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The Italian omen

Published in Business Spectator (Melbourne), 12 August 2010
http://www.businessspectator.com.au/bs.nsf/Article/Europe-debt-GFC-Greece-pd20100811-885F6?OpenDocument

A few months ago, you could not read any newspaper, watch TV or listen to the radio without being bombarded by news about the great European crisis. Remember the frantic sequence of emergency summits, trillion dollar rescue packages and predictions of the euro dropping to parity with the US dollar? Judging by the tremors it created, an earthquake must have been rocking Europe at the time.

With the advantage of hindsight, you may now be asking yourself what this was all about. Some European economies are growing again, the euro has regained much of the lost ground vis-à-vis the US dollar, and Spain even won the World Cup.

So is everything back to normal for Europe? Was the seeming earthquake just a storm in a teacup?

The latest initiative of the Italian government is a useful reminder that Europe is still facing a mountain of problems. You can actually take this quite literally.

Last month, the Italian government published a long list of state assets worth about 3.6 billion euros that it wishes to sell. It includes barracks, roads, schools, warehouses, farm houses, industrial buildings, canals and land. A total of 12,000 places in Italy are up for sale. Local governments across the country have 60 days to decide whether to buy these objects or sell them on to the private sector.

That Rome is even willing to privatise parts of the Dolomites Mountains, a UNESCO World Heritage site, generated most headlines. Maybe because it’s a bargain: the group of mountain peaks formed by the Croda del Becco, Col Rosà, Lavinores and the Croda d’Antruiles were together valued at precisely 11,929 euros. As it turns out, even a no-frills Fiat can be more expensive than a piece of the Parco d’Ampezzo.

A federal government body, the Agenzia del Demanio (the State Property Agency), is organising the big Italian sell-off. It manages about 50 billion euros of state assets. Last year only 150 million were sold. Although Italian politicians now emphasise improved efficiencies resulting from an asset transfer to the local level or the private sector, there is no denying that the Italian state could do well with an injection of cash.

In a way, it is unfair to compare Italy to the other PIIGS countries. There hadn’t been a property bubble in Italy. Italy’s banks survived the financial crisis with little toxic debt on their balance sheets. And the Italian government had refrained from engaging in costly stimulus spending during the economic downturn – if only because it could not afford it.

After generations of economic mismanagement, Italy’s public debt is one of the highest in the Western world. There is little consolation in the fact that the Italian budget deficit at 5.3 percent of GDP looks manageable compared to countries like Britain or the US. It’s not the annual deficit that is worrying but Italy’s accumulated debt load. According to the European Commission, it stood at 115.8 percent last year – marginally higher than Greece’s public debt at 115.1 percent.

Although the Italian government has developed remarkable skills at refinancing itself, the task is getting harder with every year. Over the past decade, Italy’s economy has basically stood still. Real economic output today is almost identical to 10 years ago. Unemployment, particularly among young Italians, is stubbornly high. To make matters worse, tax revenue has fallen 1.2 percent in the first quarter of this year.

As if all of this was not enough to depress even the most cheerful Italians, Italian politics gives little reason for optimism. It is fair to say that Italy never quite looked like a role model for good governance, but the past few months have been disturbing even by Italian standards.

Prime Minister Silvio Berlusconi just lost his parliamentary majority after long-time ally Gianfranco Fini broke away from the coalition government. Fini was quick to form his own parliamentary grouping and went on the offensive against the Prime Minister, whom he openly accused of corruption and a monarchic understanding of democracy.

Amid the ongoing soap opera of Italian politics, the economic reforms for which the country has been waiting for decades are unlikely to happen. The only option left for Italy’s politicians is to continue muddling through just as they have done in the past. This may include a few cutbacks in expenditure here and there, some discreet tax increases, and the occasional sale of a couple of mountains or palazzi.

In this way, Italy could well become the unlikely role model for the rest of Europe. Never addressing their actual problems, the Europeans could somehow avoid the final catastrophe with some Italian-style improvvisazione and simply drag on. Think of the Japanese ‘lost decade’, extend it in perpetuity and you get the basic idea. It’s actually the worst kind of predicament that is just being skilfully managed without ever being solved.

No, the European crisis that we were all talking about earlier this year was not an imaginary phenomenon. Europe’s problems remain painfully real. But it was wrong to believe that they would inevitably lead to a cataclysmic crisis. It now looks as if it’s going to be much worse. There is never going to be a solution, just a slow, ongoing decline. Not a purgatory from which there is an eventual escape route to heaven, but a Dantean inferno with its famous inscription above the gates: ‘Lasciate ogni speranza, voi ch’entrate’ – ‘Abandon all hope, ye who enter here.’

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