Italy's Letta wins French backing for focus on growth

"TWO AND TWO DON'T MAKE EIGHT"

"I don't think political parties can ask for arithmetic to be different from what we learned at school," Flavio Zanonato, Letta's Industry Minister who is still also serving as mayor of the northern city of Padua, told the daily Corriere della Sera.

"Two and two don't make eight and if we abolish IMU on primary residences we'll have to close down the town halls."

Ratings agency Fitch welcomed the formation of the new government but noted that it had little room for manoeuvre on public finances and may not last long enough to deliver the structural economic reforms needed to increase growth.

"Letta's first outline of his government's program, in a speech to parliament on Monday, lacked important detail on how major tax reductions will be funded," it added.

Italy has committed to maintaining a budget deficit of 2.9 percent of gross domestic product in 2013, just under the European Union's 3 percent ceiling and expects to emerge in May from the so-called excessive deficit procedure it has been under for breaking the limit in previous years.

That has left the government squeezed between keeping its promises to European partners and maintaining the delicate balance within the coalition while confronting an economic crisis that has put a severe strain on Italian society.

While Berlusconi's center-right People of Freedom (PDL) party is insisting on scrapping the housing tax, many in Letta's own center-left Democratic Party (PD) want to put the focus on stopping a planned one percentage point rise in sales tax due to come into effect in July.

Some ministers, including Zanonato, have floated the idea of excluding spending on investment from EU budget deficit calculations, but that idea has got nowhere in the past and there has been no sign from Brussels of readiness to reconsider.

More detail is expected next week but the dispute over tax is just one problem facing Letta, who has also promised to beef up Italy's inadequate welfare system and cut taxes on companies hiring young workers.

In the longer term, he has spoken little of the kind of structural reforms to the economy that might improve Italy's chronic lack of competitiveness and pull it out of a recession set to match the longest since World War II.

Improving the much criticised labour law introduced by Monti's government last year or opening up closed professions could provide a longer term boost to growth and ease the pressure on squeezed public finances.

But any prospect of that will require him to negotiate the tensions already testing his government.