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Grim News For Italy

Heading in a better direction?

It’s a grim Monday morning here in Milan, Italy. Matching the grim weather is Italy’s news.

Italy’s under 35s are having terrible problems finding jobs.  Businesses are shutting down right, left and centre.  Consumption is falling, and prices, including fuel costs, are rising.  Fewer Italians are buying new cars.  The property market is suffering and the banks are highly reluctant to do much lending.  Taxes, as ever in Italy, are crippling.  Red tape continues to tie everyone in knots.  Corruption and organised crime continue to hang over Italy like a huge dark shadow.  As Rome based reader Terry quite rightly pointed out in his comment, also hindering Italy’s growth is clientelism which is another massive problem for Italy.

Then there is the warped way in which business is conducted in Italy.  Here is but one example of many from the Wall Street Journal: Deal Making, Italian Style, which illustrates how clientelism works.

The Old Guard is Winning

The Mario Monti led government appears to be having huge problems removing the vice like grip of Italy’s super-clique, the “salotto buono” and all the other odd little cliques, from Italy’s innards.   As a consequence, few constructive reforms are being pushed through Italy’s eternally bickering clientelism-ridden parliament.

The reforms so far, if that’s what they can be called, seem to be pushing the cost of living up to stratospheric levels.   About the only ray of light on the horizon for Italy is that more teachers are to be taken on, maybe.  While education is one answer to Italy’s woes, its effects will not be immediate.  Nor is there any guarantee that the quality of education in Italy will improve simply because there are more teachers.

As for attempting to sort out Italy’s flawed political system, forget it.  Monti is going nowhere fast on that front.

Growth: Mission Impossible?

Now, Monti and his team of technocrats are turning their efforts to the subject of growth.  The trouble is, Italy is rather short of cash, so finding the resources needed to stimulate growth is not going to prove easy.  Indeed, it may prove impossible.

Monti would like to encourage foreign businesses to invest in Italy, but taxes which are some of the highest in the world, combined with a snails pace slow legal system, corruption, and employment legislation which does not permit businesses to adapt to market conditions, all add up to make Italy a very unappetizing proposition for any foreign investor.  In actual fact, Italy has been a wholly unappetizing proposition for foreign investors for many a year.

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A few quick calculations will convince investors to look elsewhere – to nations where employees are not cosseted by an over-protective system and its odd Article 18 provision that stifles Italy, for example.   Austria does not have an Article 18, so investors may head there.

In Italy when the market shrinks, businesses do not downsize to weather the economic storm, they simply close.  Many more people than need to be end up unemployed as a result.  Such is the, defective, Italian way.

Italy Cannot Afford Tax Cuts

Tax cuts are being talked about, but the truth is, Italy cannot afford to lower taxes, at least not until the nation’s huge public debt has been brought under control.

An attempt to tax fizzy drinks, probably with the intention of using the income to lower direct taxes, fizzled out.  Italy’s fizzy drinks makers pointed out that the proposed tax was likely to do more harm than good and lead to a loss of jobs.

Indirect taxes will only work for Italy if direct taxes are cut.  But before the direct taxes can be cut, complex calculations need to be performed to assess the costs and benefits.  In the case of the fizzy drinks debacle, it sounds very much as if someone either messed up the calculations, or did not do them properly.  So much for technocrat expertise.

Catch 22?

To bring down Italy’s public debt, the economy needs to achieve an annual growth rate of more than 3%.  However tax rises, while potentially reducing Italy’s public debt, will not stimulate growth, and are not doing so.  In fact, the opposite is happening.  Italy’s economy is contracting by the day.  Businesses are not opening, they are closing.

No work, means no money which in turn leads to falling consumption.  Lower consumption means no growth, or recession.  Yes, it’s that bleak.

A Solution

How can Italy save its economic skin?  Well, one answer might be to ‘switch-off’ the over protective Article 18 employment legislation for five years or so and see how things work out.  This would be a risk and it would cause uproar, but it might kick-start Italy’s flagging economy.  Deactivating Article 18 would make Italy much more appetizing for foreign investors too.

Silvio Berlusconi really did leave Italy in a complete and utter mess.  Such is the mess, some are even questioning whether ‘la dolce vita’ still exists.

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