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Italy politics: A sad Italian story(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST Disillusioned Italian voters may dump Silvio Berlusconi's centre-right coalition next week, but a government led by Romano Prodi might be little better ELECTIONS never used to matter much in Italy. For most of the post-1945 period, they were frequent, they led to a ragbag of short-term, centrist coalitions and they produced a string of faceless prime ministers who seemed to change almost yearly. Yet despite--or perhaps because of--this, the economy prospered and living standards of ordinary Italians rose fast. None of these things is true of the election being held on April 9th and 10th. It comes after a centre-right prime minister has, for the first time in post-war Italy, served out an entire five-year term. That prime minister is Silvio Berlusconi, a controversial media tycoon who is also Italy's richest man. But the biggest difference from the past is that the economy over which Mr Berlusconi has presided has done so badly. Last year GDP growth was near-zero; this year's forecast has just been cut from 1.5% to 1.3%. Italy deserves its title as the new sick man of Europe. It is in far worse shape than Germany or France. And the pressing need to find a cure for that sickness means that the outcome of next week's election matters. It is also one reason why the battle between Mr Berlusconi's centre-right House of Liberties coalition and the centre-left Union group led by Romano Prodi, a former prime minister, has been so vitriolic. Another is that Mr Berlusconi is a colourful, often outrageous character whose appeal lies as much in his entertainment value as in his politics. In recent weeks he has likened himself to Napoleon and Jesus Christ; insulted Italian businessmen, the media and China's Communists; and heaped abuse on Mr Prodi and his supporters ("vampires" and "dickheads" being two recent samples). He has also managed to squabble with all his coalition partners. Indeed, as the election has drawn near, some centre-right leaders have taken on an air of desperation, and begun manoeuvring for the aftermath of a defeat. The centre-left's opinion-poll lead was briefly dented at the start of the year, but it has since been a remarkably consistent 3-5% (publication of poll data is banned in the final two weeks of election campaigns). Mr Berlusconi, a consummate media performer, had high hopes for his two televised debates with Mr Prodi, a bespectacled former professor and European Commission president whose communication skills are notoriously bad. In the event Mr Berlusconi comprehensively lost the first debate, on March 18th. Yet, in a rancorous final debate on April 3rd, he seized back the initiative with a string of promises to tempt the undecided. In particular, in the dying seconds, when Mr Prodi no longer had a right of reply, he landed what he hoped would be the killer punch. Giving viewers his best salesman's grin, Mr Berlusconi said he planned to slash the tax on bank current accounts and, even more enticingly, to abolish the municipal tax on primary residences--which was not in his manifesto. The left dismissed this as just another populist gimmick and demanded to know how he would pay for it. But it is doable. The tax brings in some 2.3 billion ($2.8 billion) a year, a large amount but not so huge as to ravage the public accounts. Moreover, a future Berlusconi government might not make up the shortfall. Most local authorities lean to the left. If they have to cut services, would that worry a conservative administration in Rome? Despite Mr Berlusconi's last-minute offerings, the odds are still, just, on a centre-left victory next week. But the margin is likely to be small. That is partly because, in a final effort to keep out the opposition, the government has changed the voting system. Since 1993 three-quarters of the seats in parliament have been elected on a first-past-the-post basis. Italian politics has evolved away from the old set-up, with lots of parties feuding among themselves before forming a kaleidoscope of differing coalitions, towards a new bipolar system with two broad coalitions of parties on the centre-right and centre-left. All the evidence is that voters welcomed this change, as it gave them a clearer choice at elections. Yet last year the government junked it to move back to full proportional representation (albeit with a threshold for parliamentary seats and a complex top-up formula for the winning side). The new voting system seems likely to produce a smaller majority for the centre-left if it wins, especially in the Senate. Indeed, it is possible that the two chambers could end up in different hands, a recipe for policy paralysis. A close result would make it much harder for Mr Prodi to control his broad coalition, which