Domestic solidity is of great importance for Italy; so are political stability and predictability. In times of economic and political uncertainty following Brexit, the latter would come in handy to Great Britain too
The Independent has recently shown an interest in the future of Italy’s political and economic landscape. An article published earlier this month (“Why Italy’s economy is about to collapse”, Monday 20thJune) was rich in data yet the perception it created of the country was anachronistic to say the least, failing as it did to take account of the commitment to reforms of ordinary Italians and their Government. The article wrongly placed Italy in a doomsday scenario, which is actually more likely to happen elsewhere.
The fact is, Italy is recovering from the most dire global financial crisis in modern times. After several challenging years, confidence among consumers as well as businesses is rising. Growth in GDP and employment is finally on a clear upward trend. This happened through a parallel path of institutional and structural reforms to streamline governance in both the economic and political sphere, thus attacking the structural causes of traditional weaknesses.
We pushed even stronger for reforms when the European Central Bank’s Quantitative Easing and the fall of oil price could have done the job for us. According to the OECD, “progress on the structural reforms programme is contributing to strengthening long-term growth prospects”. In fact, the “Jobs Act”, new legislation to speed up civil justice and a new public procurement code for construction works, as well as scaling up the fight against corruption through the newly created National Anticorruption Agency, together with several other major reforms, are all boosting competiveness and supporting job-creation.
Italy has been running a primary surplus since 1995, with the sole exception of 2009. The reforms of the labour market and the banking system have consolidated investors’ confidence and the level of cross border mergers and acquisitions in Italy in 2015 reached a record high; as did the flow of foreign direct investment to the country.
Our deficit has contracted from 3 percent in 2014 to 2.6 in 2015 and it is estimated to further shrink to 2.4 in 2016 (just as a comparison, UK recorded a deficit-to-GDP ratio of 5.6 in 2014 and is expected to contract to 3.4 in the current year, even before the Brexit effect is considered). Public spending has been reduced and rationalized, thanks not least to a public administration efficiency drive.
Government debt is not “approaching 140 per cent of GDP”, as your recent item had it; rather it reached a peak of 132.7 per cent in 2015 and has started to decline since the beginning of this year. Moreover the latest European Commission Fiscal Sustainability Report argues that Italian public finances are the most stable over the long run in Europe thanks to the fully implemented reform of the pension system. With regard to infrastructure, which according to your article dates “back to the immediate post World War II era”, we warmly invite your readers to travel between Rome and Milan in less than three hours on one of the most comfortable trains in the World, running at 186 m.p.h.
Domestic macroeconomic solidity is of great importance for Italy. So are political stability and predictability. In times of economic and political uncertainty following Brexit, the latter would come in handy to Great Britain too.
Pasquale Q. Terracciano, Ambassador of Italy to the United Kingdom
In reply to:
Why Italy’s economy is about to collapse by Satyajit Das (The Independent of 20th June 2016)
A contracted economy, inadequate banking systems, engorged public sector and festering corruption mean that Italy is facing a troubled future
Now the Five Star Party has secured the mayor-ship of Rome, Italian Prime Minister Matteo Renzi probably understands what Benito Mussolini meant when he stated: “Governing the Italians is not impossible, it is merely useless”. Attempts at reformation by Renzi have not yielded the hoped-for results.
Italy’s economy has shrunk by around 10 per cent since 2007, as the country endured a triple-dip recession. Output has regressed to levels of over a decade ago. Overall unemployment is around 12-13 per cent, with youth unemployment around 40 per cent. Consumption and investment are flaccid.
The damage is long term, with as much as 15 per cent of Italian industrial capacity destroyed, reducing employment and growth potential. Once its strength, Italy’s smaller enterprises have contracted as a result of low sales, declining profitability and lack of financing.
Italy has a current account surplus of 1.9 per cent, reversing a number of years of deficits. The change reflects the deterioration of the Italian economy rather than a change in its trading position.
Banking system problems have exacerbated the contraction. Italian banks are hamstrung by around €150-200 billion of bad or doubtful loans, which has exposed inadequate capital and reserves. Unlike counterparts in the UK and US, Italian banks have been unwilling or unable to tackle the asset quality problem. The most recent exercise (with a glorious title based on the Atlas) was underfunded and ill-conceived and did little more than support a few weaker banks at the expense of more solid enterprises.
This has constrained the supply of credit to the economy. Larger companies can use capital markets for finance but this option is less available to small and medium sized enterprises that are crucial to employment and activity. The lack of credit availability combined with the deformation of Italy’s industrial structure will constrain any recovery.
