Entitled to Fail: Inside Italy’s Downward Spiral

Entitled to Fail: Inside Italy’s Downward Spiral

October 15, 2011, was the day when recent Italian history changed course. After twenty years of Berlusconian torpor, Italians staged a large demonstration in Rome to voice their woes. It was not so much the “bunga bunga” sex scandals as the tangible perception of financial distress that drove citizens into the streets. Of course, there had been similar events previously in the Eternal City, most notably a recurring “No Berlusconi Day,” but none had had such broad participation. There were families, youngsters, pensioners, blue and white collars, union representatives and entrepreneurs, all chanting and yelling. There were also some who wore black helmets and marched in columns, and some parading with a different uniform of hood and a scarf covering the face. It was just a minority, yet it was motivated enough to turn the half-million-people march into a long afternoon of urban warfare. A Carabinieri (military police) van burst to flames, as paving stones rained on police units. Seventy people had to be treated in the hospital. Television viewers were shocked at the Felliniesque image of a boy carrying a woman in his arms, then throwing her to the ground and kicking her head. It was a statue of the Holy Mary, stolen from a nearby church, and it broke into pieces under his assault.

Berlusconi resigned a month later and was succeeded by Mario Monti, a former EU commissioner and an academic, who formed a governmental cabinet with a large presence of professors and experts, something more common in the US than in Italy, where top ministerial spots are often occupied by people with no college degree, and sometimes no track record whatsoever. The watchword of the country became “reform,” but it was spoken against a dangerous backdrop: the last political murders of reformers had been perpetrated as recently as 1999 and 2002, when labor laws experts Massimo D’Antona and Marco Biagi were shot in Rome and Bologna.

Nevertheless, Italians were well aware of the dire straits in which their country found itself. There was some sentiment that Monti should not only reorganize the budget, but even leverage the occasion to lay the foundation of a “Third Republic” in the Gaullist tradition. Established parties had not been able to cope with Italy’s traditional problems of high debt and slow growth, and the feeling was that Berlusconi’s personalist policies had brought traditional party structures to such collapse that Italy had to be “reinstitutionalized.”

Italy’s economic performance had been grim for a long time. The country had not benefited from the pre-crisis expansion as other industrialized countries did. Between 1991 and 2000, in those “Roaring Nineties” celebrated by economist Joseph Stiglitz, Italy’s GDP increased a mere fifteen percent: below France (twenty percent), Germany (seventeen), Spain (twenty-nine), the UK (thirty), and the US (forty). The following decade was even grimmer, with a mere one percent growth from 2001 to 2010, again the worst among industrialized nations. Also, the economic synergy with Germany, the largest EU economy, seemed broken. Traditionally, a German recovery will aid an Italian one, as companies from Bavaria and Baden-Württemberg order components from Italy to produce complex final goods such as cars or home appliances. But the correlation was weaker than in previous recoveries, primarily because many Germany companies were now opting for Asian suppliers.

Not surprisingly, these economic conditions led to the unsustainability of the monster public debt, swollen to one hundred and twenty percent of the GDP. When it was first introduced, the euro had lent Italy financial credibility, yet the advantage was not used for reforms or to quell the debt itself, but on lavish public programs to buy a popular consensus. Between 2000 and 2006, when Berlusconi’s “neoliberals” were in power, public expenditures grew a staggering twenty-one percent in real terms, reaching forty-four percent of the GDP (up from 39.5 percent in 2000). It is now floating at around 720 billion euros, still representing a similar percentage of the GDP.

Over the last couple of years, people have blamed Italy’s woes on the euro, on Germany, on Berlusconi. Yet state budgets and spending habits were simply at odds with reality.

As the smoke created by Berlusconi’s long tenure began to clear, it became obvious that Italy was paying for having disregarded the role of private companies in sustaining the economy. In the postwar surge that transformed the Italian economy in the space of two decades, the boom was primarily the result of low-cost productive factors (especially in labor) and to the creativity of small and medium enterprises (SMEs) working at the border between technology and craftsmanship.

Yet the system never really evolved. Smaller companies never got larger, and some larger ones collapsed. The biggest Italian enterprise today is state-owned Eni (oil and gas), twenty-third-largest in the world. Far below banks, insurance companies, and other state enterprises, the largest privately held Italian business is automaker FIAT, eighty-third in the world. There are only twenty-two Italian companies with revenue above 3 billion euros ($3.93 billion), whereas in Germany there are one hundred and fifty. It seems, therefore, that Italy relies on business structure way too fragmented for an economy its size—still the eighth in the world in terms of GDP

This lack of industrial heavyweights prevented Italy from designing strategies that would give it a robust role in the post-1991 global economy. Smaller companies lack enough resources to invest in research and the scale of production that drives costs down. Italy lags behind the rest of Western Europe in industrial patents registered per year, and has been also remarkably late in getting a foothold in the developing economies of the East. Italy’s investments in China in 2009 have been 0.35 billion dollars, whereas France and Germany invested respectively 0.65 and 1.22 billion. It is no surprise that the Italian market has been overwhelmed by Chinese exports, without having been able to counter the flood.

