Daily Archives: July 13, 2011

The eurozone crisis has finally knocked on Italy’s door – and rather brutally at that. At one level this is surprising. Unlike Greece, Italy has gradually brought its deficit under control in recent years. Unlike Ireland, Italian banks have been only moderately affected by the crisis. Unlike Spain, Italy had not been characterised by an over expansion in either construction or private sector indebtedness.

So why has Italy been hit by sudden mistrust, expressed in words by rating agencies and in deeds by the markets? The answer is found in the combination of two factors: first, a tendency to defer to the Greek calends (in Brussels more than in Athens); and second, a revival of commedia all’italiana (in Rome, of course).

It would be unfair not to recognise that the European Union’s response to the Greek crisis has been vigorous and fairly well-co-ordinated. But the cacophony of statements from the leaders of the eurozone, the Eurogroup and the Euruopean Central Bank, when combined with the problems of reaching speedy agreement on a final strategy, is clearly increasing the appetite of the markets to test the EU’s response.

The market’s new front might well have been Spain, whose underlying problems are by no means less serious. So if Italy has been chosen as the target – and a target whose size and seniority within the EU makes it a more severe test of the eurozone’s resilience – it is probably because of the recent intensification of belligerence within prime minister Silvio Berlusconi’s government.

Describing that as commedia is, I admit, a form of understatement. Yet even if these moves against Italy are not wholly justified by fundamentals, the pronouncements by rating agencies and markets have triggered a sense of urgency reminiscent of days in which Italy regularly found itself in financial difficulties before the launch of the euro.

Masterminded by president of the republic, Giorgio Napolitano, the reaction has in fact been prompt and unexpectedly cohesive. True, finance minister Giulio Tremonti’s manoeuvre, a new set of budgetary adjustments and other measures, has seen its fair share of criticisms. But it is widely regarded as necessary to reassure both the EU and the markets, and the opposition parties have promised that the package will be adopted by this Friday. In turn, the majority in parliament is likely to accept at least some of the opposition’s amendments.

It is sad that it has taken an attack by “a conspiracy of speculators”, as many Italians see them, to push the political system towards common responsibility. Even so, the reaction has been remarkable. Few would have put money on this outcome; indeed, many had already placed huge bets against it.

Of course this will not be the end of Italy’s pains. Even if Friday’s announcement discourages further speculation, a fundamental reorientation of economic policy is urgently needed. It is now vital to stick to the fiscal discipline being pushed by Mr Tremonti, and to make sure, if anything, that it is reinforced in the implementation phase. It is equally vital, however, to leave behind the policies – and even the philosophy – followed by Mr Tremonti himself, in the three governments led by Mr Berlusconi, all of which have failed to recognise the need to raise Italy’s productivity, competitiveness and growth, and lower its pronounced social inequalities.

None of this will be achieved by reducing the current drive for fiscal discipline, even though many members of the centre-right majority (and some important ministers) have been pressuring Mr Tremonti to do just that. Instead, only the removal of structural impediments to growth can make a difference.

Sadly these are numerous and well-entrenched, flowing from Italy’s tradition of corporatism and low competition. These problems are caused in part by the limited powers, independence and resources given to the competition authority as well as to other regulatory agencies, and also in part by a whole host of restrictions to competition generated by the policies of the government itself. Even the rating agencies, who normally concentrate on short-term financial conditions, have this week emphasised Italy’s weak policies on growth. There can be no clearer reminder that issue is critical to achieving sustained improvements in Italy’s public finances.

This new growth strategy must also be matched at EU level, where fiscal discipline must be combined with moves to make Europe more competitive through deeper market integration. But it is Italy that now faces the most immediate threat. The need for a new generation of reforms capable of raising levels of growth and productivity is not widely accepted on either Italian right or left. When the worst of this week’s turbulence is passed, ensuring that they occur is now Italy’s next big challenge.

The writer is president of Bocconi University and a former European commissioner.

Response by Ferdinando Giugliano

Italy’s leaders lack the credibility to reassure the markets

It may be hard to spot, but even in a financial storm every cloud can have a silver lining. As Mario Monti rightly points out, in the case of the turmoil that has affected the Italian markets over the last week, this silver lining came in the shape of a strong and cohesive response by the country’s political system. Both the government and the opposition appear to have abandoned the temptation to ditch austerity for profligacy, and Giulio Tremonti’s budgetary adjustment has rightly been fast tracked in parliament.

The manoeuvre is a necessary but, alas, insufficient step, and not only because more austerity is needed. As Mr Monti correctly argues, structural reforms must follow, and soon. He rightly focuses on the role that an effective competition policy can play in relaunching Italy’s sluggish economy.

Yet, other problems must be addressed too. As it has been repeatedly emphasised by Tito Boeri, an economist at Bocconi University, Italy should take care of the schizophrenia of its labour market, parts of which are much too rigid while others are much too loose, thereby weighing down the country’s productivity. The policy towards research and development must be corrected too, starting with Italian universities which, as it was pointed out in the this year’s Economic Survey by the Organisation for Economic Co-operation and Development, are badly in need of mending.

That these reforms are long overdue means that their returns could be high. Yet, no one should expect these benefits to come quickly. Time is needed but, as this last week has shown, time is a luxury that Italy does not have at the moment. The market needs to be convinced that Italy is, at last, seriously committed to a shake-up in the supply-side of its economy.

Unfortunately, with its record of dithering and postponing, the current Italian political class does not have much credibility. It can reacquire it only through tough and quick decisions that shock the market as much as the recent turbulence has shaken Italy. If this proves impossible, a change of leadership should seriously be taken into account. Having just lost two decades, Italy cannot afford to waste more time.

The writer is a lecturer in economics at Pembroke College, Oxford university.

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