Italy's long decline

So Italians have voted primarily for the socialist, the corrupt philanderer and the comedian (whose main joke is that he isn't even standing because he has a conviction for manslaughter).   The socialist opposes austerity, the philanderer opposes it too, promising to reverse tax increases and give everyone their money back (nice try) and the comedian wants to halve the working week and give everyone free internet access.  For Italians to have bothered supporting any of these buffoons is comedy extraordinaire.

Italians don't trust politicians or bankers much, but also are averse to change.  It's why on the one hand public debt in Italy is over 120% of GDP its private debt is very low.  Around 30% of Italians don't have bank accounts, because of a history with a Lira that past government simply inflated away, so they don't trust their savings with banks.  Italians don't take our credit to pay for a holiday or a car, they save, they have tightly integrated families.  There is a lot to be said for not borrowing to consume, and the tradeoff of the intact families is a female employment rate 12% lower than the EU average.  Whether the stability of families offsets the loss of economic and human potential from low employment of women is a moot point.

However, on the government side Italy is a disaster.  It has had fiscal incontinence for many years, so needs to get spending under control.   Mario Monti was the man appointed by the European Commission to sort the country out - and he was punished for that by his party coming a distant fourth.  Not, because he is not respected, but because he was a tool of Brussels.  The European Union, the great arrogant entity that proclaims whenever it can that it kept the peace in Europe, now has on its record the imposition of rule from Brussels upon a Member State.  That wasn't going to last.

Yet Italy's problems are deep and cancerous, with endemic corruption, of which Silvio Berlusconi is only the leading figurehead for.  Of a labour market that would make unions in the UK, US, Australia and NZ groan with envy, but which effectively makes it nearly impossibly expensive to make people redundant, and so keeps so many Italian businesses just below the threshold for such a law to come into place.

Italy needs to shrink its sclerotic state, which dishes out more subsidies, favours and benefits than it can afford, and is far too often seeking to bail out large ailing businesses.  Alitalia is not far off its umpteenth collapse into bankruptcy. 

It needs labour market reform, so businesses are not afraid of hiring people they cannot quickly remove if performance is poor or business is bad.  Two previous advisors on labour law reform was assassinated by the communist Red Brigades.   It's dangerous seeking to take on socialism in Italy.   Italy has relatively low unemployment because it has a whole generation of fully employed people, whilst youth unemployment is 27%.  The status quo is damning a generation to protect the privileges of the one before.

It needs judicial reform, as its justice system is painfully slow, and is estimated to be a drag of 1% on national GDP.  A backlog of 5.5 million civil cases that take 7-8 years to complete is simply unworkable in terms of contracts or indeed torts.  Criminal cases are little better, with 3.4 million cases waiting to be heard with an average clearance time of five years.  FIVE years of suspects sitting in custody or remand waiting to be found guilty or innocent.   Consider not just the enormous costs of supporting this, but the human and economic costs of wasted lives and time.

It needs to tackle growing corruption that puts it at 71st amongst 174 countries by Transparency International.   It is embarrassing for a western European country to be worse than any eastern European EU Member State, the only state in the EU that beats it is Greece.  It ranks below Brazil, South Africa and Turkey.

Finally it needs to liberalise.  Vast swathes of the Italian economy are protected by licensed incumbents, such as pharmacies, taxis and utilities.  There needs to be competition, onerous licensing requirements and limits on geographical competition need to be swept away.  In essence, Italy's economy needs to be opened up from a regulatory burden akin to that of the former Soviet bloc to that of a modern open economy.

However, most Italians didn't vote to reform, they voted for those who want to cover their ears and eyes and say no, no, no, no, no.  They voted to keep a sclerotic regulated stagnant economy, to hope that the huge public debt will be reduced maybe by the Germans (it worked for the Greeks).

Except of course, Italy isn't Greece.  Italy is the 8th largest economy in the world (4th in Europe, 3rd in the Eurozone), Greece is 34th.  If Italy can't balance its budget, or service its debts, it is a crisis for the Eurozone that will make Greece look like an inconvenience.

Even if it does avoid such a crisis, the outlook for an unreformed Italy is bleak.  It has had no real GDP growth per capita in over a decade.  It is now slipping in rankings to around that of New Zealand and Spain, and in the long run the trajectory looks somewhat akin to that of Argentina, which slipped from being similar to Europe in the 1930s to being a basket case by the 1970s.   I'm not sure that Germans will tolerate being up for the bill to change that.