Moreover, in recent years, many famous Italian brands have been gobbled up by other nations. Such has been the case of Bulgari (Louis Vuitton, France), Gucci (Pinault-Printemps, France), Valentino (Permira, GB), Ferrè (Paris Group, Dubai), Safilo (Hai Holding, Netherlands), Ducati (Audi, Germany). Meanwhile, brands from abroad have set up shop in the city outskirts of Italy, if not in the historical centers, doing the good business that is no longer possible for indigenous companies.

In this regard, the invasion of IKEA (Sweden) has had a significant impact, as have the electronics brand Media Markt-Saturn (Germany), the clothing and accessories brands Zara (Spain) and H&M (Sweden), and the food markets Auchan and Carrefour (both French).

It is exactly these problems that Monti, the archetypal technocrat, was summoned to solve. The first and most profound issue facing him was obvious: lack of growth in both GDP and size of companies. But even more significant than this long-range problem was the more immediate need simply to save the country from bankruptcy, and possibly avoid full-blown revolutionary outbursts growing out of that Roman spark of October 2011. Normally, buttressing public finances in the short term requires budget cuts or tax increases, and Italian governments opted mostly for the latter. The combined bills passed by Berlusconi in 2011 and later by Monti to create solvency totaled 48 billion euros in 2012 ($62.8 billion), with official forecasts stating that 79.5 percent of the sum will be represented by additional taxes; 81 billion euros ($106.1 billion) will be required by 2014, and then will become permanent.

No wonder the national media stress the importance of waging a war on “tax evasion.” Indeed, every year, some 180 billion euros ($235.7 billion) escape the tax man. Yet if all this money were recovered, the actual tax burden in Italy would reach 53.7 percent, making it the second most tax intensive country in the world—after Oceania’s Kiribati Islands.

The decision of the Monti government to increase taxation instead of cutting state expenses was the result of fears about social stability. Yet such an increase also drastically reduces disposable income. The average annual salary of Italians is 29,653 euros, but by the time taxes have been collected it has been reduced to a mere 19,171 euros ($25,140). Moreover, labor participation is very low: for every one hundred people who work, one hundred and eleven do not, compared to seventy-six in Germany, eighty-five in France, and fifty-four in the Netherlands. There are two basic reasons for this disturbing statistic: in Italy, few women and few people from the south (compared to the north) have a job; and there are an estimated two million “Neet” youngsters (“Not in employment, education, or training”).

The few working people have to bear an unreasonably high fiscal burden to sustain Roman rentiers and the welfare state. The average yearly hours worked by the ostensibly “lazy” lovers of espresso is some seventeen hundred and eleven, whereas for their opposite numbers in allegedly work-crazed Germany it is only fourteen hundred and nineteen.

Nor are taxes the end of the story. Labor regulations not only fail to support business, they are actively hostile to its success. The labyrinthine legal system allows a worker to be laid off only after very complex and expensive proceedings with some cases taking a decade of litigation to resolve. Whether or not a business is profitable is not recognized as a “fair” ground for layoffs. If the employee wins, he is granted a retroactive salary for the whole period of judicial proceedings and may demand to be hired back.

Such labor regulation applies to companies with more than fifteen employees, and many observers believe this to be the most decisive reason why Italian businesses are so tiny. Yet a set of labor reforms introduced since Monti’s arrival has been criticized as being “the same as before, or even less clear.”

In addition to the “protected” laborers, there are also 2.8 million people hired through a set of “temporary contracts” who have no guarantees. These “light” contracts initially applied primarily to younger people presumably learning an occupation or providing freelance services, but they have evolved into a common way to bypass onerous labor relations. Of course, temporary workers do not enjoy any investment in training, and do not follow defined career development plans. The uneasy coexistence of over-protected and temporary workers was a target of Monti’s early efforts at reform, but so far little has been accomplished.

Those labor reforms that have been instituted, moreover, do not apply to state employees in Italy. The older system has been kept alive for ministerial workers and their peers, whereas private employees will face the uncertainty of the new regulations. The group of some 3.4 million public servants of Italy (or 13.5 percent of the workforce) always seems to find a way to keep its privileges.

It is also true that little has been done to dismantle the power of a set of “corporations” introduced under fascism. These are nineteen self-regulating “clubs” from different professions, ranging from journalism to architecture. In most cases, access to the profession is granted after a couple of years of “practice,” at no wages or at very low salary, and a state exam. These corporations are intended to guarantee professional quality and ethics, yet often end up merely restricting competition.

