John Bruton

Opinions & Ideas

Category: Italy

POLITICS AND DEBT……ITALY NEEDS BRAVE LEADERSHIP

Italy and EU Puzzle Pieces - Italian and European Flag

Italy and EU Puzzle Pieces – Italian and European Flag

Crunch decisions are approaching for Italy and its new Prime Minister Paolo Gentiloni.

The really difficult decisions are not about who gets which Ministry in the new government, or even about the timing of elections, but about how to cope with the problems of some of Italy’s banks.  

On Friday last the European Central Bank rejected a request from Rome to delay a proposed private sector  led rescue of Monte Paschi di Siena (MPS), Italy’s oldest and most troubled bank.

According to the Financial Times, this leaves Italy with little option but trigger a government led bailout of the bank which will involve imposing losses on junior bondholders in the bank, many of whom are small savers rather than anonymous financial institutions. “Burning the bondholders” thus does not have quite the same popular appeal in Italy as it had in Ireland a few years back!

But the burning of bondholders, in a bank that has to be rescued by the taxpayer, is now required by EU rules, and the EU is a rule based institution. The primacy of rules, rather than of raw power, are what distinguishes the EU from other international arrangements, and are among the reasons EU membership is particularly valued by smaller countries, like Ireland.

Avoiding a taxpayer led bailout of MPS, by forcing the other Italian banks, who are better off than MPS, but have troubles of their own, to bail out MPS could infect the  entire Italian banking system and weaken confidence in it.  And all banking, like all money itself, depends on confidence. As it is, Italian banks have only half the capital they need to meet  the required safety standards.

Of course it is true that if the Italian economy was growing more quickly, its banks would not be in such trouble. The Italian economy is expected to grow by only 1% this year, well below the EU average. In fact the Italian economy is the same size as it was in 2007, whereas other countries , which are also subject to the  disciplines of the euro zone, have grown substantially since 2007, France by 20% and Spain by 15%.

This contradicts those who want to blame the euro for all Italy’s problems.

For example, David McWilliams has mistakenly claimed  that “the strictures imposed by the euro have destroyed the Italian economy”. He said that Italy’s economy grew, before it joined the euro. But it was only able to do this because it repeatedly devalued its currency. This gave temporary relief but concealed the underlying problems. Devaluation was an anaesthetic, not a cure.

Once it joined the euro, this had to stop

When  Italy’s  leaders decided to join the euro, and  set the rate of exchange between the old lira and the  new euro, they  knew  that  devaluation was impossible thereafter. This was a freely taken Italian decision.

Unfortunately Italian voters do not see things that way and blame Europe for problems that are actually home grown. For example in a poll last September, only 38% of Italians felt their country had benefitted from being in the EU, whereas 51% felt it had not .

In truth, the problems of the Italian economy predate the decision to join the euro. Government debt levels were increased during the 1980’s and were already  well above the recommended 60% of GDP  when Italy joined the euro.

Italy was already an ageing economy at that stage, with early retirement and historically low birth rates. The ageing of a society inevitably saps its growth potential, as even the Chinese are now beginning to find.

There was the added difficulty, since 2000, that the Italian consumer and fashion goods sector competed directly with goods coming from Asia, and Italy could no longer devalue  to meet this  new competition.

Italy did not adapt to this new reality.

Productivity remains poor in Italy.  For example, since 2007, Spanish productivity per hour increased by 10%, whereas Italian productivity per hour actually DECLINED by 5%. Both Italy and Spain are in the euro, so the euro does not explain this difference in  productivity performance.

The public sector in Italy is expensive and inefficient. The hourly pay rate in the Italian public sector is 40% above that in the private sector, whereas in France and Germany, the hourly rate in the public sector is below that in the private sector.

Incidentally in Ireland, hourly pay in the public sector is 25% above that in the private sector.

In Italy, healthcare and pensions absorb 20% of GDP, as against 12% in Ireland.

There are also severe inefficiencies in Italy’s commercial sector caused by lack of adequate competition. The transport and energy sectors are particularly costly.

There is a lack of competition in the legal system. The Italian courts are the third slowest in the EU. For example it takes 500 days to get a case into court. This means that it is difficult and costly for Italian businesses to enforce contracts and collect debts owing to them. Court delays have also contributed to the increase in non performing loans(NPLs) in the Italian banking system. NPLs are now 18% of all loans, as against 6% in 2007.

A Competition Bill, which would have helped resolve some of these problems, was watered down in the bargaining between the Senate and the Lower House.

Renzi’s constitutional reforms, which would have reduced the power of the Senate, would have dealt with that problem. Unfortunately they were rejected by the voters.

