Italy’s mixed political fortunes: a look back and forward
1Italy’s mixed political fortunes: a look back – and forwardVincenzina Santoro*November 30, 2011________________________________________________________________________After the second longest-serving government in Italian postwar history gave up the ghostin early November 2011, there was swift agreement on the successor to Prime MinisterSilvio Berlusconi. The designated nominee, Prof. Mario Monti, former President ofBocconi University (Italy’s equivalent of the Harvard Business School) and ex-EuropeanCommissioner, quickly put together a top notch cabinet that was approved in record time.The street protesters’ negative farewell to Prime Minister Berlusconi was applauded bythe Anglo Saxon press from The Economist to the New York Times that has wallowed inthe muddy waters of the Prime Minister’s amorous dalliances ad nauseam.For Italians, the real disappointment with Prime Minister Berlusconi was that he wasunable to transfer his successful business skills to the political arena and strengthen theeconomy as was expected by the electorate. Mr. Berlusconi had a number of keyaccomplishments in his business career. The son of a banker, he chose the entertainmentworld to initiate his career, and still writes many songs. In his media business hesucceeded in breaking the monopoly of Italian state television and introduce private TVchannels, a significant achievement. The RAI state-run system had consisted of threechannels: RAI 1 for the Christian Democrats, RAI 2 for the Socialists and RAI 3 for theCommunists. Each channel carried news and programs with their respective political huesand views. Mr. Berlusconi’s company Mediaset introduced variety that was appreciatedby viewers.Mr. Berlusconi was also a successful builder. His flagship real estate projects createdmuch needed large-scale residential housing with pleasant landscaping in Milano Dueand Milano Tre, built on the outskirts of the Italian fashion and finance capital.After Mr. Berlusconi’s announcement to resign in early November, the foreign pressdusted off old references to Italian political instability instead of acknowledging theperiod of stability attributable to Mr. Berlusconi. One Italian newspaper, La Repubblica,estimated that Mr. Berlusconi governed a record of 3,336 days with four governments.Second in line was Giulio Andreotti who ruled 2,279 days as head of seven governments.Mr. Berlusconi has been a major force in Italian politics since 1994, when he won hisfirst election only to be toppled by his ally the Lega Nord a few months later. He isItaly’s only postwar Prime Minister to serve out a full five-year term, from May 2001 toMay 2006. His coalition narrowly missed re-election (votes cast were 49.74% versus49.81% for the leftist coalition headed by Romano Prodi, a Bologna University Professorand a former President of the European Commission) due to the sort of antics whichplagued Berlusconi’s political career.
2The unwieldy nine-party Prodi coalition failed to reinvigorate the Italian economy andfell after two years. New elections were called in April 2008 and Mr. Berlusconi’scoalition of Popolo della Libertà (which had combined Forza Italia, the party he founded,with the right-wing Alleanza Nazionale) and the Lega Nord was brought back to powerwith a significant majority and became the second longest serving postwar government.With Mr. Berlusconi gone, the Financial Times (November 12-13, 2011) pined andopined: “Abroad the womanizing premier will be remembered, even missed, for hisentertainment value.” Moreover, some Italian comedians, masquerading as journalists,have made plenty of money ridiculing Prime Minister Berlusconi for the benefit offoreign audiences. Beppe Severgnini, who blogs for the Corriere della Sera, recentlypresented in New York his latest book with the ungainly and pompous title: “MammaMia! Berlusconi’s Italy Explained for Posterity and Friends Abroad.” Its sordid cover isan affront to womanhood, art and culture.Would a Frenchman so deprecate his political leader overseas?The Economist magazine of November 12thhad perhaps the most debauched cover ever,picturing a revolting sex orgy with Prime Minister Berlusconi adjusting his tie, as theBritish publication unleashed its deep seated antipathy to all things Italian. For years theirnumerous verbal thrashings have antagonized honest Italians everywhere.To paraphrase President Richard Nixon, the Anglo press won’t have Berlusconi “to kickaround any more.” Hopefully, historians will be more objective, incisive and inclusive injudging developments over Mr. Berlusconi’s entire career.The political negativism heaped upon Italy has been exceeded only by the pessimism offinancial markets which sometimes ignore key fundamentals. Although the foreign pressconstantly refers to the country as “peripheral,” Italy is a founding member of what isnow the European Union, and is ipso facto a “core” member.Italy’s economy needs to be put into perspective too. Despite low growth, data for 2010show that Italy remains the world’s seventh largest economy (third in the Euro Area) witha gross domestic product of $2.1 trillion. It is the eighth largest exporter with goods soldabroad totaling $448 billion and is the 15thlargest foreign investor globally.Italy’s population of just over 60 million ranks as the 23rdlargest in the world while itsunemployment rate of 8.3% in September 2011 was lower than the Euro Area average of10.2% and the United States rate of 9.1%.According to the OECD’s latest compilation (2009), Italy’s tax ratio of 43.5% of GDPwas the third highest among the 33 developed member countries. Comparable ratios were37% for Germany and only 24% for the United States. Yes, this means that the tax
