Rosemary Righter: Economic view
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Events, dear boy, events. Europeans went on holiday this year more cheerful about their economic prospects than some of them had been for years. With luck, they are reading Harry Potter on the beach, not the financial pages of their newspapers. Consumer confidence is a creature with a fragile digestion, calculated to be upset by plunging stock markets and emergency injections of liquidity by central banks. The Ode to Joy has abruptly been replaced by Noël Coward: “There are bad times just around the corner, And the outlook is absolutely vile . . .”
In the calm of a sustained global boom, it has been too easily assumed that, particularly in Germany, Europe’s return to healthy growth is reform-driven and therefore durable, rather than merely cyclical. Whether the European Central Bank’s unaccustomed activism was needed to calm financial market jitters, or was over the top and panic-inducing, the robustness of the eurozone’s vaunted recovery may now face its first serious test.
Italy, the weakest link in the euro-chain, is on course to fail that test. The Mad Hatter’s tea party that passes for Italy’s Government has blown the opportunity to get its house in better financial order while the good times lasted, demonstrating yet again that self-preservation is the only game that Italy’s venal politicians play well. That ought to concern the ECB as much as the sub-prime fallout: Italy’s profligacy is no longer only Italy’s business.
Luck attended the birth of the Prodi coalition just over a year ago. After five static years, growth had picked up along with business confidence and export orders — not least from Germany, Italy’s biggest market. Tax revenues in 2006 unexpectedly surged by € 6.5 billion, a windfall that Italy’s two most credible public figures, the Bank of Italy Governor Mario Draghi and Tommaso Padoa-Schioppa, the Economy Minister, insisted should go on trimming Italy’s monstrous public debt, currently 107 per cent of GDP. Unemployment had dropped to about 6.4 per cent (although in Italy, where 27 per cent of economic activity is “underground”, official employment statistics are pretty meaningless).
Best of all, although voters had rightly punished the outgoing Berlusconi Government for doing too little, two of its braver reforms made the Centre Left’s task easier.
The first, known as the Biagi law in honour of a reformer murdered by the Red Brigades, had liberalised the job market by easing absurdly rigid restrictions on flexible contracts. The second reform tackled Italy’s worst financial headache, a pension bill that absorbs a bankrupting 15.4 per cent of GDP and, with a rapidly ageing population, could equal all of Italy’s earned income by 2020. The Maroni law intended to hold spending steady by increasing the minimum retirement age from — wait for it — 57, to 60 in 2008 and 62 in 2014. Given that one Italian in five is over 80 and there are already only 1.5 adult children per retired parent, adjustment was urgent.
Romano “Mortadella” Prodi bores the Italians, but they were half convinced by his promises to close the gaping budget deficit, cut the tax burden on employers, and expand Italy’s backward services economy by ending restrictive practices in commerce and the professions. Boredom has now become infuriated contempt. The man and his minions are seen as interested in one thing only — power.
Prodi’s fractious nine-party “team” has been held hostage by the hard left fringe. He could have called the Communists’ bluff. They no more want fresh elections than he does. Instead he has appeased them; first, with a tax-and-spend first budget — predictably followed by demands for even higher public spending to “compensate” for stiffer taxes. So, in the five-year spending plan approved in June this year, he postponed half the spending cuts needed to put budgets in the black by 2011, the theoretical end of this do-nothing government’s term. Finally, in a vote of confidence this month, Parliament blew the tax windfall on € 6.5 billion of extra welfare spending.
Market and labour reforms have fared little better. The assault on restrictive practices has hit small fry — cab drivers, hairdressers, bakers — far harder than richer professions. The unions are chipping away at the Biagi employment law. And last month, in a craven deal with unions that froze out employers, the Maroni law was effectively gutted.
The minimum retirement age will now rise by only one year in 2008, to 58, and even by 2013 a 61-year-old will be able to retire on full pension. Workers with “strenuous” jobs, a category expanded on union insistence to assembly-line workers, bus drivers and even night shifts, can still draw pensions at 57. The estimated financial cost of this sell-out to the hard left is € 10 billion — 0.7 per cent of GDP — a third met by raising employers’ contributions on temporary contracts, and any shortfall, under a “safeguard clause”, by yet higher taxes. The cost in political credibility is far higher.
Never mind, there is always the Pope.
