03 August, 2008

The State of Italy

Italy has had more written about it in the European and American press this year than at any time since 1994 (the year of the ‘mani pulite’ clear out of the old political order and emergence of Berlusconi as a political figure). The reason is Berlusconi’s third government, elected in April with a working majority: the foreign media cannot believe that a modern democracy would elect such a person. The reason they have is that the Italians, dangerously late and with great reluctance, have come to realise that there must be change. There was not a wide choice of reformers on offer; in fact the choice was the possibility of reform (no more than that) from Berlusconi or more of the same from the Left, and looked at in these terms the choice was encouraging. But no more than encouraging.

Berlusconi identified two urgent problems for his first months in government: Alitalia and Naples. The reason for these, as opposed to other pressing problems is that they are visible: they are part of Italy’s shop window on the world and Berlusconi needs Italy to feel good about itself, to present a bella figura. Alitalia is grossly overmanned, too much the child of the trade unions, heavily in debt and with outdated planes and support equipment. It is a throwback to the 1960s when a flag carrier was considered important and it was normal for major industries to be in public ownership. By rights it ought simply to be closed down and sold for the value of its landing slots, but now is not the time for such a gesture. A plan emerged at the end of last month which will involve 5,000 redundancies and some new money. It is not enough but it will close out the problem for a while.

Napes is the capital of the South, one of Italy’s great cities, and the streets were filled with garbage. Tourism had dropped to zero and the foreign papers and TV news were filled with dreadful pictures of rotting garbage, rats and filth. Again, a problem which was too visible. The cause had been organised crime selling space in the landfill sites to companies in the north and indeed from abroad. There was no room for the people’s garbage. The streets have now largely been cleaned, with the aid of the military. The underlying malaise, Italy’s tolerance of the excesses of the mafia (Sicily), n’drangheta (Calabria) the Camorra (Naples) and their offshoots and imitators, has not.

But a wide range of problems threaten Italy which are perhaps less visible.

The power of the unions is as great, and as malevolent, as it was in Britain in the 1970s. Job protection legislation, introduced to appease them, has led to a stagnant labour market. It is almost impossible to fire someone, so no one is taken on. Foreign firms operating in Italy have found that it is cheaper in the long run to import workers from their home country and put them up in hotels than employ Italians. Labour competitiveness has declined 15% against Germany since the introduction of the euro, due to the unions forcing through pay rises without productivity increases. Foreign direct investment into Italy is virtually zero.

The Italian public sector is one of the worst examples imaginable of failed enterprise. Hundreds of thousands of people, probably millions, moonlight to another job, simply by clocking in and leaving their jacket on the chair. This entry and exit through the turnpike is visible, but Italians’ strong sense of omertà prevents anything from being done about it. No one criticises the gross inefficiency and gross overmanning because it could be your cousin threatened with redundancy. 70% of jobs in all Italy, not just the public sector, are on ‘raccomandazione’ – recommendation from a friend or relative.

Immigration is a new problem for Italy, unlike in Britain with its Commonwealth and the entry of workers and their families since the 1960s. There was, until last year or so, effectively no immigration policy – traditionally Italy has suffered a net exodus. But with easy access from North Africa and the Balkans, and a long unguardable coastline, the peninsula has suddenly found itself with a massive increase in immigrant population (from, by UK standards, a fairly low base). And the Italians have begun to realise that these immigrants are culturally different. The rise in petty and occasionally violent crime has shocked the nation and, worse, threatened organised crime with competition on its very doorstep. The camps are being emptied by a bizarre alliance of the Camorra and the Carabinieri while the world looks on and whispers about the 1930s. This will eventually sort itself out, as it has in Britain (Commonwealth immigration) and Germany (Italians and Turks) but will take time.

Italy is still in the throws of shaking off the post war settlement which has served it so badly. Established parties were (and are) subsidised by the state. Television channels, with heavy subsidies, were shared between political parties (it is a myth that Berlusconi controls the State broadcaster: realising it could never be impartial the Italians made it multi-partial). Newspapers are subsidised by the State. From his morning paper to his evening game show the State is in the Italian’s face, although he often doesn’t see it. Politics is everywhere. His local Comune may be communist, lavishly spending money levied by a centre-right government (local taxes are very low) and begging for more. Above the Comune are the 110 Provinces, and above those the 20 regions, each with its own layers of government, police force etc. It is crying out for reform.

The problems above largely tell the story of Italy’s economic position. The huge, sluggard public sector costs a fortune to maintain; almost farcical over-regulation strangles competitiveness; productive industry in the north subsidises the unproductive south, these subsidies are creamed off by organised crime which keeps the people of the south quiet, loyal and poor. Growth is the lowest in the eurozone. Italy’s debt costs €70bn a year in interest and despite being in the euro it has to pay more an half a percent above what the Germans pay. This spread is widening.

Berlusconi has recently announced a package of expenditure cuts, as an alternative to tax increases while the economy suffers in the difficult worldwide trading climate. This is a welcome development but it makes, as far as one can tell, no inroads into the pre-existing problem. In the previous election both parties were bribing the voter with expenditure, and the Italians have not yet acquired the taste for hair shirts.

So what can be done, if massive Thatcher-style reforms are not politically possible? One suggestion has been for Italy to withdraw, perhaps temporarily, from the euro. It could allow the New Lira to decline against the euro (it would be hard to stop it), giving a boost to Italian business and devaluing the debt.

Against this are three points:
- First, the nature of the goods Italy produces tends more to the quality/fashion end of the spectrum than the basics – Ferrari rather than FIAT, and these goods are less price elastic(you don’t sell many more Ferraris by dropping the price 20%)
- Second, there would be an inflation rush as the currency devalued
- Third, it is a one-off measure. What happens next?

However, proponents of the strategy point to the boost given to the UK economy by Britain’s exit from the exchange rate mechanism in 1992 with sterling’s accompanying 20% decline. The difference of course is that post-Thatcher Britain had deregulated and reformed its Labour market. A boost to business via a more competitive exchange rate went straight to employment and growth.

Should Italy leave the euro? Only with a series of strict reforms to make sure it wasn’t just another devaluation. Will it? Berlusconi is the only person who could take such a step and, in the face of a worldwide downturn, he just might. An S precedes the number on Italian euro notes. The German ones begin with X.

Unlike most commentators I am cautiously optimistic about Berlusconi. He has the mandate for change, the capability of blue skies thinking and, perhaps most important, the desire to cement his legacy. If his last government was spent keeping him out of prison, this one might have the time to do something for Italy.

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