The Time is Up for Italy’s Social Contract

To move forward, Italy needs to abandon its entitlement mentality

Most of Europe adopted a post-war social contract; it survived for around 50 years until the Global Financial Crisis exposed its bankruptcy.

Broadly speaking the compact – based on government sponsored wealth redistribution – promised full employment, with generous welfare and pensions. Henceforth prosperity would be shared. A burgeoning middle class became the defining demographic trend.

Different European countries varied the mix to suit their own purposes. Italy introduced its welfare state later than others. Its model relied more on rigid job protection; early retirement on generous pensions would create new work opportunities.

The European compact was supported by the post-war reconstruction boom and rapid ‘consumerisation’. Domestic industry protection policies and lack of external competition from the Eastern bloc, China and India – none of which had emerged as economic forces – were contributing factors.

As birthrates fell and the population aged, as Europe became more integrated and as globalization replaced protection and the emerging economies became major market players, the income and expenditure gap in the public finances grew. It was propped up with borrowings. When the US financial system collapsed, Italy and most of Europe was in deficit and borrowed heavily – it was in no position to withstand the shock.

The four years since the collapse of Lehmann Brothers have seen most countries grappling with policies designed to deal with mass unemployment, structural deficits, debt overload and reduced asset values. History will judge whether the perceived wisdom of austerity coupled with next to zero interest rates has been the appropriate response.

Boom Times Over

What does seem clear is that the boom times are over, perhaps for a long time, and with that the ability to fund a continuation of the social contract. Entitlements expected by the current generation, in terms of employment security and retirement, will have to be renegotiated.

The money simply is not there. The credit card is full. The bank is saying no more credit increases. Worse, the excesses of the last decade or so have to be repaid.

Although this is a Europe-wide problem it has different focuses. Germany, the strong man, is seeking to call the shots. France has elected a socialist government in an effort to shift the emphasis. Greece and Spain are agreeing to be squeezed in an attempt to survive. The UK wants to renegotiate EU membership.

Italy? Well, Italy is having an election. What will happen in Italy? Barring complete fragmentation this election will likely determine Italy’s response to the Financial Crisis for the next four or five years; domestic policy will be the key to the success or failure of Italy.

Time to Reject the Entitlement Mentality

Is it possible Italians might see it that way? The right choices are not easy. The right choices involve rejecting the entitlement mentality that came with the social contract. They involve electing a government that will oversee a transition from a handout culture to one that is more entrepreneurial. Substituting the role of government with the efforts of the individual.

A revolution is not wanted or needed, and will not happen, but Italy should be looking at progressive changes at the margins that, over time, will move the country towards accepting a different mindset.

Italians will need to trust leadership. The German solution is questionable. Time is too short for the results of the French experiment to emerge. Equally, the adoption by the United States of President Obama’s collectivist solution will not produce results for some time either. However, there should be little doubt that weaning America from its constitutionally inspired liberties and freedoms to the corruption of ‘we’re stronger when we’re all in this together’ welfare state will not produce job growth, deficit reduction and debt management.

President Obama’s legacy will be having seen the destruction of the US dollar on his watch. Debasement of a nation’s currency for domestic purposes will not fly in the face of the growth being produced by the emerging economies. American hegemony is in the process of being surrendered. The process will be accelerated by a revival in Europe.

Hard Choices for Italy

A revival in Europe can be advanced by Italy making hard choices. By helping itself Italy will be showing Europe the way. If the third largest economy in the Eurozone can be liberated and shift to a growth path it will be a living example of how policy can be tuned to reduce dependence and promote growth and jobs.

For their part the markets need to be confident there is a plan. With the right policy mix Italy has the credibility to make the objective of a return to plus 3% growth level realistic.

Growth above 3% will create jobs, cut welfare, bring in tax revenue, reduce the deficit and ultimately repay debt. The markets will support such policies. The bonus will be the improved competitiveness against the other Euro economies.

Italy’s future can be bright. It needs Italians to understand that the days of the social compact as they knew it are over. That will first require a political leader who is brave enough to tell the story.

Who will stand up?

By Ex-Australian Politician Stephen Lusher

Stephen Lusher

Stephen Lusher served five terms in the Australian Federal Parliament. He worked around the fringes of politics before setting up Lush on Bondi, a trendy bar on Sydney’s Bondi Beach.

Frequent trips to Italy led to an inevitable love affair with Tuscany. He and his wife Cathy sold up in Sydney and purchased Il Mulinaccio in 2008.

Within two months of moving to the Chianti Hills he was diagnosed with throat cancer. The experience led to him re-focusing his life and priorities. After a few uncomfortable years he thinks he has it beaten.

Stephen’s interests include wine, food, history, culture and travel.

He struggles with the Italian language and indulges himself in some occasional writing.