Total real economy (government, household and business) debt is around 259 per cent of GDP, up 55 per cent since 2007. This understates real liabilities as it ignores unfunded pension and healthcare obligations. Household debt is low, relative to peers. Its net international investment is -32 per cent of GDP, superior to Spain (-92 per cent) and Portugal (-100 per cent).
Despite its commitment to fiscal reform, Italy is running a budget deficit of 3 per cent. Government debt is US$2.4 trillion approaching 140 per cent of GDP. The government is tardy in paying suppliers, in an elaborate shell game to lower Italy’s overall debt levels and mollify the EU and investors. There is an estimated $160 billion in taxes uncollected each year, the third highest rate in Western Europe.
While the Eurozone debt crisis has been a factor, Italy’s problems are more fundamental with the economy having grown little since the introduction of the Euro in 1999.
Labour markets, the legacy of the power of the Italian Communist Party in the post-war period, are rigid, with high labour costs and multiple barriers to hiring and firing workers. A long-running government scheme requires the state to pay laid-off workers up to 80 per cent of their normal salary while their employer restructures. Productivity improvements are also slow.
Italy’s economy is increasingly unbalanced with high end producers, such as those in luxury products and also advanced manufacturing, benefitting from demand from emerging markets. Other sectors, such as standard automobiles, domestic appliances and low-priced fabrics and clothes have found it difficult to compete with manufacturers based in emerging markets.
Domestic appliances or white goods exemplify Italy’s decline. In 2007, Italy, once a world leader in the sector, produced 24 million appliances. By 2012, it was down to 13 million; output of washing machines, dishwashers, refrigerators and cookers was down by 52 per cent, 59 per cent, 55 per cent and 75 per cent. Italian manufacturers have shifted production to lower cost countries, resulting in large job losses. These developments have increased the gap between the industrial North and the Mezzogiorno, the traditional term for the southern regions, which competes with emerging economies in price-sensitive sectors.
There are other structural problems. In World Bank studies, Italy ranks 65th out of 189 countries for ease of doing business. Infrastructure, dating back to the immediate post World War II era, is in need of renewal and lags leading economies. Energy costs are high. Italy spends less than 5 per cent of GDP on education, compared with a 6.3 per cent average across the OECD. The proportion aged 25-34 completing higher studies is 21 per cent, compared with a 39 per cent average for the OECD.
Italy’s large public sector and bureaucracy is legendary. Tax and other revenues are around 46 per cent of GDP. According to the World Bank, the effective Italian corporate tax burden is around 65 per cent. The European average is around 41 per cent, with only France (64 per cent and Spain (58 per cent) in a comparable range. Switzerland and Croatia, both located close to Italy have tax rates of 29 per cent and 20 per cent respectably. This diverts investment away from Italy. There are around 100 new tax laws affecting business promulgated annually.
The size of the government payroll is not matched by the quality of public services. Enforcement of a contract takes around three years compared to an OECD average of 18 months. Civil lawsuits take over eight years compared to less than three years in Germany.
Italian business is not much better, dominated by a group of well-connected monopolistic or oligopolistic firms and, in the words of author Alan Friedman, “self-congratulating and self-perpetuating” dynasties and salons, historically focused around figures such as Fiat’s Gianni Agnelli and Mediobanca founder Enrico Cuccia. Complex corporate cross holdings ensure that external disciplines are minimal and resistance to change high.
Transparency International ranks Italy 69 out of 175 countries in perceived levels of public corruption, comparable to Romania, Greece and Bulgaria. The World Bank indicator for Control of Corruption and the World Economic Forum also ranks Italy poorly on indicators related to ethics and corruption. The International Monetary Fund considers bribery a serious problem. A number of prominent business figures are facing embezzlement charges as well as prosecutions for breaching regulations, highlighting the extent of the problem.
The cost of corruption, in the form of increased cost with resultant economic losses, has been estimated by the Italian Court of Auditors at around €60 billion annually or 4 per cent of the country’s GDP. It also creates economic incentives reducing potential output, investment and ultimately the growth without which Italy’s debt problems threaten to overwhelm the nation.
Despite the weight of problems, the desire for change is limited. Italians favour “pannicelli caldi” that is small tinkering. Radical reforms are for Anglo Saxon or Teutons, but not for them.
Satyajit Das is a former banker and author. His latest book is ‘A Banquet of Consequences’