Prodi has publicly challenged the Vatican to back the Government’s blitz on tax evasion by exhorting Italians to “render unto Caesar”. Tax evasion is endemic, no question. Of Italy’s 40 million taxpayers, 10 million report less than € 6,000 a year, only 5 per cent admit to € 40,000 and a nugatory 0.8 per cent own up to more than € 100,000. The gap is at least € 100 billion a year, 7 per cent of GDP. But honesty would cost Italians serious money. Corporation taxes are 37 per cent, payroll taxes are crippling, personal taxation is punitively high, and the tax code is a monster. The obvious way to widen the tax base — and shrink the black economy — is to reduce and simplify taxes. The Prodi solution is 3,000 extra tax inspectors, and a new wealth tax that the seriously rich will avoid and the middle classes resent. At bottom, rotted politics makes for rotten taxpayers. Italians do not pay taxes because they despise the politicians who would spend their earnings. The Caste, an exposé of Italy’s parasitic and corrupt political class, is this summer’s runaway bestseller. It makes Harry Potter look tame.
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Congratulations for the perfect description of the Italian situation. Prodi is a calamity, he never did anything good in his career, neither when he was first time at the governement in Italy nor as President of the European Commission not to speak of his present position. Now he is on holyday, he could go quitely on his bycicle and eat mortadella but nothing to do he still has to speak : yesterday he said that we should dialogue with Hamas raising hell among our European partners and who knows about today ? Let's wait for tomorrow's papers.
Roberto Castellano, Salsomaggiore, Italy
This article hits the Italian situation on the head. I live in Italy and this is the opinion of most of the Italians I know. Getting power and hanging onto it seems to be the main motivation behind all political actions, and the cynical masses know this, but there is little they can do about it except vote what appears to be the least worst political party at that time â though we know deep down that theyâre all the same.
And of course the desire for power struggles with common sense, which is regularly knocked out, not necessarily in the first round, but in successive ones. And then itâs given a funeral, presided over by fine sounding words.
Basically, here everyone is out for him/her self, which is an undeniably human trait, but not to be encouraged when the different components of Europe should be working in harmony.
asora, sassari,
I'm not sure that one could sincerely ask Italians to pay their taxes to a succession of Governments that have demonstrated that they cannot use the money effectively.
Taxes that Italians do pay are not used effectively - Venice has been on the point of being saved for most of my life - and the Italian Government presides over a kleptocracy that now includes endemic corruption in EU subsidies and payments - that British taxpayers help to fund.
Italy seems to me to be stuck in a vicious cycle of its own making. Russian used to joke that "we pretend to work and they pretend to pay us". The Italians could equally well say "They pretend to govern, so we pretend to pay taxes".
And the credit markets know what's going on. Italian Euro bonds are punished by an extra yield of one third of a percent over German Euro bonds. Apparently a Euro isn't always a Euro.
jon livesey, Sunnyvale, CA/US
"But honesty would cost Italians serious money."
As a native Italian educated and industrialized in Britain and the US, this is unfortunately the brutal truth engrained deep within the Italian culture. Yes, Italian politicians are some of the most corrupt and self-preserving on earth, but that should not stop its people from living with integrity and honesty â something that must be part of the fabric of their marketplace. This is obviously lacking and hence the organic existence and growth of corruption. One only needs to visit Italy for five minutes to taste the cunning behavior of its merchants. A warm people? Absolutely! But charm can also be devious. The old Biblical term âgive to Caesar what belongs to Caesarâ is what my fellow Italians desperately need. Honesty may only look costly because theyâre not used to it.
Sal, Orange County, US
Well, reading this article makes me feel confortable to have a permanent job in London. The worst thing is pheraphs the fact that italians, the citizens, are not even trying.
Is so bad to have such a beautiful toy, that all the world evies us, and let it go in such a disruptful way.
Few things to say though.
Things to save:
the rising of an industrial social class that is independent from the politics (Geox, Ferrari, Barilla ect) and everyday fights globally (with success) nowithstanding our corrupt system and lacks of competitive infrastrucures.
Our NHS, might be creepy in the south, but is a perfect model at least in the north. (Try to cure a ski injury in London, then try in Bolzano, see the difference. And it's FREE)
Low level of indebtments among the young population. Contrarily to their American or UK peers in fact, italian ragazzi manage to finish college without student loans, and don't get hung easily on credit card spending.
Davide, London, UK
Rosemary, you're dead right as usual. I keep telling youngsters who ask me for advice to leave this corrupt country as soon as they can, they may miss something like food or weather (at times) and the small-town atmosphere that in some places like Tuscany and Umbria still attracts naive foreigners, but they won't miss everything else, and if they grow up abroad, especially in some countries, and start working abroad they'd find it impossible to go back to Italy once they get to see the primitive working mentality that prevails, the lawlessness and the abominable rest. Try telling an estate agent that you want his 3% fee to be officially registered in full and he'll kick you out of his office.
Roberto, Bologna, Italy
I'm an Italian researcher in the UK originally from Venice..
I find it disgusting that in Italy researchers earn in a month less than what a gondolier or a souvenir seller makes in half a day, with one difference....a gondolier has a special tax status, by which he does not pay taxes, the souvenir seller often simply just don't pay taxes..
