Italy’s Economic Problems Under The Spotlight

As Manuel points out in the accompanying post, Romano Prodi’s resignation as Italy’s Prime Minister is a rather sudden and dramatic, but scarcely unexpected, development. The immediate political crisis may be resolved as rapidly as it appeared, but again as Manuel indicates it may only serve as a prelude for further things to come, and the fragility of any government coalition which may be put together only underlines the difficulties Italy will almost certainly have in addressing what are important ongoing economic problems. The present post will simply attempt to outline some of the main economic problems Italy faces, in order to contextualize the political problem a little.
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A Crisis is Born in Italy

Well as almost everyone must surely know by now, Romano Prodi’s government resigned earlier in the week. The present situation is still far from clear, with President Giorgio Napolitano holding urgent consultations with the various interested parties even as I write. Since my interest in Italy is largely an economic one (see accompanying post to follow this) and since I do not consider myself to be any sort of expert on the Italian political process, I asked Manuel Alvarez Rivera (who runs the Election Resources on the Internet site) and who is a political scientist with detailed knowledge of Italian politics for an opinion. Below the fold you can find what he sent me.

At the same time anyone inside or outside of Italy with a different take or perspective please feel free to add something in the comments section.
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Bloodthirsty Slavs vs. Racist, Revisionist Italians

Actually, it’s racist, revisionist, and revanchist Italians. But we’ll get to that.

Short version: Italy and Croatia have just had a brief but bitter diplomatic dispute over statements made by Italian President Giorgio Napolitano and Croatian President Stipe Mesic. There’s not really a good or bad side here, either; both nations seem to have had a short but violent attack of what my grandmother used to call “the stupids”.

On the plus side, it seems to be over now, and cooler heads have prevailed.

Much more below, if you’re interested.
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La Febbre

A couple of weeks back I had the pleasure of seeing Alessandro D’Alatri’s recent film La Febbre (Fever). As the reviewer says (Italian link), this is a ‘normal’ (everyday) film, not a great one, even if it does include one or two memorable moments, like the scenes shot along the river bank, which were (and I imagine this is not entirely unintentional) rather reminiscent of some which are to be found in the unforgettable L’Albero Degli Zoccoli from that giant of Italian cinema Ermanno Olmi.

La Febbre è il classico film italiano, che vuol raccontare una storia normale, di tutti i giorni, e che per farlo non trascende dai canoni della buona creanza del plot, e da quel pizzico di amara critica sociale che lo rende molto politically correct.”

(La Febbre (the fever) is a typical Italian film, the kind of film which tries to tell a simple, ‘normal’ story – an everyday one – and which in order to do this stays well within the bounds of what is normally thought to be an acceptable plot structure, and then, following the recipe, there is added just enough social criticism to make the film a highly politically correct one.)

My point of interest in this post, however, is not really the film itself, but rather the film as a reflection of something else: the disenchantment and frustration that many young Italians seem to feel with contemporary Italian society, and the impact that the evident failure of Italian civil society to adjust to Italy’s contemporary social and demographic reality may have on the future evolution of Italian economy and society.
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Cultural war tax

In Italy people can choose to assign a small amount of their taxes, 0.8 percent, to a favourite good cause, the so-called otto per mille*. This contribution either goes to the Catholic or Lutheran Churches, or the State. The State is supposed to use the money for well-defined humanitarian, environmental and cultural causes. At least, that is what I gleened from the wikipedia entry. I am sure our Italian readers could expand on this.

To my surprise I had to learn from Middle East expert Juan Cole that the Italian government used the otto per mille contributions to fund… the Italian war effort in Iraq. Now, it could be argued that the Italian contingent in Iraq is engaged in humanitarian activities but I doubt all those generous Italian citizens had that in mind when they allowed the government to spend some of their tax money on a good cause.

However, the AGI article Juan Cole mentions is the only English language source I could find for this, so maybe we should be careful before we start talking about kleptocracies. Are there any Italian readers or Italy watchers who could tell us more?

Quick update: Italian online daily Affari Italiani quotes Forza Italia senator Giuseppe Vegas, who estimates the amount of money that went to Iraq at 80 million euros.

*Thanks to reader Stefano for correcting me on the definition of otto per mille

Italy 2007 Budget Storm

Italian Finance Minister Tommaso Padoa-Schioppa is going to be a man of his word (and not follow in the path of that other European political leader who was lying about his budget in the morning, in the afternoon, and at night). He assures us of this:

Mr Padoa-Schioppa was adamant any adjustments to the budget, which MPs must approve, would not affect its goal of cutting Italy’s budget deficit to 2.8 per cent.

