Daily Archives: January 17, 2013

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.

The A-List

The A-list

The A-List provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

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.


On this story

On this topic

The A-List

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

The hostage drama in an Algerian gas field is a brutal reminder of the perils of western intervention. A French military operation in Mali, a country whose difficulties were largely unknown to broader public opinion until a few days ago, seems to have tipped the world back towards a dangerous confrontation with radical Islam.

The lessons are many but the first is that whereas 60,000 civilian deaths in Syria’s civil war still leaves the international community divided and hesitant to intervene militarily, the harsh Islamic rebel order that has been imposed in northern Mali prompted no such hesitancy, although there has been no comparable toll in lives. Even if this is the first much of the world has heard about it, diplomats and defence officials in Paris, Washington and at the UN in New York have been talking intervention for months. Indeed, the French action has provided a substitute for a much more leisurely Security Council -approved UN deployment of neighbouring African peacekeeping troops. The rebels seemed to be about to advance on the Malian capital, Bamako: Mali’s beleaguered Government and the French felt an immediate intervention had become necessary.

So the first lesson is a rueful reminder for many of us that national security interests still trump humanitarian need when it comes to intervention. While the world dithers, and the Russians veto when it comes to the complex horrors of current Syria, the Security Council approval and international community support quickly falls into place when an al-Qaeda-linked movement threatens the stability of states.

Thereafter though, the parallels for Mali are Afghanistan not Syria. The French operation risks following the same trajectory of early honeymoon and apparent success followed by a long, bitter and losing engagement with no clear exit strategy.

The French with their own bitter experience in neighbouring Algeria’s colonial war are well aware of the risks. President François Hollande’s campaign commitments to avoid African entanglements means he will not have entered into this adventure lightly whatever the temporary fillip to his poll numbers. Beyond rightly feeling circumstances left them no choice, he and his advisers have pulled off the first phase of the operation with a very French aplomb that we British or Americans can only marvel at. Planners in Washington had been contemplating drone attacks which would be a much more problematic response than this combination of air power and ground troops. It may be lower tech (one of two British loaned C17 transport planes apparently quickly broke down) but it’s better politics.

France’s network of contacts in Francophone West Africa remains unrivaled and therefore Hollande’s team has been able to accelerate the deployment of ground troops from neighbours as anxious as the West to contain an expansion of revolutionary Islam. In doing so France will keep the region’s governments if not all of its People on side.

While the hostage crisis and the vulnerability of the growing number of foreign-operated oil and gas facilities across Africa seems likely to bring early rain on the French parade, the real dangers lie ahead. First, that the loosely networked al-Qaeda brand will avoid pitched battles with the French and melt back into the desert, as the Taliban did in Afghanistan, regroup and begin an insurgency against a logistically stretched occupier mounting attacks not just in Mali but back home in France through Islamic sympathisers. Second, the suddenness of the intervention risks aborting a political process to encourage the regime in Bamako to broaden its legitimacy and authority so that it can offer credible national leadership. Coups and political confusion have created the weak local partner that has dogged interventions of this kind from Vietnam to Afghanistan.

Without a credible government to hand back control to there could be no easy exit for France and its allies from a military occupation that may over time seed its own backlash as liberators become occupiers. There is a further critical point. The troubles began with a mildly Islamic Tuareg ethnic secessionist movement in northern Mali that has been hijacked by jihadists. The former need to be got back on side. This will require deep local knowledge of politics and culture which the French no doubt have but which tends in these crises to be pushed aside in a military driven operational planning process.

The French have given refreshingly firm leadership to a needed intervention but as the stand-off around the Algerian gas field shows it is already starting to get harder. The need to find a political solution to Mali’s divisions is even more important now than it was before French boots hit its desert ground.

The A-List

About this blog Blog guide
Welcome. This blog is available to subscribers only.

The A-List from the Financial Times provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

Read the A-List author biographies

Subscribe to the RSS feed

To comment, please register for free with FT.com and read our policy on submitting comments.

All posts are published in UK time.

See the full list of FT blogs.

What we’re writing about

Afghanistan Asia maritime tensions carbon central banks China climate change Crimea emerging markets energy EU European Central Bank George Osborne global economy inflation Japan Pakistan quantitative easing Russia Rwanda security surveillance Syria technology terrorism UK Budget UK economy Ukraine unemployment US US Federal Reserve US jobs Vladimir Putin


Africa America Asia Britain Business China Davos Europe Finance Foreign Policy Global Economy Latin America Markets Middle East Syria World


« Dec Feb »January 2013