“Fidarsi è bene, non fidarsi è meglio” How serious is the recession in Italy?

Popular wisdom in Italy advises us that “to trust is good, not to trust is better” and this, in a very down to earth phrase is what has ruined the Italian economy over the last two decades and for the moment at least, saved it from some of the more acute pain of the present recession.

But now the hard reality of the world economy and Italy’s structural problems is catching up on the country. It is not the banks and the financial sector that are the problem but the old favorites: excessive public spending and debt and poor productivity. There are actually two economic crises gnawing at Italy – one is the world recession and the other is the longstanding structural faults which have been hamstrung Italy for decades. The government is hiding behind the first to mask its inability to deal with the second.

For most of this year, the OECD has been scathing in its criticisms of the management of the Italian economy. In March their report Economic Policy Reforms: Going for Growth 2009, they said that it was slipping further and further behind other wealthy developed countries. There was poor use of labour especially among the young, the old, women and the south. They reckoned that Italy needs to reduce public property and obstacles to competition. Taxes, especially on lower incomes should be reduced. There is a need for more education, especially at the university level. These are comments that we have heard for the last 40 years, maybe more. On the Heritage Foundation index of economic freedom, Italy sank from an already dismal 64th in 2008 to 76th in world ranking, behind Turkey and just making it into their “moderately free” category.

The OECD came back on the attack last week with a report on an Italian economy in “sharp recession” despite “a relatively healthy banking system”. They repeat the usual faults, a “weak underlying fiscal situation” and “poor productivity”.
Just yesterday, the OECD reported that Italy’s pension spending was too high at 14% of GDP in 2005, the highest in the OECD, almost a third of public spending and almost double most other countries. In 1995 Dini began pension reform but neither centre-left nor centre-right has had the courage to continue in any significant way. Italy huge commitment to pensions means that there is less welfare money available for education and to cushion the effects of job losses.
National organisations confirm this pessimism.

Confcommercio says that GDP this year will be 94.8% of 2007 figure (compared to US’s 98.2%, the UK’s 95.6% and Spain’s 98%. The lower GDP will mean less tax income and therefore a much greater increase in the public debt if there are to be any serious stimulus packages. It is due to rise from 105.7% last year to 114.7% this year and 117.5% in 2010, almost double the supposed eurozone limit of 60%.

The Confindustria’s president Emma Marcegaglia said last week that their studies reckoned that unemployment will go to 8.4% in ’09 to 9.3 in ’10. A million or so, still less than in ’91-’92 but for the government a timebomb on a short fuse. So far there has been almost no activity on the unemployed front but in September, with the holidays over and hundreds of thousands of workers with no work to go back to, there is bound to be unrest. This will be made worse by the natural deadline of contract renewal for large sectors of the economy.

Earlier in the year, Berlusconi showed his usual optimism and declared with a big smile that Italy had no toxic assets, Italian houses were not suffering from negative equity and there was (almost) no credit crunch, all of which was more or less true. Today, Italian businesses do have serious difficulties finding credit as the banks become even less trusting. Finance Minister Giulio Tremonti has made it very clear to Berlusconi that there is no money for big public works and very little even for earthquake reconstruction.

Berlusconi dismissed the stories about his parties and prostitutes as “rubbish”. He cannot brush aside the economic problems as “rubbish” nor that they are “a private matter”. The Berlusconi circus will keep people smiling or tut-tutting according to their point of view but without the bread he will have difficulty staying in power.