This is an important re-affirmation, since this time yesterday this little detail wasn’t clear at all, as there was a small matter of 5 billion euro of cuts which were in the budget but which effectively didn’t exist. (All of this is explained in a post on the Italian Economy Watch blog, and the follow up here, as well as by Claus Vistesen on his blog).

As the Economist said:

This is not the sort of thing you expect of a former board member of the European Central Bank. But it shows how far Mr Padoa-Schioppa has had to bend to placate demands by left-wing parties within the government.

The uproar produced within the small business community – who would have seen this mony simply transferred from their coffers to those of the state – has meant that Prodi has now had to publicly vow that the budget will be changed, always of course sticking to the three principles which underlie the budget policy of the current Italian government, namely:

“It’s clear that we will make technical corrections and adjustments, but we absolutely won’t renounce the three objectives of fairness, restoring the health of the public finances and development,”

So, Tommaso Padoa-Schioppa, even though this isn’t exactly the sort of thing that you expect from an ex-director of the ECB, we will assume that this time you are serious, and that you will try to comply with the spirit of what your government has agreed with the European Commission, even if, realistically, it may be a very difficult objective to achieve in the global economic environment we may all face in 2007.

Italy’s Supply Constraint

The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
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Italy and the Eurozone

John Kay had an article in the Financial Times earlier in the week, and this seems to have caused quite a ripple around the blogsphere (Eurozone Watch, Economonitor, Claus Vistesen at Alpha Sources). The article was about whether or not it was technically possible for Italy to leave the Eurozone. (Update: Sebastian has a fresh post over at Eurozone Watch Blog continuing the discussion).

John Kay’s conclusion, and it is supported by a very reasoned commentary by Sebastien Dullien at Eurozone Watch Blog (welcome Sebastain and Daniela), is that there is no in-principle technical difficulty in exit. The most authoritative piece of work on this topic that I know of comes from Harvard International financial law specialist Hal Scott. The paper was written back in 1998, and was provocatively entitled “When the Euro Falls Apart“. Despite the title the paper is a tightly reasoned piece of work whose main conclusion is that not only is euro-exit technically perfectly feasibe, in fact the mechanisms which would make this possible were incorporated from the start (in particular keeping independent central banks with their own reserves). I think those who were able to think clearly back then – and were able to use some emotional intelligence – were always aware that there were question marks over Italy’s ability to go the distance.

So the problem is not a technical one. But as John Kay indicates it *is* a political one:
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Italian Elections, Now The Serious Part Starts

At the time of writing Berlusconi is still filibustering, but it seems to be simply that, rather than any serious attempt to derail the outcome of the electoral process. Meantime the financial markets are adapting themselves to the new reality.

I too am gearing myself up for what looks like being a very bumpy ride ahead. I have dusted off some of the rust from an old weblog I used to maintain – Italian Economy Watch. Many of the posts I have been putting up are simply recycled versions of material which has appeared here at Afoe, but it does at least serve the useful purpose of keeping all the posts tidily in one place. Recent posts include The Future Of Italy’s Young, Addio, Dolce Vita, Or Twilight of the Idols?, Italy Had Zero GDP Growth In 2005, Les Jeux Sont Faits, and The Italian Government Has A New Crisis.

But talking of new crisises, I fear Italy has a pretty old one (puns intended), and the ratings agencies are only just starting to get their minds round the problem.
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Italian Elections: Still too close to call.

With respect to the Italian elections, there’s still only one thing certain – it’s going to be a long night, and, possibly, not the last one. There have apparently been, if my rudimentary understanding of Italian news broadcaster Rai News 24 is correct, unjustified delays in data processing. Thus, given the closeness of the race between the center-left and center-right coalitions, Italian expatriats may be the ones who cast the decisive votes for both lower and upper chambers of the Italian Parliament, since a law, introduced in 2001 formed four “overseas constituencies.” They will, accordingly, choose 12 of the 630 MPS in the lower, and six of the the 315 senators in the upper house.

So, instead of news, just some more context. At wwitv.com you can find a whole page full of web streams provided by Italian tv stations. Electionresources.com features a long explanation of the Italian electoral systems, both old and new. As the author, Manuel Álvarez-Rivera explains, the system has been altered in numerous ways for this election –

It is widely anticipated that in the event of an Unione victory under the new PR systems, the resulting center-left majorities in both houses of Parliament would be considerably smaller than under the previous systems, and the leader of the Unione, former Prime Minister (and former President of the European Commission) Romano Prodi has promised to undo the changes if the center-left returns to power in this year’s elections.

Finally, here’s the google-translated election website provided by Italy’s interior ministery, which, hopefully, is, where you can find the eventual election results as soon as they are released officially.