Then no wonder the brain drain that is currently happening there....
Prodi to the contrary is a bit too academic for the role he has.
Luca Broggiolo, London, England
Having lived for many years in both the UK and Italy, I can tell you the difference between Italy and the UK is that common Italians have not yet been enslaved by debt and submitted into becoming worker bees for the benefit of the ruling elites, as instead is the case for possibly more than 90% of the UK population.
Alex, Munich,
The funny side of the question is that Prodi has recently declared that during his summer holidays he will read Harry Potter as well as the optimistic European cited in the article. Maybe he reckons that Italy needs a wizard for an economical turnaround.
Angelo, Perugia, Europe
It speaks volumes for Italian incompetence when one realises that for a couple of hundred pounds one can open a company in the UK, whereas in Italy a similar company would cost an entrepeneur about 13,000 euros (including the obligatory professional fees). To add insult to injury, taxes must then be prepaid based on the newly formed comapany's business plan.
Roberto Avondo, Ivrea, Italy
'Romano âMortadellaâ Prodi [â¦] and his minions are seen as interested in one thing only â power'. True enough, but all politicians are, aren't they. Yet democracy is supposed to channel this politicians' self-interest towards socially useful ends. So perhaps the real question is why democracy is working so badly in Italy.
One culprit would appear to be coalition politics, which gives such great power to small minorities. Yet this is the result of rules that could well be changed under public pressure. So at the bottom one finds irrational voting by most electors: a problem with deep cultural & historical roots, with no quick remedy. Still, things are slowly getting better. One generation ago, in 1972-73, Italy's Government was printing money to the tune of almost one third of its total expenditure, in an effort to buy social peace in the teeth of Red-Brigade terrorism rooted in the Marxist ideology then prevailing within the left.
Mario Ferretti, L'Aquila, Italy
Dear Madam,
you are right but why all the British (Economist) and European establishment was so fiercely against the Berlusconi government?
The actual situation is the result of such a policy and attitude.
Viscardo Paganelli, Rome, Italy
I am Italian, I am happy to live and work outside Italy.
From far, and not being directly involved, our politics looks funnier than the Beckhams
Davide, London, UK
Dear Rosemary Righter,
I come from Italy and live in UK for a number of years and I find your comments about Italy very offensive and discriminatory. I am surprised to see such comments in a country where equal opportunities exists.
Regards
G Gatward
G Gatward, London, UK
In Italy only Tax and Mortadella
Mario, Rome, Italy
What also drags this country down is the absence of any real competition in their markets. A great example of this is the recent withdrawal of all four investment companies who declared an interest in purchasing Alitalia. Too many clauses and interference from the government eventually scared them off. Everything is run with a closed cartell mentality, the worst case of all being the criminally run south. Even those with southern roots who've made a life in the north cannot believe how backward life is when they return there on holiday. It's sad to see a country with such amazing potential held back by incompetent polititians and the mafia.
RB, Milan, Italy
We are bolted onto an EU that contains countries like Italy. The n thousand regulations spewed out by the EU are in the main followed, to their detriment, by countries like Britain yet is hard to imagine Italy following most of them and in southern Mafia controlled Italy it is impossible to imagine them following any of them. We seem to follow all the laws about fishing and enforce them, again to our detriment. I understand that Spain has an inspector stationed in Madrid that is not exactly on the coast
William Garrett, Harrow,
"Parliament blew the tax windfall on ⬠6.5 billion of extra welfare spending."
What a waste! Couldn't they have found something better to spend it on!
M Smith, Firenze, Italy
Dear Madam,
you are definitely right...unfortunately.
Massimo Menichetti, La Spezia, Italy
'Romano âMortadellaâ Prodi [â¦] and his minions are seen as interested in one thing only â power', writes Rosemary Righter. True enough, but all politicians are, aren't they. Yet democracy is supposed to channel this politicians' self-interest towards socially useful ends. So perhaps the real question is why democracy is working so badly in Italy.
One obvious culprit would appear to be coalition politics, which gives such great power to small minorities. Yet this is due to electoral rules that could be changed under public pressure. So the problem seems to boil down to irrational voting behaviour by most electors: a cultural problem with deep historical roots, and thus with no easy remedy. Still, things are slowly getting better. One generation ago the Italian Government was printing money to the tune of almost one third of its total expenditure, in an effort to buy social peace in the teeth of Red-Brigade terrorism roooted in the then prevailing Marxist ideology of the left.
Mario Ferretti, L'Aquila, Italy
We have far too many politicians in Britain who also only care about self preservation. If the number of MPs was cut by half I doubt if anybody would notice.
Betty Gleave, Reading, England