Italy, an Example of What Not to Do to Get out of the Recession ?

emblem of the Italian Republic
Is Italy adrift, is it about to drown? Everything seems to conspire against recovery in this once happy, go-lucky country - really the second economic power in Europe after Germany. Yes, the second if one includes the "submerged economy": some 20 to 30 percent of total GNP (those are all the small businesses that don't pay tax and thus escape being counted in the statistics).

The numbers are dire. ISTAT, the Italian statistical bureau, has announced that Italian labour productivity has plunged to minus 2,7 percent in August, while Germany's and France's were both up. Actually labour productivity in Italy has been slipping steadily over the past ten years, at an average of 0,5 percent. Doesn't sound like much, but it is, if you consider that in the same time period Germany's productivity has risen by 16% and France's by 20%.

This growing gap is really worrying  the Italians who count - I mean responsible politicians and businessmen and women, foremost among them Emma Marcegaglia, the very vocal and active President of Confindustria, the Italian industrial managers association. Bini Smaghi, a Vice-President at the European Central Bank, had some devastating things to say about his country (see the article attached below).  Marchionne, the head of Fiat, a couple of days ago had some harsh words that made headlines in all the national papers. He said Italy was "senza bussola" (without a compass), that it had lost the "sense of the institutions", i.e. "as if someone had opened the doors of the zoo and all had gotten out". He complained that in his travels around the world (and since he is also at the helm of Chrysler, he travels a lot) it is becoming harder and harder to explain what is happening in Italy.

Indeed, what exactly is happening in Italy?

First, whatever statistics you use to describe the situation, particularly official ISTAT numbers, have to be taken with a HUGE grain of salt. As I've said, you need to correct them with whatever is happening in the "submerged economy" and of course, that's a bit of a black box. It used to be a roaring sector of the Italian economy, competing successfully against the globalization tide - largely a result of  its ability to keep wages low since it didn't pay taxes nor participated in the costly national security system.

Probably because of the submerged economy, the Italian model has always baffled foreign observers. The country several times over the past fifty years has managed  to unexpectedly jump forward, defeating all dismal predictions: in the 1960s first (the famous "economic miracle" after excruciating poverty in the post-war period). Then  in the 1980s, with the "made in Italy" formula that broke new ground in international trade and secured for Italy a very profitable niche market. There was a slow down in the 1990s and then a tiny rebound in the early 2000s, but by 2007, on the eve of the Big Recession, the economy had slowed down again. Except for agriculture, commerce and some specialized luxury industries (example: nautical), Italy was in slow-down mode in practically all its sectors.

Why? Because Italy was (and is) suffering from long-standing problems, some of which have afflicted the country since its foundation in the 1860s - like a machiavellically complex bureaucracy inherited from the Austrian Empire (and other empires before it), coupled with a fiscal system that seems especially designed to slow the economy down and discourage anybody from working. Italian conventional wisdom is that you can work and live happily in this country only as long as the government doesn't notice you exist. They have an extraordinary centuries-old saying that beautifully expresses this state of affairs: "piove,  governo ladro!" It rains, the government is a thief!

But there are other problems, of course, chief among them the trade-unions, some of the strongest, most radically communist-inspired in Europe. Italy really suffers from an obsolete model of industrial relations. There are three big unions, two of which are beginning to show a certain sense of responsability, but the third, the Cgil, will have none of it. So far. There is yet another meeting tomorrow with the major business managers in the country. Something might come out of this encounter, but I doubt it. In any case, it will take a long time to undo the damage the trade unions have done to the economy - a damage that can be summarized in two short sentences: they've kept salaries too high in relation to productivity; they've kept out the young and protected for too long people useless in their jobs, thus becoming a machine to protect vested interests. A cause of rigidity in the labour market. No wonder small enterprises stay small in Italy: it is the only way to escape becoming unionized (by law you have to keep your staff below 15 people).