The Gentiloni government, like that led by Renzi, has a  majority in the Lower House, but will  now face an increased risk of  any reforms it proposes, being bogged down in the  Senate, because the Senate  will feel empowered by the referendum result.

The electoral arithmetic may have changed, but the arithmetic of Italy’s debts has not.

Leaving the euro would actually increase the nominal value of those debts, because the debts would still be owed in euros, but the money to pay them would have to be raised in a new, and probably, less valuable Italian currency.

Resolving Italy’s problems will require statesmanship of a high order in Rome, Brussels, Frankfurt and Berlin. Ireland overcame a similar crisis since 2010, and the willingness here of all sectors of society here to meet the painful challenge quickly , and leave politics aside till later, may provide a model that Italy could follow.

ITALY……..EUROPE’S NEXT BIG CHALLENGE

Screen Shot 2016-08-08 at 17.31.08Now that the UK has decided to leave, the next big problem facing the EU is the constitutional reform referendum in Italy later this year.

In April the Italian Parliament has passed a package of constitutional reforms.  They were designed to improve the efficiency and stability of the Italian state, and reduce the ability of the Italian Senate to bring the government down.

Although  the package passed, it did not get  the required  66% majority in both Houses  to come into  immediate effect.

The only way the package can come into effect now, is if it is approved by the Italian people in a referendum.

The Prime Minister, Matteo Renzi, decided that this referendum will take place this autumn, and he has gone further and said that, unless the people approve the proposals, he will resign.

David Cameron’s recent failed  referendum gamble makes this look now to be  a more risky decision than when it was taken.

The proposed constitutional  reforms  include

  • reducing the size of the Senate
  • reducing the power of the Senate  both  to block legislation that has been passed by the Chamber of Deputies, and to bring down the government
  • reducing the power of Italian regional governments

Major reforms of the Italian state are urgent because the debt of the Italian state is 130% of GDP, and the state has to find resources for an ageing population, and influx of refugees, and bank rescue.   The Senate has proved to be an obstacle to some reforms.

Reforms are needed to increase the overall productivity of the Italian economy.  This  requires

  •  a simplification of the tax code,
  • less taxation of work and more on property,
  • simpler public administration and
  • a simpler and more efficient courts system.

State owned enterprises also need to face  more competition, as do some professions and retailers.

Before it joined the euro, Italy was able to devalue its way out of short term problems, as the UK is doing now. But devaluation  enabled it to avoid making big and difficult reforms.

Since it joined the euro, Italy has reformed its previously unviable public pension system, a task Ireland and the UK have yet even to discuss seriously. So Italy’s underlying ability to make big reforms should not be underestimated.

The polls on how Italians will vote in the referendum are very volatile.

The proportion in the “Don’t Know” category ranged from 19% to 42% in the two most recent polls.

Furthermore Prime Minister Renzi’s party lost ground in recent city elections, including in Rome.

Renzi’s main opponents are the “ 5 Star” Movement, who make their policies, and select their candidates, by polls over the internet. They reject the idea of career politicians and prefer politicians to be amateurs, who do the work on a short term basis. This sentiment is similar to the rejection of the opinion of “experts” and “elites” in the recent UK Referendum.

The trouble with amateur politicians is that, while they may have good ideas, they may lack the necessary technical ability, and staying power, to see their ideas through to full and effective implementation.

Italy is the 8th largest economy in the world. It has an excellent quality of life, and a great reputation.

Unfortunately its state system does not work well and there is not enough political consensus to put things right. This is not a weakness that Italy can afford. It needs a strong and effective state.  A rise in the price of fuel, or in international interest rates, could cause a big crisis for Italy, unless it has a state that is capable of making and fully implementing difficult decisions.

That is why Prime Minister Renzi’s referendum is so important for Italy, and for Europe.

 

 

WHEN CRIME AND POLITICS MIX……….A STORY FROM ANOTHER EUROPEAN ISLAND

My wife Finola, who is an Italophile, recommended that I read Alexander Stille’s “Excellent Cadavers, the Mafia and the death of the First Italian Republic”. It was good advice (as usual!).

Stille’s book tells the story of the war between the Sicilian Mafia and the Italian state from 1960 to 1993. It also tells the story of a war within the Mafia itself and  between it and an increasingly exasperated, but passive, Sicilian public opinion.

The heroes of this story are two Italian prosecutors, both Sicilian themselves, Giovanni Falcone and  Paolo Borsellino, who systematically delved into the inner working of the Mafia, gathering evidence that brought hundreds of Mafiosi before the courts. Although they secured convictions, the Italian judicial system allowed many of those convicted out on bail, while they pursued appeals.  Others had their sentences reduced by friendly judges. Falcone and Borsellino encountered jealousy and obstruction from some of their superiors in pursuing these cases.

