Wednesday, August 01, 2012

Can 'good Italy' triumph over 'bad Italy'?

The key battles for the survival of the euro will be fought in Italy more than anywhere else. Mario Monti’s technocratic government is struggling to push through sufficient reforms to convince financial markets that economic growth will return and thus erode the country’s mountain of public debt. Unless EU institutions intervene in government bond markets to lower the country’s cost of borrowing, Italy may soon be frozen out of those markets. The EU’s bail-out funds may just have enough money to provide Spain’s financing needs for the next few years, but they would then have no spare capacity to save the larger Italian economy. So Italy’s inability to borrow could lead to the euro unravelling – unless the Germans suddenly agree to bigger bail-out funds or the mutualisation of eurozone debt.
When the euro was conceived, more than 20 years ago, many economists thought the Italian economy ill-suited to take part. Then Italy’s reformist governments in the 1990s did just enough to convince the EU’s leading member-states that it should be allowed into the single currency. But after the launch of the euro in 1999, with Silvio Berlusconi prime minister for much of the time, reform more or less stopped.
Bill Emmott’s new book, ‘Good Italy, Bad Italy: why Italy must conquer its demons to face the future’ (Yale University Press), provides an excellent account of what is rotten in the state of Italy. When editor of The Economist, in 2001, Emmott started to run a series of investigative stories that exposed Berlusconi’s questionable financial dealings. One cover proclaimed: “Why Silvio Berlusconi is unfit to lead Italy”. The Italian prime minister, unamused, complained of an “E-Communist plot” against himself, pointed out that Emmott looked like Lenin and launched two libel actions that The Economist fought and won (though one of these is still subject to appeal).
Emmott’s book is particularly good on the sorry story of the Italian economy. Only Haiti and Zimbabwe grew more slowly in the period 2000-10. He describes how archaic labour market rules that prevent employers of more than 15 people from firing workers have kept companies small and thus damaged productivity. The lack of competition in the economy is a major cause of Italy’s service firms being inefficient. As a result, businesses pay more than they should for logistics, information and communications technology, marketing, transport and legal advice. There are 290 lawyers for every 100,000 Italian citizens, compared with just 22 in Britain. Emmott explains how an ageing population, unmeritocratic universities, low levels of foreign direct investment and the high level of public debt (over 120 per cent of GDP) depress the economy. Meanwhile a black economy amounting to 20-25 per cent of GDP weakens the state.
Emmott defines ‘Bad Italy’ as “the urge to seek power in order to use it for self-interested purposes, to amass power to reward friends, family, bag-carriers and sexual partners regardless of merit or ability, and by doing so to build clans and other networks that are beholden to you, and that live by enriching themselves at the expense of others, by closing doors rather than opening them, by excluding rather than including…This sort of selfishness involves a special and even wilfully destructive disregard for a wider community or, especially, national interests, institutions, laws and values.”
The roots of Bad Italy are embedded in the political system and the nature of Italian society. Emmott’s descriptions of these are not as profound as his economic analysis. He does not say a great deal about the centre-left, which held power from 1995-2001 and again from 2006-08 but reformed very little (though its record is somewhat better than that of the centre-right). He might have examined why the Italian centre-left is so weak and fragmented, compared with that in Britain, France or Germany. However, Emmott is good on the nefarious influence of the Catholic Church on politics: for many years it supported Berlusconi because of his stance on gay marriage and in vitro fertilisation – and because he exempted Church property from taxation.
Emmott could have focused more on the many vested interests that profit from the current system and have been so successful in blocking reform. But he implies that they can be overcome because half the book is about ‘Good Italy’, the Italy that draws its strength from civil society, promotes vigorous entrepreneurialism and thinks globally. One of the book’s merits is to point out that Bad Italy is not synonymous with the south of the country, nor Good Italy with the north. Emmott takes the reader on a tour of success stories, to ‘Addiopizzo’, an anti-mafia NGO in Sicily; the Tecnam sports aircraft manufacturer near Naples; the Brunello Cucinelli cashmere clothing company near Perugia; Rainbow, a world-beating maker of animated children’s cartoons near Ancona; the Slow Food movement in Turin; and well-known firms such as Luxottica (sunglasses) in Milan and Ferrero (chocolates) in the Langhe region of Piedmont.
Emmott shows that energetic companies, usually led by brilliant individuals, can beat the system and succeed. He sets out a list of reforms that Mario Monti – or the next prime minister – should seek to achieve, to tilt the system in favour of Good Italy. But he does not attempt to say how a reformist government should seek to overcome the vested interests of Bad Italy, or why Good Italy will ultimately triumph.
Mario Monti, a brilliant economist and the incarnation of the hopes of Good Italy, would surely agree with Emmott’s analysis. But his government is embattled. Within Italy, trade unions, professional associations and other conservative lobbies have diluted many of Monti’s reforms. In democratic countries, the most able governments find it hard to introduce structural economic reforms, even when economies are growing; the losers feel the pain immediately while the benefits take years to emerge. When an economy is shrinking – as is the case in Italy, partly because of excessively tight fiscal policies across the EU – it is almost impossible to implement structural reforms.
Monti’s noble efforts to reform Italy may have come too late. Bad Italy is extraordinarily resilient. Even if Monti’s government survives until the elections that are due in spring 2013, the entrenched power of Bad Italy may yet force Italy out of the euro. And if Italy and the other southerners quit, the EU’s leaders may find it hard to convince financial markets that France – which though a much stronger economy than Italy, suffers from some of the same ailments – can stay in the euro.
Charles Grant is director of the Centre for European Reform.
A similar article appears in the August 2012 edition of the Literary Review.

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