One month from the vote, Italy’s election campaign is running at full speed. The leaders of the main political parties blame each other for the country’s state of disarray. However, none of them is proposing measures that will solve Italy’s real problems.
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There has been a collective failure by politicians, academics, journalists, and the public at large to understand the origins of Italy’s crisis. Only when under pressure from financial markets or international institutions has Italy tackled causes rather than symptoms.
The steps taken by Italy’s leaders to address its crisis have focused on reducing its budget deficit and its public debt, mainly by raising revenues. Spending cuts and structural reforms were postponed until a “second phase”, the so-called “growth phase”. But by that time, the pressure of the markets had vanished, and the required urgency had evaporated.
As a result, since the start of the eurozone crisis, Italy’s economy has suffered more than any other, save for Greece. Gross domestic product has fallen 7 per cent since 2008, more than Portugal (5.5 per cent), Ireland (5 per cent) and Spain (4 per cent). Per capita income has fallen back to levels last seen in the mid-1990s.
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The election debate continues to focus on fiscal measures: property taxation and ways to boost aggregate demand. State intervention is seen as the only way to increase employment, and to protect ailing companies.
The missing word is competitiveness. Italy’s economy has lost competitiveness over the past decade or so. Internal labour costs have grown at a faster pace than productivity, and faster than in most of the rest of the world. Since the creation of the euro, Italy’s unit labour costs have risen by about 30 per cent more than the currency area average.
Other indicators of international competitiveness, such as tax rates, costs of starting a business, market flexibility, layers of bureaucracy, research and development investment, and transparency, show Italy as a laggard. The result? Stagnant productivity.
This explains why Italy’s current account has moved from surplus at the start of monetary union to a deficit of about 4 per cent of GDP in 2010. Italy’s external competitiveness has not even improved since the start of the crisis, unlike in Spain, Ireland and even Greece, where “internal devaluation” has occurred. The current account adjustment has taken place largely through a reduction of imports of goods and services (by 7 per cent in 2012), while exports have recovered (increasing by 1 per cent), but at a slower pace than the eurozone average.
Weak competitiveness has depressed growth, which in turn has worsened the public finances. The measures to tackle the latter have further reduced competitiveness and growth, creating a vicious circle. The only way to escape is to adopt measures to improve competitiveness and increase Italy’s growth potential. However, these measures require the determination to fight the opposition of multiple interest groups, which protect privileges and so-called “acquired rights”.
In this respect, the main obstacle resides in a traditional tendency in the Italian political system to avoid confrontation and to decide by consensus. Since the mid-1970s, governments have become used to taking decisions in concert with all sorts of unions and interest groups, representing labour, employers, commerce and banks, with the aim of achieving social cohesion.
During the 1970s and 1980s, the cost of inflexibility was shifted on to the public budget and on to the value of the currency, which was devalued several times. The debt burden doubled in a decade, from 60 per cent of GDP in 1980 to 120 per cent in 1992. The Italian lira went from 250 to the Deutschemark in the mid-1970s to 990 before joining the euro.
Since the start of monetary union, no room was left for inflation or the state budget to pick up the bill. As a result, Italy stopped growing. In these conditions social cohesion is unlikely to last. The new government will be confronted with tough decisions. Unless it wants to try to revert to the policies of the 1970s and 1980s, which cannot be done within the eurozone, it will have to start taking decisions without waiting for all social partners to sign up. (France’s recent decision to press ahead with labour market reform might be a good model.) This action might be politically costly, but will be unavoidable.
Election campaigns are surely not the right time to send tough messages to the public. But each of the candidates for prime minister should at least show that they are aware of the challenges and that they are willing to change how the country is governed. They have one month left to do so. There is no time to waste.
The writer is a former member of the ECB’s executive board