Sunday 25 September 2016

Real crisis will come when eurozone realises it cannot bail out a bust Italy

If the euro breaks apart, the catastrophic endgame will be in Rome and not Athens, writes Dan O'Brien from the Italian capital

Published 19/07/2015 | 02:30

Stagnation: Italy has fallen far behind the UK and France in terms of exports over the last 20 years
Stagnation: Italy has fallen far behind the UK and France in terms of exports over the last 20 years

Nobody can doubt the significance of the Greek crisis for the European order as it has existed since the middle of the last century. The damage it has caused - politically, economically and even among the continent's peoples - is huge. The seeming unending nature of the crisis, and the speed at which it continues to evolve, makes it difficult to stand back and put it all in any historical perspective.

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It can, however, be said with a high degree of confidence that if Greece ends up out of the euro, it will be a disaster for Greece and the departure will be a hammer blow to the single currency.

But while Grexit is unlikely to trigger an immediate unravelling of the euro, not least owing to the firewalls that have been put in place over more than half a decade, it would highlight the other weak link economies in the currency, and make those links even weaker by signalling that they too could be pushed out of the euro.

The weakest link of all is Italy.

There are a frightening number of similarities between the two countries on either side of the Adriatic in terms of inefficient and corrupt politics and public administration, chronically weak economic fundamentals and huge (and rising) public debt. The biggest difference between the two countries is their relative size. Greece, for all its intractable woes, accounts for just one fiftieth of the eurozone economy. Italy's economy, which is the ninth biggest in the world, is almost 10 times the size.

If Italy gets into trouble, it will be Greece times 10. If the European model of inter-state cooperation is being stretched to its limits by the Greek crisis, an Italian crisis would blow it apart.

There are many reasons to fear that Italy is growing Greek. There are very few reasons to believe that the country will turn itself around.

Let's start with an anecdote. Living in Italy in the 1990s, the first time I was in Rome's second airport was to pick up a friend on the day Ireland played Italy in the 1994 World Cup. Arriving into the same airport last week, it was striking how unchanged it was 21 years on - there has been next to no upgrading or investment and it retains the feel a small provincial airport, not one in the capital of a G7 nation.

That very much reflects a wider truth. In the early 1990s, Italy was everywhere visibly more prosperous than Ireland. Now it is the other way around. That is because the economy simply hasn't grown. Since 2008 it has been shrinking almost without interruption.

Today, per capita GDP - the most commonly used measure of a nation's prosperity - is back at the levels recorded at the turn of the century. As its happens, that is identical to Greece, even if the intervening period has had many more ups and downs for Greece.

The jaded infrastructure up and down the peninsula is also reflected in hard data. Italy and Greece are two of only three countries in which spending on investment - private and public - is lower today than 20 years ago.

As is so often the case in economics, there are no simple answers explaining the end of growth in Italy. But what governments do and don't do play a big part.

In some ways Italy's politics are worse than Greece's. While much of the reason for the county's chaotic politics is to do with political culture, institutional design is also a factor.

After two decades of fascist dictatorship ended in the 1940s, Italians concluded that the best way to avoid tyranny was to ensure no one individual or entity had very much power. This may have prevented another dictator from emerging but it has not been good for pro-active and reform-orientated government.

It has also widened the scope for graft. With so many politicians and administrators having at least some power, the trough has been made very large to accommodate so many snouts.

The use of public office for self-enrichment is pervasive according to any attempt that has been made to compare it with other countries. Transparency International's Corruption Perceptions Index, perhaps the most cited indicator of corruption globally, puts Italy at the very bottom of the league table for public probity in Europe. Globally it was in 69th place in 2014, a position it shares - coincidentally - with Greece.

This picture is confirmed by other organisations. The World Bank in Washington tries to measure the degree to which corruption is tackled with its Control of Corruption rankings. Again, Italy and Greece are bottom of the European table.

Given the well-established link between pervasive corruption and lower economic growth, graft explains at least some of the past two decades of under performance.

The more benign aspects of a creaking state are likely to do as much damage as corruption. Doing many things in Italy - paying taxes, obtaining licences, starting a business and much else besides - is mired in senseless, frustrating, Byzantine bureaucracy. It was this sense of wading through treacle, and not being sure if the rules would suddenly change in some seemingly arbitrary way, that made me leave Italy in the 1990s, despite loving the country and its quality of life.

The coming to power of the young Matteo Renzi in a country known for its geriatric politics does give some hope that things might be changing. But many who watch the Machiavellian bear pit of Italian politics are doubtful. Not only are there questions about the depth of his understanding of the huge challenges facing the country, but one can only be sceptical of the chances of one man changing something as profound as an entire political culture.

One crucial aspect linking politics and economic performance is education. Renzi is trying to push through reforms of the education system, but it is so antiquated that it is hard to see his reforms, which are hardly radical, bringing the system into the 21st century.

And change is needed. Italian teenagers perform poorly in international comparisons of numeracy, literacy and knowledge of science. Educational deficiencies explain, in part at least, the share of twentysomethings not in employment, education or training (a much better measure than youth unemployment). It is over 30pc in Italy - the highest in the EU along with Greece.

But while bad government holds Italy back in many ways, all the country's economic woes cannot be attributed to politics.

Globalisation has not been kind to Italy. Much of its industrial base, mostly in low-wage, medium tech industries, has either moved abroad or been put out of business by foreign competition.

This can be seen in the country's export performance. Twenty years ago, the value of the Italy's exports were the same as those of Britain and France, two economies of broadly similar size and population. But because Italian exporters have consistently lagged behind their counterparts, their foreign sales are now just two thirds of French and British exporters.

A politically and economically stagnant Italy might not be of huge concern to the rest of Europe if the euro crisis had not amply demonstrated just how interconnected the economies of the eurozone are. Much of the linkages are via the financial channel in the form of debt.

And this is where things in Italy begin to look really frightening.

The very latest figures on Italian public debt, published last week by the country's central bank, show it surpassing the €2.2 trillion threshold for the first time ever in May. Relative to the size of its economy, that is not far short of Greece's debt when its true size was revealed in early 2010, triggering the euro crisis in the first place.

Because the economy is ­stagnating and because Rome seems perpetually incapable of balancing its books, the debt mountain continues to grow, both in absolute terms and as a percentage of GDP.

This is unsustainable unless Italy starts growing at a decent clip. As there is little reason to believe that the economy is about to take off.

Sooner or later the realisation will dawn that the Italian state is bust. Given its size, there will be no bailout because the rest of the eurozone combined does not have the resources to bail it out.

A sovereign default of a G7 economy would make Lehman Brothers look like a minor event. The consequences would go far beyond the break-up of the euro. The future is not bright for Italy, and by extension, Europe.

Sunday Independent

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