The other big problems are the cost of energy (rising) and globalization, with its accompanying phenomena of trade competition and outsourcing. As to the cost of energy, it affects everyone - and not just Italy. So I won't go into it here.Globalization is far more interesting and has taken an unexpected turn in the Italian submerged sector. As I've said, it's hard to figure out what might be going on in there, but there are some indirect indications. For example, the textile industry in Prato (north of Florence). An interesting report from the Monash Asia Institute (Australia) showed how small enterprises in Prato are increasingly falling into the hands of Chinese immigrants, both legal and illegal.As the author of that report writes, "Prato’s Chinese community thus accounts for approximately one fifth of the entire Chinese population (100,000) in Italy", or about  10% of a population of 180,000 - three times the average percentage of the Chinese community in Europe.

That's a lot! Prato is a real Trojan Horse for the Chinese invasion! The situation in Prato was also recently investigated by the New York Times which pointed how the Chinese, working in about 3,200 small textile businesses have managed to beat the Italians at their own game. As the NYT put it,  the Chinese, taking advantage of Italy's "weak institutions and high tolerance of rule bending", have succeeded in creating "a thriving, if largely underground, new sector while many Prato businesses have gone under." In short, we are seeing ruthless, jungle-like capitalistic competition at its worst, with the authorities apparently unable to intervene. No rule of law here.

That sort of thing hurts precisely the one Italian sector - the "underground" or submerged economy - that had so far escaped from not only taxes but downturns in the business cycle. No more. It looks like outsourcing is a two-way street, and the "made in Italy" is becoming blurred with the "made in China". That is a very frightening prospect and many Italian managers are having sleepless nights over this.

Is the Italian model - the "made in Italy" niche in international trade - a thing of the past? Hard to say, but I am not all that pessimistic. Bottom line, it's intelligence that wins the day, and the Italians have shown over their history that they have a lot of it. Even if contrary to the Americans,  they don't invest in Research and Development anywhere near the necessary funds and Italian venture capital investments are minuscule. In 2009, only €98 million were invested in Italy as compared to €500 million in France. Five times as little!

Yet, even on a shoe-string, they manage to go forward. Let me mention just one initiative that was recently reported in the Sole 24 Ore: a major Italian bank, Intesa Sanpaolo, has set up a yearly "Start-Up Initiative" (now at its 5th year) bringing together young entrepreneurs and venture capitalists. This year's event was focussed on innovations in green technology, and the next one is programmed for nanotechnologies. Then the Bank will move abroad, with meetings planned in London, Frankfurt and Israel. The beneficiaries of this initiative are young Italian entrepreneurs with a bright idea (the example reported in the Sole 24 Ore was production of biocarburant in Ghana). To participate in the event, these young people have to face a hard selection process: out of a total 170, only 26 were approved by the Bank to present their business plan. Perhaps this selection process is too harsh - who knows - but at least something is done, and candidates with innovative ideas are obviously numerous. That speaks for a young, dynamic society, doesn't it?

Then there's another positive factor at work: Italians, believe it or not, are fairly chauvinistic. Not as much as the French, but they do like to defend their culture and their cuisine. More importantly, they often put their money into it - and that, in economic terms, makes a lot of difference. Developing countries have always had a hard time developing because over time their elites have stashed away their money in Switzerland and other havens instead of investing at home. Italian business is not like that - and, above all, Fiat, the very symbol of Italian industry. Today, it produces more cars in its Polish factory than in all its five Italian factories combined. Yet, the €20 billion it plans to invest to overhaul its production, as Marchionne recently remarked, will not go to Poland (which might have made more economic sense) but to Italy. And that is bound to make a big, big difference!

All is not yet lost for Italy - as soccer fans say, "Forza Italia!" But don't misread me. That's not meant as a reference to Berlusconi's party or the slogan he so cleverly crafted for his party. Not at all. Berlusconi is another story for another post: in my view, his time is past, he's an old man, he hasn't done the half of what he should have done to fight the recession...We'll see who, among the younger managerial generation, will make it to the top and push the country back on track! 
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