The End of the Dolce Vita?

Are the good times and the good life still going to continue to roll in the Italy of the twenty first century? This is the core question the Economist’s Europe editor John Peet asks in the latest Economist Survey: Italy, Addio, Dolce Vita. As Peet says:

Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today’s Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.

Now I have often waxed hard and long on this situation (you can find some examples here, and here) so I will restrict myself now to highlighting some of the points made in the survey.

Demographics

To cap it all, Italy’s demographics look terrible. The country has one of the lowest birth rates in western Europe, at an average of 1.3 children per woman, and the population is now shrinking; yet Italians are living ever longer, so it is also ageing rapidly. The economic consequences—too many pensioners, not enough workers to maintain them—are worrying enough on their own. What makes them worse is Italians’ low rate of participation in work. Only 57% of those in the 15-64 age range are in employment, the smallest proportion in western Europe. Germany, by comparison, has an employment rate of 66%, and Britain one of 73%. Although overall unemployment in Italy is not too bad by west European standards, it is disturbingly high among the young and in the south.

Not only does Italy have an incredibly low birth rate, it also has a very high life expectancy of 79.68 years and it is the combination of the two which produces the lethal cocktail. To cap it all, as Peet notes, participation rates are very, very low for the working age population, and the skill profile is not changing rapidly enough to meet the needs of a changing global market. Net result: productivity has been going down in Italy.

Productivity and Product Profile

As I have just said, Italy is struggling to keep pace with change, and with a rapidly ageing population this may only get worse:

Italian companies, especially the small, family-owned firms that have been the backbone of the economy, are under ever-increasing pressure. Costs have risen, but productivity has remained flat or even declined. Membership of the euro, Europe’s single currency, now rules out devaluation, which for many years acted as a safety-valve for Italian business. Italy’s competitiveness is deteriorating fast, and its shares of world exports and foreign direct investment are very low. The World Economic Forum in its annual competitiveness league table recently ranked the country a humiliating 47th, just above Botswana. The economy has also proved highly vulnerable to Asian competition, because so many small Italian firms specialise in such areas as textiles, shoes, furniture and white goods, which are taking the brunt of China’s export assault.

The Berlusconi factor:

The Economist’s view of Mr Berlusconi is well known. We declared in April 2001 that he was unfit to lead Italy, because of the morass of legal cases brought against him at various stages of his business career and because of the conflicts of interest inherent in his ownership of Italy’s three main private television channels. Almost five years on, he still faces legal problems (of which more later), and he has done little to resolve his conflicts of interest: indeed, because the government owns RAI, the state broadcaster, Mr Berlusconi now controls or influences some 90% of Italian terrestrial television (which does not stop him complaining about his critics on TV). Our verdict of April 2001 stands.

The most recent clear example of what the Economist is talking about here comes from the area of pension reform. Italy badly needs to reform its pension system, but Berlusconi and his government allies have been haggling over the details of this for some years now. Last week the Italian government finally decided to delay the launch of its private pension reform by two years, by taking the decision to implement the reform in 2008 rather the originally planned 2006. As many cynics might note, this is conveniently after the forthcoming general election next spring. The reform also was intended to raise the retirement rate for government employees from 57 to 60. This gives a measure of the extent of the problem. The UK and Germany are both currently discussing raising retirement ages to at least 67.

And it isn’t only the Economist that is worried, the Financial Times last week had the following about the difficulties the pension reform and

With parliament only weeks away from dissolution ahead of next April’s national election, businessmen, economists and some politicians are worried the infighting will not be solved quickly enough to ensure the measures come into effect.

The reforms concern Italys bulky state pension system and its weak regulatory system for financial markets. If the measures collapse, it will be hard for Mr Berlusconi to point to a single piece of serious structural economic reform, apart from some changes to the labour market, that his government has passed in almost five years in power.

Is it purely a coincidence the FT asks, that the main opposition to the pension reform is coming from the insurance sector, a sector where Mr Berlusconi himself is not without interests.

Some of the loudest opponents of the pension reform are in Italys insurance industry, which complains that the measure discriminates against them. As it happens, Mr Berlusconis business empire includes a significant minority stake in Mediolanum, one of Italys biggest insurers and fund managers.

Unfortunately the Survey as a whole is subscription only. There is however an audio summary, and the list of background reading is itself interesting.

5 thoughts on “The End of the Dolce Vita?

  1. Isn’t this the opportune moment for action, all according to the model prescriptions of the Third Way?

    Any news yet of Tony Blair taking the initiative during the UK’s presidency of the EU to promote a coalition of the willing to bring about a regime change?

  2. “Any news yet of Tony Blair taking the initiative during the UK’s presidency of the EU to promote a coalition of the willing to bring about a regime change?”

    Your cynicism Bob doesn’t surprise me, although Prodi – who is a third way person – will probably be back after the election.

    He will probably be the ‘scrificial lamb’, holding the fort while “the boys from wherever it is” do what I am now convinced they have decided to do: default.

    In this Prodi is set to become Italy’s De La Rua (Argentina) exhorting his fellow citizens to make all kinds of sacrifices to try and stop the inevitable snap in the elastic.

    What surprises me is the lack of interest this topic seems to generate. Everyone seems to be willing to go in for all kinds of wild speculation about a possible dollar collapse on the back of Chinsese trade (which, IMHO, is highly improbable), but people don’t seem to see the danger under their noses. If there is major financial termoil, it will start in Italy. It is by far the wekest economy of the big problem three (Japan, Germany, Italy), yet, via the impact on eurozone financial markets any big crisis in Italy will rapidly travel the globe.

  3. A very elaborate post Edward that shows very well the problems and issues Italy as a country and society faces … If I was to add something that also serves as nail in the coffin of italy’s politics it would the recent bank scandal with the central bank director Antonio Fazio

    http://clausvistesen.squarespace.com/alphasources-blog/2005/9/25/siniscalco-goes-fazio-stays-why.html

    See also these articles from the Economist

    http://www.economist.com/agenda/displayStory.cfm?Story_id=S%27%28X%24%2FQQ%3F%2B%21P%20L

    http://www.economist.com/agenda/displayStory.cfm?Story_id=S%27%28X%24%2ARA%27%21%23P%20L

    http://www.economist.com/agenda/displayStory.cfm?story_id=4424836

    Cheers

    Claus Vistesen

  4. “as well as an attempt to eradicate the flourishing black-market..”

    This raises an interesting question, since my impression here in Spain is that the continuing inflation and thus continuining declining price competitiveness is serving to drive a lot more economic activity into the ‘underground’ sector. The large numbers of ‘irregular immigrants’ arriving is a reflection of this. Something similar seems to have been happening in Italy.

    So Trichet needs to consider the point that – in the Mediterranean world at least – raising rates, rather than producing the desired structural reforms may rather produce some undesired ones, like an increasing component of GDP being unrecorded.