Oh for a new Risorgimento

[Gbelle]

Introduction

Silvio Berlusconi has a lot to smile about. In his 74 years he has created a media empire that made him Italy's richest man. He has dominated politics since 1994, and is now Italy's longest serving president since Mussolini. He has survived countless forecasts of his imminent departure. Yet despite his personal successes, he has been a disastrous national leader in three ways.

The first two are well known, with his lurid saga of "bunga bunga" sex parties, one which led to him being put on trial for paying to have sex with a minor. Over the years he has been tried more than a dozen times for fraud, false accounting, and bribery. Worst by far though is his total disregard for economic condition for his country. In his nine years he has failed to remedy or even really acknowledge Italy's grave economic weaknesses. As a result he will leave behind him a nation in dire straits.

A chronic disease
The grim conclusion might surprise students of the euro crisis. Thanks to tight fiscal policy, of Mr. Berlusconi's finance minister, Giulio Tremonti, Italy has so far escaped the market's wrath. Ireland, not Italy is the 'I' in PIGS. Italy avoided a housing bubble; It's banks did not go bust. Employment held up; the unemployment rate is 8%, compared with over 20% in Spain. The budget deficit in 2011 will be 4% of GDP, against 6% in France.

Yet these reassuring numbers are deceptive. Italy's economic illness is not the acute sort, but a chronic disease that slowly gnaws away at vitality. When Europe's economies shrink, Italy's shrinks more; When they grow, it grows less. Only Zimbabwe, and Haiti had lower GDP growth than Italy in the decade to 2010. In fact GDP per head in Italy actually fell. Lack of growth means that, despite Mr. Tremonti, the public debt is 120% of GDP, the rich world's third-biggest. This is all the more worrying given the rapid ageing of Italy's population.

Low average unemployment disguises some sharp variations. A quarter of young people - far more in parts of the depressed south - are jobless. The female participation rate in the workforce is 46%, the lowest in Western Europe. A mix of low productivity, and high wages is eroding competitiveness. Whereas productivity rose by a fifth in America, and a tenth in the UK in the decade to 2010, in Italy it fell by 5%. Italy comes in 80th in the World Bank's "Doing Business" index, below Belarus and Mongolia, and 48th in the World Economic Forum's Competitiveness rankings, behind Indonesia, and Barbados.

The Bank of Italy's outgoing governor, Mario Draghi, spelt things out recently in a hard-hitting farewell speech. He insisted that the economy desperately needs big structural reforms. He pinpointed the stagnant productivity, and attacked government policies that "fail to encourage, and often hamper, Italy's development", such as delays in civil-justice system, poor universities, a two-tier labour market with protected insiders, and exposed outsiders, and too few big firms.

All these things are beginning to affect Italy's justly acclaimed quality of life. Infrastructure is getting shabbier. Public services are stretched. The environment is suffering. Real incomes are best stagnant. Ambitious young Italians are quitting their country in droves, leaving power in the hands of an elderly, and out-of-touch elite. Few Europeans despise their pampered politicians as much as Italians do.

Italy, A new creation

All countries argue about their history. America's recent commemoration of the 150th anniversary of it's civil war saw plenty of conflict between nostalgics for the old South. With all its carbuncles, and fans of Abraham Lincoln. But it is hard to find anybody in America who thinks that the states should have never been united. Italy is different. Plenty of people feel that the regions making up the country were too distinct to be squeezed into a single nation and that, as a result, Italy has shallow roots. According to this line of thinking, the lack of consent to the national project has resulted in weak institutions, and dysfunctional government. Manlio Graziano's "The Failure of Italian Nationhood" and David Dilmour's " The Pursuit of Italy", the two most serious attempts to grapple with Italy's first 150 years, both take this view. In political terms, the rise, and rise of the Separatist Northern League over the past 15 years, to a point where it now occupies key ministries in Rome, underlines the power of this idea.

One reason why the past seems to have an unusually strong hold over the present in Italy is that the country's long-terms problems seem impervious to charges of party, government or constitution. The most striking of these is the north-south divide. Most countries have richer regions and poorer ones. What is unusual with Italy is the south's failure in recent years to catch up with the north in any way at all. Data from the Bank of Italy shows that GDP per person is 40% lower in the south than in the centre and the north, and has been for the past 30 years. A third of Italy's population lives in the south making it "the largest and most populated underdeveloped region in the euro area" according to Mario Draghi, the Bank's Governor.

For ever espresso

Why Italy is not growing

Two years ago yields on sovereign debt issued by countries in the euro zone suddenly became interesting for people other than bond traders. As spreads on Irish, Portuguese, and Greek treasuries over German bonds soared, handing those countries a choice between sovereign default, and accepting a bail-out, Italy seemed next in line. It's gross debt-to-GDP ratio reached 119% in 2010, and it's poor economic performance suggested it might find it hard to pay all those bondholders back.