embraces, on the right, the Margherita Party led by Francesco Rutelli (who lost for the centre-left against Mr Berlusconi in 2001), the reformed ex-communist Democrats of the Left, led by Piero Fassino, and, on the far left, the unreformed Communists, led by Fausto Bertinotti. Should Mr Berlusconi's centre-right coalition bounce back and win, it too is likely to have a wafer-thin majority. The prospect is that any new government, from either side, will be weak and beholden to fractious parties at the extremes. Would that make any difference? Yes, for the challenges facing a new government are immense. And, as France's protesters and strikers across much of Europe have been showing, none is harder or more pressing than the need to set about reforming and restructuring the economy. Over the past five years, Italian GDP growth has averaged less than 0.7% a year, by far the slowest rate among big OECD countries. The rate of employment of the working-age population, at 58%, is the lowest in western Europe (see charts). Productivity growth has been at best static, and at times negative. Competitiveness has declined shockingly: since the start of Europe's single currency, the euro, in 1999, unit labour costs relative to the average have climbed by 10% in Italy, but fallen by a similar amount in Germany. And Italy's public finances, which improved in the late 1990s, have deteriorated. The public debt is at 106% of GDP and rising, and the budget deficit is some 4% of GDP (against the euro area's stability-pact ceiling of 3%). The macroeconomic picture is thus pretty ugly. Yet Italy's situation is worse even than this implies. If it were merely a case of putting right the public finances and waiting for Europe's economic upturn, that would be simple. But the ills of the Italian economy are deeper and more structural--and will take years to cure. For a start, Italy is in the wrong industries, from textiles and shoes to white goods and machine tools. These manufacturing businesses are now vulnerable to global competition from countries with lower labour costs--and China has duly taken some big bites out of Italian industry over the past decade. The country has too many small firms, and not enough big ones. It is weak in high-tech. The mezzogiorno, or south, is a corrupt, underemployed mess that holds back all of Italy--and it accounts for 35% of the population. Above all, Italy's service sector is woefully underdeveloped. Roger Abravanel, a consultant at McKinsey in Milan, points out that, if Italy wants to match Britain's rate of employment, it needs as many as 5m new jobs. With agriculture in decline, manufacturing under attack from China and the public sector bloated, most of those jobs must be created in private-sector services. Yet Mr Abravanel notes that Italy has more barriers to competition or to new entrants in services than almost any other rich economy. The mezzogiorno badly needs more services, in tourism and in caring for the old: properly developed, it could aspire to be the Florida of Europe. In the past Italy had a safety valve that enabled it to live with these economic weaknesses: devaluation of the lira. That course was not costless--and, in any case, was no longer available once the country had joined the euro. For all the market chatter about Italy being pushed out of the single currency, that is not a serious option: it would lead to painful default and recession, Argentina-style. In effect, the euro and global competition are forcing Italy into a wholesale transformation, away from small-scale manufacturing, family firms and a reliance on low labour costs and devaluation, and towards larger enterprises, more service industries and higher value-added activities. The challenge for the government is to ensure that this transformation happens quickly and in the least painful way. This requires more than sound macroeconomic policy: it demands a programme of liberalisation, privatisation and the injection of more competition across the board. Silvio's legacy It would be a travesty to lay the blame for Italy's economic failings at the door of the Berlusconi government. In reality, their origins date back three decades or more. Yet it is fair to ask what the centre-right government has done to tackle them. And the short answer is: precious little. In only two areas has it pursued serious reforms: pensions, where it is raising the retirement age and bringing in private pension funds, and the labour market, where it passed the "Biagi" law to make it easier to hire workers on short-term contracts. Thanks to these reforms, Italy's prospective pension bill and its overall unemployment (though not its youth unemployment) compare well with other European countries. But in general the story has been of a failure to promote competition, to privatise state-owned businesses or to liberalise