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Italy’s Economic Rot Is Europe’s Problem, Too

Italy’s Economic Rot Is Europe’s Problem, Too

Sunday, 18 August, 2019 - 10:45

As I am spending the week in Italy, my thoughts have naturally turned to the topic of economic growth and its benefits. One striking fact about Italy is that, over the last 20 years, growth in per capita income has been close to zero. That’s not a recession, rather it’s become the normal state of affairs. And so the question arises: What is economic growth good for, anyway?

Unfortunately, a zero-growth environment cannot be stable forever. The reasons are many; structures ossify, firms and governments become less productive and dynamic, rules become more vulnerable to gaming and rent-seeking, and interest groups increase their ability to seize parts of the pie. If the pie doesn’t grow, eventually it becomes harder to sustain productive activity and a healthy politics.

Aging is another reason economic growth is necessary. As nations grow older, they will have fewer workers and more retirees, and of course many countries (including Italy) have expensive pension systems. Someone has to pay the bill, and without innovation and economic growth, taxes will have to rise. That in turn discourages work, pushing people into untaxed black-market activity, necessitating higher tax rates, and the vicious cycle starts again.

This is hardly a hypothetical scenario for Italy, which has one of the lowest birthrates in Europe and has long had a large informal economy. The country also has a debt-to-GDP ratio of 132%, and is pushing up against EU limits on its budget deficits.

Economic growth also is needed to handle change. Population pressures will increasingly bring more and more migrants from Africa and northern Africa to Europe. Italy of course is a natural landing point, and already has received many arrivals. What should Italy do? Take them all in and help them assimilate? Erect new barriers to keep them out? Pay other countries to harbor refugees? Try to get the EU to reopen the Dublin agreement so more arrivals into Italy will be taken care of by other nations? No matter what combination of answers you favor, it will cost money — which is to say, it will require economic growth.

Decay is another problem faced by Italy, including decay of its natural and cultural heritage. The city of Venice — a wonder of mankind and also a big money-maker as a tourist destination — is threatened by rising water levels. The Roman Coliseum is endangered by traffic fumes and exhaust. Solving those problems requires (again) extra money. As it stands, Italy has some of the worst-maintained cultural heritage in the Western world, and further decay could cut into Italy’s tourist income, producing another dangerous downward spiral.

Sadly, it wasn’t that long ago that Italy was hailed as a growth miracle. Until the 1980s, its postwar performance was one of the very best in the world, for a while surpassing the UK in per capita income (much to the chagrin and disbelief of many Brits). Since then, something has gone very wrong.

The possible culprits include strong competition from Chinese firms, excess bureaucratization, too much political turnover, some bad leaders, too many people employed by Italian municipal governments in low productivity jobs, and growing regional disparities. Italy also specialized in the mid-sized family firm at a time when large global behemoths were on the rise. The euro and the 2011 eurocrisis, which hit the country with punishing deflationary pressures, didn’t help any. Some speculate that the fine quality of life in Italy — at least for many elites — contributed to the complacency and lack of will to solve these and other problems.

The latest development is a possible collapse of the current ruling coalition and the prospect that, after the next election, Italy will be ruled by one of the most populist governments in Europe. Regardless of your political views, it’s hard to argue that Italian politics is moving toward a pragmatic, problem-solving approach. Blaming immigrants and the EU is unlikely to resolve Italy’s core dilemmas. The best way to push Italy’s electoral rhetoric closer to the center may be a dose of sustained economic growth.

Slow or nonexistent economic growth may be tolerable when the surrounding world is fairly static. But when challenges increase, zero growth is a less feasible option. It’s difficult to pay all the bills, pay off debts, and address new problems without additional resources to deploy.

Throughout history, from the Roman Empire to the Renaissance and beyond, few places have done more to boost global economic growth than Italy. Italians today are undoubtedly aware of their proud heritage — and so should be most Europeans. If Europe is to remain prosperous and well-governed, it will need a flourishing Italy.


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