But it had built up enough credibility to get away with it. From 1992 until the crisis hit, the government had run a primary budget surplus(before taken debt service into account), and Italy's public finances deteriorate d less than those of most other euro-zone countries, thanks to big reductions in the budget deficit. Eventually Ireland swapped places with Italy to provide the vowel in the unflattering acronym. No Italian banks went bust, and rather than having to prostrate itself before the IMF or the EU, Italy became one of the biggest contributors to the rescue funds for troubled European economies. All of which, says the Italian government demonstrates the robustness of it;s economic model.

This picture is a little too comforting. " It is a bit like saying that in a storm you are better off in a big heavy flat-bottomed boat, like a barge, than in a racing yacht," Bill Emmott, a former editor of The economist and author of "Forza Italia: Come Ripartire Dopo Berlusconi" (Courage, Italy: How to start after Berlusconi). "This still doesn't make you win races when there isn't a storm, which thankfully is normal economic weather." Italy did indeed avoid disaster during the recent storm. But its economy has also continued along the path of underperformance it has trodden for the past few decades. In 2008, the year of the Lehman Brothers' failure, Italy's growth rate fell farther and faster than the euro-zone average. In 2010, when the euro-zone began to recover, Italy grew more slowly. " In bad times we usually avoid collapse," says Domenico Siniscalco, a former finance minister who now works for Morgan Stanley. " Unfortunately in good times we do not grow."

A rosy view of Italy's economy relies on two assumptions that are only half right. The first of these is that Italy is an export-led economy like Germany. There are indeed lots of successful Italian exporters. Some of them have famous names like Benetton, Prada, and Ferrari. Others less well known even if, like Luxottica, they make products that sit on many people's noses, such as Ray-Ban and Oakley sunglasses. Yet that does not make Italy a champion exporter. Unlike Germany it has run a current account deficit since `999 and a trade deficit since 2005. Italy may still have the world's sixth-largest industrial base, but Britain, often portrayed as an industrial weakling, makes and exports more cars than Italy does.

The second assumption is that a high level of domestic savings, which tend to be conservatively invested in government debt or simply parked in bank accounts, insulates the economy from trouble. Italy is sometimes thought as an outlier within the Euro zone - a kind of European "Japan" - where only a small part of public debt is in the hands of jumpy foreigners. In fact the IMF reckons that 47% of Italian government debt is currently held abroad - less than most european countries but hardly negligible. The figure for Japan is 6.9%

A better argument for Italy's robustness is that it's public debt is so vast that investors can not afford to abandon it: Italian treasuries make up the third biggest bond market in the world. For investors who want exposure to bonds denominated in the euros there are not enough other places to go. The apparent strength comes with it's own hazards , however namely vulnerability to a sustained rise in interest rates. Each percentage point rise in interest rates costs Italy an additional 1% of servicing, a scary prospect for a country that does not grow.

An Economy in a Small Cup of Coffee

Italy's lack of growth over the past 20 years - a period that has until recently has been notably benign - has been it's most persistent economic failing. Put simply, Italian firms have a problem with productivity, and competitiveness. To understand this better, picture the Italian economy as a café, one of those places selling Cappuccinos, espressos, sandwiches, and freshly squeezed orange juice that are a cornerstone of contemporary italian civilisation. Many Italians believe their economy is to be powered by manufacturing, and industry. But since 70% of the labour force actually works in the service sector, this café is more representative than firms like Fiat, and Zanussi.

The making and drinking of delicious coffee took a leap forward in the period after the second world war when Italy rebuilt itself. Through the 1950's and 1960s Italy grew like a developing country rather than a rich-world one. Among countries now considered developed, only Japan and South Korea performed better. Growth just shy of 10% a year became the norm.

One reason for this startling pace was the application of new technologies to the workplace - something that was as noticeable in cafés as in the factories of Milan and Turin. Before the war espressos had often been ruined by machines that squirted steam through ground coffee, burning it on the way producing a dark, bitter liquid. In the late 1940's a company founded by Achille Gaggia produced an espresso-maker that used a lever to force boiling water through the coffee at high pressure. The result was a shot of coffee with a sweet, tan-coloured froth on top that came out perfect every time. There were many thousands of such innovations, and they made Italy hum. A second source of growth wad large-scale internal migration, mainly from south to north. This increased the productive labour force, since many people moved from something close to subsistence agriculture into making things that others wanted to buy. Statistics for this are hard to come by, but the best guess is that between 1955 and 1971 some 9 million Italians migrated within their own country. Though many of them put up with great hardship to establish a toehold in this new Italy, eventually thet earned enough to join a consumer society.