what is one of the most highly regulated economies in the OECD. This explains why Italian business is so disappointed by the Berlusconi government. In 2001, many bosses swallowed their doubts about the conflicts of interest inherent in Mr Berlusconi's ownership of Mediaset, which controls the three main private television channels, and about the mass of legal cases outstanding against him, because they hoped that a centre-right government with a substantial majority--by some claims, the first such government since the war--would pursue a programme of Thatcherite reforms. Those hopes have been dashed. The government has been beset in part by in-fighting. None of the three biggest centre-right parties after Mr Berlusconi's Forza Italia--the National Alliance, led by Gianfranco Fini, the Union of Centre and Christian Democrats, now led by Pier Ferdinando Casini, and the Northern League, led by Umberto Bossi--is a true believer in free-market liberalism. All are beholden to special interests. Even Mr Berlusconi is no advocate of competition: his fortune was based on protected monopolies and the obtaining of political favours. A further problem is that the government's attention has been so focused on passing laws to help Mr Berlusconi avoid conviction in various legal cases brought against him. Criminal offences have been downgraded; statutes of limitation (ie, periods after which a crime is extinguished) have been shortened; an unsuccessful attempt was even made to give the prime minister blanket immunity from prosecution. These measures, plus the government's predilection for amnesties for tax evasion, money laundering and illegal building, have not only distracted the government; they have further lowered the quality of Italian public life. Politicians on the centre-right promise to do better in a second term. Yet the record of the past five years is terrible. And the campaign pledges of Mr Berlusconi--including higher pensions, tax credits for having children and a raft of tax cuts besides his latest promise to scrap municipal taxes--are hardly reassuring. The real concern is whether a centre-left government might do any better. One ray of hope is that the previous centre-left government did more than Mr Berlusconi in such areas as privatisation, as well as getting the public finances into better shape. Unlike Mr Berlusconi, Mr Prodi and his advisers talk the right language about the need for more competition. And the producer lobbies that are fiercely against reform--shopkeepers, small tradesmen--are often stronger within centre-right parties than within the centre-left. Yet the big difficulty for Mr Prodi is that he is hamstrung by coalition partners who are unenthusiastic about freer markets, notably Mr Bertinotti's unreconstructed Communists. Ominously, Mr Bertinotti declares himself entirely happy with the 280-page manifesto of the centre-left, which is a careful compromise between his views and those of others within the coalition. He also claims that Mr Prodi has shifted leftwards since he was prime minister in 1996-98. On that occasion, the government was brought down by none other than Mr Bertinotti, but so long as the centre-left sticks to its programme, he promises not to do it again. A centrepiece of that programme is to reduce the social-security tax on labour by five percentage points, a bigger cut than is promised by the centre-right. It will be financed by raising taxes on income from capital and by reintroducing inheritance taxes. On labour markets, however, the Prodi platform proposes partly to reverse the Biagi law by making it less attractive to employ people on temporary contracts. And Mr Bertinotti declares himself firmly against privatisation--though, intriguingly, he is not against all liberalisation. It is hard to avoid the conclusion that a Prodi-led government with a small majority is unlikely to be either willing or able to promote reforms on the scale that Italy badly needs. So what might happen? Some hopeful politicians in Rome talk of the collapse of a new government leading to a reassembling of a middle-of-the-road coalition that took in more centrist elements from both sides--a sort of rebirth of 1980s-style Christian Democracy. Others talk of a broader German-style "grand coalition" of left and right together. A failure by yet another Italian government to improve the economy could indeed lead to a reshaping of the political map. But the truth is that, even in the centre, few politicians or parties have much appetite for pushing reform and taking on producer lobbies. The real sadness of Italy, maybe reflecting its long political divide into Catholics and Communists, is that it has so few liberals. Even today, as Emma Bonino, leader of the tiny Radical Party, puts it: "In Italy, to be liberal is somewhere between a sin and a crime." SOURCE: The Economist |