Is Italy Beyond Repair?

 

Why the most important election in the last two weeks  was in Italy, not Eastleigh

As I write this, amidst the fallout of the Eastleigh by-election, I can’t help but conclude that the while the result will provide talking points for journalists and political anoraks alike, in two weeks’ time everyone who doesn’t have a direct interest in the outcome will have largely forgotten about the whole thing. In the UK, our burgers will still be full of horse meat, there will still be arguments about football in the pub and the government of the day will continue to govern largely as before. While over in Rome, the key question is, “Will Italy be governed at all?”

Italy’s recent election saw Pier Luigi Bersani’s centre left alliance winning the lower house, the Chamber of Deputies, by a wafer thin 0.3% However, since the winner of that house gets a guaranteed 340 seats, they have a comfortable majority there.

In the Senate, the notional upper house, the centre left alliance won the most seats but not enough to command a majority- they took 123, falling 35 short. This matters since both chambers have equal legislative power, therefore one must control both to govern. Many outsiders would have liked to see Mr Bersani ally with Mario Monti, the technocratic incumbent, however he won only 19 seats in the Senate so that would hardly help. It is still possible Mr Monti could be a member of the Government. However, despite the fact that he is respected if not loved on the left, he would surely have little influence domestically since Mr Bersani doesn’t really need him and he has just been panned in the polls. He would be little more than window dressing to ease the worries of bond markets.*

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Beppe Grillo’s Five Star Movement has ruled out a coalition. A grand coalition between left and right seems unlikely, has never been done before in Italy and would probably fracture at the first sign of disagreement. The hostile atmosphere at PMQs every Wednesday has nothing on the animosity between Italy’s main two parties.  Therefore, it appears that the most likely way forward will be a centre left minority government running on something akin to a confidence and supply arrangement with Mr. Grillo’s upstart grouping. Since last October, this has basically been the way Sicily has been run at a regional level, so there is a precedent. Less likely but still possible is that Italians return to the polls in the next few months, with all the uncertainty that would bring.

Italy needs change

If, as most people believe, Italy requires radical change, then this is very bad news for Italians and potentially all Europeans. Even if the centre left had a majority, things would only be a little better. Somewhat reformed former revolutionaries in Mr. Bersani’s alliance may support cleaning up Italian politics, in the aftermath of Silvio Berlusconi’s less than stellar legacy, (They would probably find comrades in Mr. Grillo’s Movement for this purpose too.) but it is unlikely they would be up for carrying on with Mr Monti’s reforms in any serious or coordinated way. Indeed, there was some pre-election talk of reversing them.

Political reform is not to be sniffed at and not just to undo damaging media, election and legal laws enacted by Mr Berlusconi. The annual running costs of the Italian parliament are broadly equivalent to those of the UK, France, Germany and Spain combined. Parliamentarians are paid around twice as much as any of those places and in 2011 just under 10% were investigated or convicted. It is widely know that in parts of Italy the mob often purchase general election votes for 100 Euros each and a local election vote for €50. If that doesn’t work, they just ship reliable supporters into an area, register them to vote and hey presto local government contracts miraculously find their way to Mafia companies.

Tackling these problems would be most welcome, but the key issues are economic. If it is questionable whether the centre left alliance will move on the economic front, Mr Grillo’s movement certainly won’t support free market reforms and no one has any reason to believe that Mr Berlusconi would do anything based on his record.

For those who believe in the merits of deregulation, it is damning that a reform of pharmacies, carried out by Mr Bersani in 2006, was considered “successful” by Italian standards at least. It was limited to letting other shops sell non-prescription drugs like aspirin and abolished regulations setting out the minimum distance between individual pharmacies. However, untouched were rules specifying that there can only be one pharmacy per 4000 residents and that only they can sell prescription drugs. As such, there are no pharmacy chains in Italy. You can inherit and run a pharmacy for 10 years with no qualifications at all, although most inheritors sell for a huge cash sum. I would imagine pharmaceutical costs are far higher than somewhere like Britain, with its outlets like Boots and Superdrug who are allowed to enter the marketplace easily and compete on price.