The final element in this byzantine labor situation concerns politics and the politicians’ protected role. The nine hundred and forty-five Italian MPs earn an astonishing 192,000 euros per year ($252,000) in salary and benefits. In the midst of the country’s financial agonies, parliamentarians are fighting to preserve a generous retirement plan that grants a pension of 36,000 euros ($47,000) per year after two and a half years of service. A commission was nominated by Monti to study the salary situation, but its chairman, the president of the Italian Statistical Institute, Enrico Giovannini, resigned from the task after a few weeks because it was “too hard to collect data.”

Politicians in Italy also enjoy other financial benefits such as “electoral reimbursement.” Unlike in the US, Italian political parties are granted public money based on the votes they receive; from 1994 to today, such payments total 2.7 billion euros ($3.6 billion).

Moreover, access to politics is strictly controlled by a Soviet-style electoral system where citizens can only vote for party lists, determined by party heads, rather than for individual candidates. This structure guarantees the permanence in power of a cluster of politicians belonging to parties that have been largely “institutionalized.” The parties control some five thousand state-owned companies, employing 1.17 million people, added to the 3.4 million public servants already mentioned. A vigorous “spoils system” that allows politicians to place pals and relatives in power positions creates a safety belt around members of the political caste.

Given such an impenetrable political bureaucracy, it is no surpise that “anti-political” political movements are gaining momentum. Italy hosts some small radical nationalist movements like those in Hungary and Scandinavia, yet the most robust new development is represented by citizens’ groups such as Movimento Cinque Stelle (“Five Star Movement”), led by former stand-up comedian Beppe Grillo, initiator of the two-million- strong national demonstration “Fuck-off Day” in 2008 and now polling at ten percent. Among other things, Grillo proposes to reduce politicians’ benefits and break some state monopolies.

It so far seems to many Italians that sacrifices have been asked of those people not belonging to particular organized groups, whereas members of organizations—notaries or millionaire politicians—have not been asked to sacrifice. The average Italian has had to swallow higher taxes, a later retirement age, and new levies on gas. (A gallon of regular in Italy costs around $9.50, sixty percent of which goes to taxes.) Interestingly, in a country plagued by low domestic demand and fears of inflation, the government might also decide to increase the value-added tax by two percent, to twenty-three percent, by October 2012, compared to a EU average of just under twenty-one percent.

The closed nature of interest groups leads to the conclusion that Berlusconi’s sultanic reign brought about a deinstitutionalization that somehow made Italy slip into a form of post-democratic pretorianism. The role of Monti, in this sense, has not been that of reformer. He is no de Gaulle; he has no military behind him, no coalitions and no party. He has been called to the job merely to redistribute power in the post-Berlusconi era. His role so far has not been that of a real reformist politician, bearing the burden of decisions whose political cost would have been too heavy for the parties: higher taxes and fewer benefits for the people. He promotes austerity above reforms to please a country—Germany—whose success was first based on reforms and later on austerity.

Italians have accepted a suspension of normal democratic proceedings because they expect reforms that will introduce the innovations that the country had been needing for too long. Monti’s government has ended up as a virtual “conservative coup” serving the needs of organized interests. Cult professor and polemist Giulio Sapelli, a sort of Italian Christopher Hitchens, even compared the nomination of Monti in a recent book to the instauration of a Roman dictatorship.

Financial stability has not been earned, only bought. The level of taxation in Italy is the equivalent of a “white default”; instead of declaring an official default on the state accounts, the choice has been to depress economic activity through higher taxes, in order to save fiscal income and feed state accounts. The GDP is receding (–1.9 percent in 2012). In the first trimester of 2012 alone, 146,368 businesses shut down for good, marking a four-year high. Manufacturing is still declining, and unemployment is approaching ten percent.

The current caretaker government may serve short-term needs (and interests), but is no recipe for a longer-term growth. Younger people in particular see little hope for the future. The new generation is not being groomed for business activity: the consequences of a thirty-one percent unemployment rate for people between the ages of fifteen and twenty-four will be felt for a long time. Only nineteen of every one hundred Italians between the ages of twenty-five and thirty-four have a college degree. (No Italian university made it into the top two hundred of last year’s Times Higher Education ranking of the best universities in the world.) Temporary work contracts do not create full-fledged professionals, only zombie survivors of the workplace.

Italians would actually enjoy having access to real political representation, but the way power has been clustered has made this almost impossible. During the Monti political regency, the crisis has taken a grim personal turn. On May 4, 2012, a march was held in Bologna by the widows of the some seventy Italian entrepreneurs who have committed suicide since the beginning of the year. The leader is Tiziana Marrone, whose husband Giuseppe Campaniello set himself on fire last March in front of an office of the Italian Revenue Agency. This time it was not a statue, but a man’s life breaking into pieces on a street.

Once again in Italy’s history, the state risks being seen as the enemy. The rising populist movements now target politicians, and could soon target institutions. And those who resort to populism often end up backing violence.

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