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.
A
similar article appears in the August 2012 edition of the Literary Review.
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