Public administration and judicial reforms would support investment and raise productivity growth
Tony Barber
Earlier this month, Italy’s national statistics agency estimated that 1.8m households were living in “absolute poverty”. These families accounted for about 5m people, or 8.4 per cent of the population.
One can quibble about how European definitions of poverty compare with those used in less prosperous parts of the world. But Italy is a country where average wages are stagnant, some public services are crumbling and per capita income slips year after year behind that of its western European neighbours.
Next to this unhappy picture is another, more dynamic side to Italy. It helps to explain why, despite routine predictions that Italy will fall into extreme crisis, the country never actually slides over the edge.
Net of energy, of which Italy is a large importer, the national trade surplus rose last year to 4.6 per cent of annual economic output from 1.4 per cent in 2010. The trade figures mainly reflect the exporting prowess of northern Italian industry. This part of the economy boasts world-class companies and delivers, for the most part, a high quality of life for the region’s inhabitants.
Yet even this success story cannot suppress rising apprehensiveness in financial markets, EU capitals and Italian circles critical of the unconventional, populist coalition government that took power just over a year ago. The primary focus of concern is Matteo Salvini, deputy prime minister and leader of the hard-right, anti-immigration League, which after its victory in the European Parliament elections is indisputably Italy’s dominant political party.
Mr Salvini delights in cocking a snook at Brussels. He scorns the eurozone’s budget deficit rules and vows repeatedly to ignore or overturn them. He refuses to drop the League’s interest in small-denomination bonds called mini-BoTs which, if ever they were introduced, might look suspiciously like an attempt to prepare Italy’s exit from Europe’s currency union.
But just as Italy repeatedly defies forecasts of imminent doom, so Mr Salvini is unlikely to turn into the demon of the EU’s nightmares. In any case, Italy’s problems have such deep roots, culturally and institutionally, that it is misleading to concentrate on the policies and pronouncements, no matter how provocative, of one politician.
Tommaso Padoa-Schioppa, the late central banker and economist, had some excellent insights on this second point. He once remarked that, to overcome its woes, Italy might wish to adopt either free-market Thatcherism or the state-directed economic policies associated with Jean-Baptiste Colbert, Louis XIV’s finance minister. But Thatcherism was ruled out because Italian politicians lacked the courage to carry out such policies against bitter opposition. Colbertism was ruled out because the Italian state was too inefficient.
Since the return of democracy after the second world war, the weakness of the Italian state has taken some bizarre forms. Tax collection in Sicily was rarely more efficient than in the period up to 1984 when it was run by a firm controlled by the Salvo cousins, members of a mafia family. They took a 10 per cent commission and paid bribes to politicians to keep the contract. Eventually they were brought to account, but Sicilian tax revenues collapsed after the state resumed control.
Under a charitable interpretation, Mr Salvini has not held power long enough to be judged on whether he is capable of improving the state’s efficiency. But as with all Italian politicians, there are grounds for doubt. In its latest economic survey of Italy, the OECD urged reforms of the public administration and justice system, saying these would have the greatest impact of all its proposals because they would strengthen the rule of law, support investment and raise productivity growth.
The evidence of Mr Salvini’s year in office suggests that his priorities lie elsewhere, in consolidating his mastery of the right wing of the Italian political spectrum and in maximising his influence on the EU stage. To achieve the first end, he needs to complete the task of driving a stake into the heart of Forza Italia, the once all-conquering party of former premier Silvio Berlusconi.
To fulfil his second goal, Mr Salvini needs to earn a certain respectability in the EU’s halls of power. This may seem an outlandish prospect, but there is a precedent. Gianfranco Fini, Mr Berlusconi’s deputy prime minister, led a party with neo-fascist roots, but he moved decisively to the centre right under the influence of moderate European politicians he met in Brussels.
The possibility that Mr Salvini will travel the same road may be one reason why the European Commission, guardian of the eurozone’s fiscal rules, is signalling its reluctance to pick a fight with Rome over Italy’s debt. It calculates that, as happened last year, financial markets can exert the discipline needed to keep the populist government’s fiscal stance in check. Before the League and the anti-establishment Five Star took office, Italy’s borrowing costs were similar to Spain’s but the spread on 10-year government bonds has widened.
Italy’s difficulties are a slow-burning fuse, set alight decades ago, rather than an act of arson by its present rulers.
Encouraged in a pragmatic direction by Brussels and by the League’s northern Italian business allies, Mr Salvini may turn out to be less threatening to the EU political and economic order than his rhetoric suggests.
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