3burden is very high and Italians pay more taxes proportionately than Germans orAmericans.1The much discussed Italian government deficit is projected by the IMF this year at 4% ofGDP, less than half the 9.1% rate expected for the United States. Italy’s government debtto GDP ratio of 121% for 2011 is half that of Japan. The United States has reached 100%.A simple but somehow overlooked calculation in the debt discussion indicates that Italyhas had, and has successfully managed, a large government debt for many years. Despitethe severity of the last international financial crisis, Italy’s debt/GDP ratio increased theleast among all the G-7 countries between 2005 and 2011, according to data compiled bythe IMF. The biggest increase over this period was in the United Kingdom where theratio jumped 92%, followed by a 62% increase for the United States. Meanwhile, Italy’sdebt/GDP ratio rose only 14%.Government debt to GDP ratio2005 2011%changeUnited Kingdom 42.1 80.8 92United States 61.7 100 62France 66.7 86.8 30Euro Area 70.3 88.6 26Japan 191.6 233.1 22Germany 68.5 82.6 21Canada 71.6 84.1 17Italy 105.9 121.1 14Source: IMF, World Economic Outlook, September 2011, Table A.8How should Italy proceed? There already has been a profound change in administration.The new Prime Minister, Prof. Mario Monti, chosen by the President after due politicalconsultations, was sworn in November 16thand obtained swift Parliamentary approvalfrom both chambers on the following two days. This government intends to stay in officeuntil the end of the current legislature in the spring of 2013.A respected economist and former head of Bocconi University, Prof. Monti has earnedcredibility, competence, and authority. For example, as the European Union CompetitionCommissioner for two consecutive terms (2000 to 2010), he was rigorous in enforcinganti-trust legislation and is best remembered for a five-year investigation of Microsoft(and its billionaire President Bill Gates) over the company’s computer operations inEurope. Monti prevailed.1OECD, Revenue Statistics 1965-2009: 2010 edition.http://www.oecd.org/document/35/0,3746,en_2649_34533_46661795_1_1_1_1,00.html andhttp://www.oecd.org/dataoecd/13/38/46721091.xls
4Prof. Monti has assembled a “technocratic” government of highly qualified academics,recognized experts and a well regarded diplomat. Among the better known cabinetmembers is the Foreign Minister, Giulio Terzi di Sant’Agata, who has been Ambassadorto the United Nations and to the United States (Italian ambassadors are career diplomats,not political appointees.) and Corrado Passera, the CEO of Banca Intesa Sanpaolo, one ofItaly’s largest banks, who was named Minister of Economic Development andInfrastructure. Prof. Monti retained the all-important post of Finance Minister. Threewomen are heading the Ministries of Justice, Labor and Internal Affairs.All of them must now undertake herculean efforts to restore government finances,remove labor market rigidities and pursue policies to boost economic growth. They areexpected to exercise authority with wisdom, prudence and, as Monti himself added in hisacceptance speech to the Chamber, “with humility.”The new government has been sworn in but Parliament, which must pass legislation,remains the same. The new government may be well qualified but has no politicalmandate – a key consideration in a democracy. However, in all likelihood, legislation willbe approved by a mixture of members of former parties in power and the opposition.More importantly, whatever measures and reforms are adopted must be executed andproduce positive results.Despite the already high tax burden, more taxes are likely. A tax on primary residencesmay be reinstated. It had been abolished by the Berlusconi government. A wealth tax maybe considered too. As Prime Minister Monti eloquently stated in the Chamber ofDeputies, it is time for those who previously contributed the least to contribute more now.Among measures contemplated to reduce government spending, there may be an attemptto reduce the number of seats in Parliament. There are 630 members in the Chamber ofDeputies for a population of 60 million, whereas the United States House ofRepresentatives has 435 members for a population of 312 million, indicating that Italyhas nearly 50% more deputies for a population that is one-fifth the US size.Pension reform is likely to be in the cards. Italy spends more on pensions – 14% of GDP,than other OECD countries. Life expectancy in Italy is the second highest in the worldafter Japan. Recent changes, including the rise in the pensionable age to 67, do not gofully into effect until 2040 and the date needs to be brought forward. Pensions oflegislators need to be reined in given that they are unduly generous.The new government must deal with rigidities in the labor market that make it difficult tohire and fire workers. Layoffs are virtually unknown and when they occur are very costlyin terms of benefits payable to departing workers. The only flexibility employers have ishiring workers on fixed-term contracts and upon expiration determine whether to renewor not. This type of hiring has affected mostly younger workers entering the labor forceand is having dire effects on society. Young people with an uncertain future earningcapacity find it difficult to marry and start a family.
5Older workers, who tend to be employed by larger companies, are “protected” regardlessof company performance. A company has to go virtually bankrupt to let workers go.Moreover, worker contracts are negotiated between unions and industry representativesand apply to all companies on a sector by sector basis irrespective of any company’sbalance sheet conditions. At will employment and profit sharing, which are common inthe United States, are alien concepts to the Italian labor scene. Nonetheless, the Italianentrepreneurial spirit remains strong, startups abound and young Italians who aresuccessful sometimes turn abroad, especially to the United States, to find enough capitalto expand operations.Given Italy’s strong industrial base, its status as a world class exporter and financialacumen that dates back to the Lombards, an unshackled Italian economy could initiateanother “Risorgimento.” Italy has nearly five million small companies employing fewerthan 10 people that in a freer market environment would leap at the opportunity toexpand, hire and contribute to the country’s economic growth. This would be a positivestart for a new government and a fitting conclusion to 2011, the year commemorating the150thanniversary of Italian unification.____________________________*Vincenzina Santoro is an international economist. She is a former Vice President ofJPMorgan & Co., Inc