Italy: it's the economy, stupido

The thing to remember about Silvio Berlusconi is that no one ever says he lacks intelligence or that he is out of touch with the people of his country. He is probably the best politician Europe has seen for 50 years (although certainly not the best leader). You have to think about this when looking at what has made the news in Italy this year: his social life, his divorce, his parties; his success with the Naples rubbish, with Alitalia, with l'Aquila. Now talk has started again of the Messina bridge. And all this has diverted attention from the real problems facing the Italian people.

The graph shows the long term moving average growth of the economy, that is to say the average of the previous 10 years. So in 1980 the average for the previous 10 years (ie the 1970s) was nearly 4%. In the 1950s and 1960s it had been over 5%. By the end of next year however it will have been zero, meaning that the economy will not have gone forward since the turn of the century. Retail sales have been falling steadily for over 2 years. In the first three months of this year the economy contracted at an annualised rate of nearly 10%.

Many of the problems will be familiar to anyone following the UK economy, only worse: the state is too large and the debt burden enormous. The regional disparity between the wealthy north and the impoverished, corrupt south far greater than the difference between, say, Glasgow and London. The native population is falling, and whilst this is offset somewhat by immigration, immigrants can go elsewhere when there is no work. The country cannot afford its pension system as too few productive people support a long lived population, with an unaffordable requirement for healthcare. The scale of organised crime is so great that it is best not to think about it.

When the banks started to crash in America and Britain the government announced that Italy was largely exempt from these problems. The Italian banking system, barely emerged from the 1950s, had not got around to considering these new CDOs and SIVs. Italian banks are among the best capitalised in Europe, but this is at least in part due to them not using their capital efficiently. Firms find it difficult to borrow from these sleepy monoliths who in any case charge vast fees for the simplest of transactions. The system has been allowed to continue only by a policy of refusing entry to foreign banks.

The industrial system, a post war marvel, consists in large part of small family businesses, often with loose associations and geographical specialisation. It is little suited to the modern world. As The Far East and India expanded on the back of lower labour rates, western nations have had to climb the quaity chain, creating new technologies their emergent competitors could not rival. The very structure of Italian industry precludes this: the family companies shoud have merged years ago, economies of scale financing research and development. But they didn't. There is no stockmarket to speak of, only a few of the largest firms being floated, and there is no venture capital / start up market. The procedure for setting up a company is one of the most time consuming in the western world, and the appalling over regulation keeps entrepreneurs away and consumer prices high.

All this will have been going through Berlusconi's mind, which is why he isn't too troubled by the news being obsessed with a couple of starlets and a hooker or two. He knows, too, that the political will does not exist in the country to effect the required change and that the people have, by and large, accepted the fact that theirs is a nation in decline. He probably also knows that whilst they can accept the slow debasement of their reputation, when it filters through to living standards it will be a different matter. That will probably be a problem for his successor.