Fast-forward 40 years and our café with it's zinc bar top, food laid out under glass, and white paper napkins is looking distinctly tired. The basic formula may not be so different from starbucks or one of it's imitators, but customer usually have to wait twice: once to buy a ticket and then again to order a coffee - a system that has long been out of favour in most rich countries.

The inputs and outputs of the café business have hardly changed, and productivity gains of the post-war period are now a distant memory. Between 2001 and 2005 labour productivity grew at a measly .1% a year, and between 2006 and 2009 it shrank by .8% a year. Official statisticians think that the reality may have been slightly better than these numbers suggest, but not so much as to alter the overall picture significantly. The drinks for sale are substantially the same as they have been for half a century(no frappuccinos here). The staff who have worked in this café for decades, are getting on a bit. Italy has aged faster than most other rich countries. Current projections suggest that by 2030 there will be only two Italians aged 20-64 for every pensioner.

Like many businesses still owned by the founder, this café has never expanded: about half of all Italians work in businesses with fewer than 20 employees. Indeed, even in Italy's large companies mergers and acquisitions are relatively rare. FAmily ownership, which is still widespread, tends to push against giving up control. The country has lots of fine family-owned companies run by dynamic managers, but on average family firms perform worse than others: a study of successions in 229 firms by the Bank of Italy found that return diminished in companies where the owner's heir took charge and increased under new bosses unrelated to the founder.

Like too many other businesses, the café operates largely in cash. UniCredit, a bank, says it spends about three times as much per customer handling cash in it's Italian branches as it does in it's German ones, because Italians have a preference for avoiding electronic payment systems. These two features of business in Italy - small firms and cash in hand - make tax evasion easier. The boss of one Italian bank who is currently renovating a house in the north of the country says that 48 out of the 50 small contractors he has used been reluctant to provide a receipt. Istat, the national statistics office, estimates that underground economic activity amounts to 16% of GDP. This in turn places extra load on the companies and individuals who do obey the law. At 45.6% of GDP Italy has a high tax burden, but the number understates the cost by those who actually pay.

Made in Italy

Italy does have it's share of world class companies, but too many Italians work in places that resemble ageing cafés and have been slow to adapt to changes in the world around them. Gaggia, the company that made the brilliant espresso machines, failed to take advantage of it's position to dominate the growing market for coffee-makers in homes, and is now majority-owned by Phillips, a Dutch electronics company.

Tax avoidance, low productivity, family ownership, shallow capital markets, a lack of competitiveness: these problems are well documented for anyone who cares to take a look. But the government has been quick to find other culprits: China for hollowing out Italian manufacturing; the European Union for heaping meddlesome regulations on Italian companies and farmers; the south of Italy for dragging the rest of the economy down.

These monster are not as terrifying as they seem. Chinese manufacturing may have taken it's toll on some Italian manufacturing in the early part of this decade, but the worst is now over. As for the European Union, plenty of successful economies have learned to live with it's single-market directives, and Italy benefits greatly from the absence of tariffs on exports to it's biggest market. Nor is the south, Italy's customary punchbag, entirely at fault. If anything, over the past few years it has been dragged down by the north: in the recent crisis the south's economy, which is dominated by the public sector, shrank less than the rest of Italy. Ultimately the country's economic failings express the preferences of a plurality of Italians. And like so many other things in this very old new country, these have deep roots.

[Kasuya]

I think it's shameless that you've copied and pasted this article without a word of credit for The Economist.

[Gbelle]

I think it's shameless that you've copied and pasted this article without a word of credit for The Economist.

Would you feel better, and gain an inflated self-righteousness if I slapped the economist as the source? Either way it's clear that I didn't write this.

[loqu]

It's just fair to mention the source, that's the work of a person or a group of people.

[johntm]

 cool

[Chekhov]

You could have saved us a lot of trouble by just linking to the article and then there wouldn't be typographical errors that are a clear giveaway that you didn't write it.

And it's also considered good form to explain what point you are making and what kind of discussion you're looking to have; the rest is supplemental reading.

[Gbelle]

You could have saved us a lot of trouble by just linking to the article and then there wouldn't be typographical errors that are a clear giveaway that you didn't write it.

And it's also considered good form to explain what point you are making and what kind of discussion you're looking to have; the rest is supplemental reading.

Maybe, because this was in one of the volumes from the journals i thought it wasn't readily available for free on the internet, and i touchtyped it up...

The point I'm making with the economist's report is the fact that people believe Italy is fine, when clearly it's up shit's creek.

[Ludwig Whitby]

We know Italy is fucked up.

[Chekhov]

I'm pretty everyone's known Italy's fucked for at least several decades.

Maybe, because this was in one of the volumes from the journals i thought it wasn't readily available for free on the internet, and i touchtyped it up...

I take it you don't know how to copy and paste any more than you do to attribute sources properly.