View from the top

At a macro level, the statistics are damning and I make no apology for laying it on thick. In the decade 2000-2010, the Italian Italian parliamenteconomy only grew 0.25%, shrinking per capita and in real terms the 2013 economy is worse than in 1999. It was directly below Liberia (169th out of 179) for that period and Liberia is a country that had a civil war and a repressive dictator for a third of the time. It is worse than Bulgaria and Romania in terms of the ease of doing business (73rd) and is more corrupt than Bosnia and Saudi Arabia (72nd).

Italy actually grew strongly from the 1950’s to the 1980’s. Growth of 8-10% a year was common. The cause of this is still not certain although well harnessed new technology and periodic currency devaluations are known to have played a key part. It is of course a truism to note that devaluation is now not an option since Italy joined the Euro. In the 80’s, growth slowed and the Italian economy was sustained by increased public spending based largely on debt. This was the beginning of a story that sees Italy today have a debt to GDP ratio of about 130%. This is the biggest in the Eurozone and Italy has to sell massive amounts of bonds with pretty high interest rates just to stay afloat.

In other areas of life, the statistics are no better. The average civil trial takes 1200 days, which is not surprising when there are minimum price laws to benefit Italian lawyers. This places Italy between such legal powerhouses as Gabon and Djibouti. Only about 20% of young people go to university and a decent chunk of them then leave Italy altogether- about one million in the last 10 years. There are those that hope that this great diaspora can come home and save the day, a prospect that I find unlikely. Despite the fact that these people were historically replaced by low skilled North Africans and are latterly replaced by low and mid skilled East Europeans, the ratio of young to old is worse than ever. This is important if the Italian state hopes to fund its ongoing pension liabilities, not withstanding Mr Monti’s reforms that raised the retirement age but were based on optimistic growth forecasts of 1.5% a year on average. Before the reforms, the Italian state spent 14% of GDP on pensions, the highest in the OECD, although this has probably fallen a little now.

Maybe recent potential students who didn’t want to leave concluded that they had a good chance of being unemployed afterwards so didn’t bother. Youth unemployment stands at 36%, although I suspect more of those are non-graduates than graduates. Maybe they thought that they would, at best, be employed on short term contracts, on worse terms than (invariably white, male) older people, which the economy privileges. Italy has fewer women active in the formal economy than any other European country and they, along with immigrants find themselves disadvantaged.

Italy is simply no longer competitive, on cost at least. They are less productive than before the Euro was introduced- unit labour costs have risen and continue to do so, even when neighbouring countries get more efficient. Back in 2011, amidst labour negotiations at Fiat’s Mirafiori plant in Turin, Sergio Marchionne, the Italian-Canadian CEO, threatened to move jobs to Poland, where workers were three times more productive. Reflecting on the fact that not one single euro of profit came from the firms Italian plants, he said in a later documentary:  “I cannot tell the 180,000 people who are… [non Italian Fiat employees,] that their role in life is to subsidise an inefficient, uncompetitive, sub-optimal set up. I can’t.”

Managed Decline?

ItalyThis should all matter to you. A failing Italy means a failing Eurozone, which although the UK is obviously not in has a huge impact on our economy and standard of living. The only way Italy can turn around the economy is through deep structural reform, which is in turn the only way it can borrow less, pay down its debt and sustainably improve the lives of its citizens. It’s too big to bail out.

The silver lining to all this is that if one views these problems as opportunities, then Italy actually has lots of low hanging fruit ready to be picked and could return to growth quite strongly. Italy’s problem however is that there appears to be no political will, from politicians or the larger body politic. So while in two weeks Britain will basically be governed as before, in Italy the best we can hope for is that there is a functional government at all to manage the decline in an orderly way. For now at least.

* These results are taken from the Economist. I have seen slightly different numbers by the BBC. Both apparently come from the Italian Interior Ministry. In either case, the general points made still hold good.

 

Matt McCoig- Lees has an MA in Terrorism and Security Studies and a Distinction in his Legal Practice Course. He tweets (mostly about football) as @MattMccoig-Lees

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