Why Italy is a Basket Case

This is not going to be a cheerful post. I love Italy - but the fact is, Italy is shooting itself in the foot. There is a very good reason why Italy's economy isn't going to get better anytime soon: overall, since the 1970s, Italy's entrepreneurs haven't believed in what they were doing here, in Italy. They haven't re-invested earnings from their businesses - what has happened, I don't know. Did they take the money they earned and ran abroad with it, buying chalets in Switzerland, apartments in London, beach houses in Florida and investing the rest in hedge funds?

Maybe. I wasn't able to uncover what Italians do with the money they make through their businesses. But if Thomas Piketty, the author of Capital in the 21st Century is right, what he says is deeply disturbing.

And discouraging.

Here is his data, comparing savings in selected countries, actually the most advanced, industrialized countries in the world (the table is in Chapter 5 - this is a screenshot):

Look at Italy. Just 3% of business earnings are re-invested - and compare that to what happens in other countries: the UK (62%); Japan (53%); the US, Canada and Australia (40% each). Both Germany and France aren't doing so well (23 and 19% respectively), but they're still much better than Italy.

Yet, on the face of it, Italy's rate of savings is a healthy 15%. Therefore, if Italian businessmen believed in themselves and in their industry, Italy should be doing very well - in fact, it should be one of the advanced countries ahead of everybody else. Italians are parcimonious, they save more than anyone else - the next best saver is Japan (14.6%) and then the figure drops to around 12% for Germany and Canada, with France and Australia much lower and the US the lowest of all (7.7%).

But if you take into account public deficits - the way the State squanders money and gets into debt - then Italian private sector savings get eaten into:

You see what happened? The Italian State's savings is in fact a deficit: -6.5%. The biggest hole of the lot: while none of the advanced countries are doing well - the only exception is Japan (in the positive range, with a meagre 0.1%) -  none comes looking as bad as Italy. As a result, if you consider national savings as a whole, adding the public sector to the private, you see that the lead Italy has in terms of savings has disappeared: Italy stands at 8.5%, well behind Japan (14.6%) or Germany (10.2%) - yet well ahead of the US (5.2% - but that's another story for another blog post).

A word of warning. These are very aggregate numbers - a little like the tip of the iceberg - and there's only so much you can deduce from all this (setting aside some minor incongruencies: for example, the US private savings is shown as 7.7% of National Income in table 5.2 and 7.6% in table 5.4). And we're looking at averages over a huge time span, from 1970 to 2010, some forty years.

Matteo Renzi, Italian Prime Minister (source)
Still, such numbers are indicative of Italy's malaise: an excessive public debt threatening private savings; and a tendency on the part of the business class to take the money and run out of the country instead of re-investing it at home, in one's business.

Italian businessmen, of course, are quick to marshall arguments to defend themselves. They will tell you they do this because of (1) a corrupt political class incapable of reform and with no state management competence; (2) a ridiculous, wasteful state bureaucracy that drowns in red tape; (3) a rigid labor market that makes Italian workers both costly and uncompetitive on a world scale; and (4) a vile Mafia conditioning the market - factors that taken together makes it impossible to run a profit-making business in Italy.

And naturally, they're right. If something is not done to correct these four areas - reforming Italian politics, modernizing the state bureaucracy, upgrading the labor market so it can compete on a global scale, reigning in the power of the Mafia - Italy won't get out of the doldrums.

Renzi, please take note. Personally, I believe he knows this. The question is: does the rest of the Italian political class realize what is at stake? I doubt it. Your views? I would love to hear from my Italian friends what they think...

And here's a video shown by the Italian Ministry of Foreign Affairs at the on-going Davos meeting. It tells you a lot about Italy that I bet you'd forgotten (though you probably knew it):

Mmmm, yes. There are big Italian corporations, like Luxottica or Ferrero, that do make a difference on a global scale. But many (like Prada) are not really "made in Italy" - the stuff is often made abroad, in China and elsewhere, where labor costs are low. The fact remains that Italy is the birthplace of a certain kind of creativity. But for how long if everyone escapes from Italy?