It was only when Falcone became an advisor to a Minister in the Government in Rome in 1991, that some of barriers to the effective pursuit of the Mafia were removed. One key step was the setting up of a single “FBI” for all of Italy, which could pool evidence gathered all over the country.

Stille suggests that the Mafia enjoyed protection from people at the highest level of the Italian state, in return for its support in elections in Sicily. Until the fall of the Berlin Wall, this  was tolerated because it helped keep the Communists out of power in Rome.

When Falcone and Borsellino were both assassinated by the Mafia in 1992, public outrage about this, combined with separate corruption allegations including the then Prime Minister, led to the collapse of the Italian political system and the destruction of the old parties that had operated it.

 In 1993, the head of the Mafia, Salvatore Riina, was finally arrested.

The origins of the Mafia, a secret society governed by ritualistic oaths, lie in the absence of effective civic institutions to govern Sicily, both under the Bourbon Kings in Naples up to 1860, and later under the new united Italian state since then.

Initially many Sicilians favoured independence for their island, which has its own language. 

This undermined the legitimacy of the civic authorities, and allowed the Mafia to develop a highly sophisticated system of protection rackets, which sucked the life blood out of the Sicilian economy, and diverted money sent as aid from Rome and Brussels to aid , into the hands of the Mafiosi.

This problem is not unique to Sicily, or Italy. People in Northern Ireland are all too familiar with how paramilitary organisations, with ostensibly political goals, can transform themselves into criminal conspiracies that enslave those whose cause they pretend to serve. If, for any reason, the legitimate state authorities are unable to do their job in administering justice, collecting taxes, and providing  basic services, the gap will be filled by Mafia like organisations.

Has Italy overcome the conditions that allowed the Mafia to flourish?

A European Commission report on Italy in 2011 found that the Italian state system was even  then
  • unable to administer EU funds properly, 
  • had inordinate delays in its courts, 
  • was the most expensive place in Europe to set up a company to run a legitimate business, and
  • that corruption costs the Italian economy 60 billion euros a year.


That is why the reform programme of the government of Matteo Renzi is so important. His challenge is not just to reform the Italian labour market, which keeps so many young Italians artificially unemployed, it is also to reform the Italian judicial and administrative system.

CLUB DE MADRID IN FLORENCE…

A SPEECH BY ROMANO PRODI

I am attending a meeting of the Club de Madrid, an organisation of former heads of government working to promote democracy, in Florence this week. The question being addresses is whether, after the 1990’s when democracy was spreading widely in the wake of the fall of Communism, democracy and human rights are now in a phase of relative decline again.

The opening keynote speech was made by Romano Prodi, former Italian Prime Minister and European Commission President, who gave an excellent speech.

He reminded us that having a market economy, as China does, does not guarantee democratic government. The dispersal of power, which is essential for a market economy, can help democracy, but it does not assure it. The Chinese” model” could become a challenge to democracy.

He worried that, if democratic governments fail to deliver acceptable economic results, democracy itself will come to be questioned. 

This is a particular risk in the European Union, where

   +  the ageing of societies,
   +  the absence of structural reforms, and
   +  the rigidities caused by the incompleteness of the euro zone,


are contributing to slow growth and high unemployment, especially among young people.

In some countries, democracy suffers from perpetual electioneering, and from too many veto points which prevent necessary changes being implemented.  Short term thinking predominates as a result.

Romano now teaches in universities in China, and he remarked that, whereas ten years ago Chinese were constantly asking questions about the European Union, they no longer do so. Their questions focus now on the lesson to be learned from Thucdydies, the ancient Greek historian, who wrote about the risks of war when a rising power meets an established one (Sparta and Athens). Clearly the Chinese see such risks as between themselves and the US.

A REPORT ON THE STATE OF DEMOCRACY IN EUROPE

We have before us a series of reports on the state of democracy and human rights in different parts of the world. The reports were prepared with the help of the Bertelsman Foundation. The scope of the study includes 

+  the fairness and openness of elections,
+  the rule of law and separation of powers,
+  internal democracy in parties,
+  strategic thinking within the governmental system,
+  efficient use of human and material resources
+  anti discrimination laws


Generally speaking, the Nordic countries came out best. There were some problems in southern Europe. Among post Communist countries, the Baltic states and Poland had the best record. The situation was somewhat more difficult in the Balkan area.

 WORRYING TRENDS IN HUNGARY…..CONCENTRATION OF POWERS

The countries to come in for the most severe criticism were Hungary, and to a lesser degree Turkey. The findings in regard to Hungary are the most alarming, given that it is a full member of the EU. 
In respect of Hungary, the report says

“The government  has tried to monopolise political power by taking control of a number of independent agencies and supervisory bodies and had undermined the judiciary’s independence”

It adds that Hungary’s new media laws

“strengthened government control over the media by vesting a Media Council, exclusively composed of persons affiliated with the Government party, with control of media content  and the granting of broadcasting licences”

These matters deserve the attention from the European Union institutions.

