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