SHINING A HARSH LIGHT ON ITALIAN HISTORY

I enjoyed reading “The Pursuit of Italy, a history of its land, regions, and peoples” by David Gilmour , published by Penguin in 2011.
David Gilmour is an historian with a point of view, and the title gives his point of view away. He has doubts about whether Italy should ever have been united as one country, because it is so diverse in geography, history, language and ethnicity.
He quotes a statistic t that ,when Italy was united in  1861, only 2.5% of its inhabitants spoke  present day Italian(which is the original language of Tuscany).
Italians ,though grouped in a series of small states, had been the richest people in Europe from the early Middle Ages to the end of the sixteenth century. In the years after unification in 1861 it was one of the poorest, and remained so almost until the mid twentieth century.   
He particularly regrets the demise of the Republic of Venice, which had lasted over 1000 years, but which was  dissolved and handed over to Austria by Napoleon.
The rule of Italy by a series of independent states was not regressive.
 Tuscany was the first state in Europe to abolish the death penalty. Gilmour argues that the legal system on Naples and Sicily was more tolerant than the Piedmontese system that was imposed, after the Neapolitan Bourbon King of Naples and Sicily had been dethroned by Garibaldi,  and a union with the rest of Italy put through in a  dubious referendum.
The central challenge facing the liberal elite that became the governors of united Italy after 1861 was to forge the diverse people of the peninsula in a single united people. Waging war was their chosen method.
 Harsh colonial campaigns were waged in Eritrea and Libya.  Italy went to war against Austria in  1915, even though Austria was willing to concede all its demands. Mussolini repeated the mistake in 1940.
Whereas the prevailing ideology of Italy from 1861 to 1945 was aggressively nationalistic, the prevailing ideology,from 1945 until very recently, has been anti nationalistic, and European in orientation.
 But not everything in post war Italy was perfect. Extravagance became a feature of public life. Italy now has the best paid parliamentarians in Europe.
This book helps a reader to understand some of the challenges facing Italy today as it seeks to get its people to support the measures necessary control its huge public debt.

A LONG FORGOTTON WAR…..ITALY AND THE HAPSBURG EMPIRE

When one thinks of the First World War, the image that springs to mind is that of thousands of  soldiers being mown down by machine guns and heavy artillery in the mud of Northern France.
Little is written in English nowadays about the slaughter on the eastern front between Germany, Austria Hungary and Russia, or about the war in the Balkans ,when  the Serb army was crushed by the Central Powers.
Another dimension of the war that gets little attention is struggle between Italy and Hapsburg Austria .
This is the subject of an excellent book I have just read, entitled   ”The White War, life and death on the Italian Front ,  1915 to 1919“  by Mark Thompson.
Thompson shows that this was a thoroughly avoidable war.
 Italy and Hapsburg Austria had actually been allies up to just before the outbreak of the war between then in 1915.  But the Italian nationalist intelligentsia had long wanted to expand their territory to what they  regarded as Italy’s  “natural” frontiers on the Alps, regardless of the fact that many of the people  living south of the Alps did not consider themselves to be Italian. They also believed the Adriatic sea should be under effective Italian control, as it had been in Venetian and Roman times.
In 1915, in order to keep Italy neutral, Hapsburg Austria offered Italy territory in South Tyrol and elsewhere.
But the Italians were not satisfied. In return for Italy joining the allied side instead, the Allies guaranteed that Italy would get all South Tyrol, Trieste, and a big slice of  coastal territory in what is now Slovenia and Croatia. Italian speakers were a minority in these areas.
Unfortunately for Italy, it was ill prepared for war. It suffered huge casualties,  attacking well defended Hapsburg positions on high ground all along the frontier. Wave after wave of conscripted and often illiterate Italian soldiers were sent to certain death in Hapsburg machine gunfire. 
To the surprise of the Italian nationalists, the Hapsburgs army, although coming from a variety of ethnic groups, fought cohesively. The leading Hapsburg genera , Boroevic, was a Croat. Bosnian Muslims were among the fiercest fighters for the Hapsburg cause.
Although the Italians were comprehensively defeated in 1917 at Caporetto, and had to fall back far into their own territory, the eventual Allied victory did bring major gains to Italy.  But many of there had to be given up to Yugoslavia after the Second World War.
Mark Thompson tells this tragic human story very well. He illustrates the erroneous judgements, and extreme sacrifices, territorial nationalism can impose on those who fall under its spell.

COPYRIGHT JOHN BRUTON & CONTENT

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