The resignation of Silvio may be compared to the collapse of the Berlin Wall: for Russia, that historical event marked the beginning of a decade of violence, poverty and geopolitical vanity. The fall of the “Bunga Bunga” king represents for Italy the implosion of a social model, and the government head, Mr. Mario Monti, must face a daunting task to avoid 2010s’ Italy resembling 1990s’ Russia.
As in Russia, capital is fleeing the country. This is due to the fear of new taxes – beneath outright fright of an even deeper economic downturn. This race for branches is just a portion of an overarching problem affecting the financial system. Due to increased lending risks, starting 2008 banks recalled credits, pushing many small and medium enterprises into financial distress. Moreover, Milan’s stock index t peaked 11 years ago at 49,355, and it is now some 70% lower.
The upshot: Italian businesses need money, and there is room for investors to make good deals. Mafia money is at hand. Mafia organizations enjoy a yearly revenue of some 135 billion € (183 billion $), and a profit of 70 billion € (95 billion $): these capitals need to be invested, and power will expand with credit. The risk for Europe and Nato in general is that of facing the threats of a “semi-failed” state in the middle of the Mediterranean.
Beneath finance, Italy suffers from productivity issues. The state of its businesses is not as deficitary as that of Russia in the 1990s, yet it is not at par with peers. The World Economic Forum competitiveness index ranked Italy at place 48 in the world, and a IESE-Ernst&Young study on investment attractiveness ranked the country at position 32.
Such performance is due to Italy’s ill-structured bureaucracy and fiscal system. Tax burden on commercial profits is at a staggering (and socialist-like) 68.6%. Larger businesses still depends on the State: just a few does not originate from former monopolies, or does not rely on State concessions. All in all, a restricted group of wealthy entrepreneurs controls the largest operations and trades.
Again, this situation reminds of Russia: cryptic and rigid business practices are in place, preventing the blossoming of new ventures, or the growth of successful ones. A new wave of privatizations or sale of large corporations will benefit the few cash-rich organizations. A generation of “Italian oligarchs” may soon come into the limelight – as in Russia twenty years ago.
Disillusioned citizens are increasingly supporting the idea of exiting the euro, and turning back to the lira. This option would very likely complete the identification process of post-Berlusconi Italy with post-1989 Russia. In the first months after its rebirth, the zombie-lira would be targeted by financial speculation, as it happened to the ruble under Yeltsin. Capital flight would ramp-up. Political instability would make tight monetary policies impossible, and Italy would print money to service its mountain-high debt. So, with another magic trick, the zombie-lira would turn into a 1990s ruble!
Moreover, as in Russia then, business stagnation in Italy exerted a deep influence in the social situation. Household debt is low, yet citizens receive low wages compared to their European peers. Income polarization and poverty are increasing, and social mobility has significantly slowed down in the last twenty years.
Unlike Russia, however, Italy can rely on a large stock private wealth: it is estimated at around 8.600 billion € (11.800 billion $), or 350.000 € (480.000 $) per household. A mere 22% of this wealth may pay the entire Italian State debt back. Yet, reforms would still be necessary. A new leadership is needed to save Italians from themselves. Reforms are needed to provide youngsters with career opportunities that differ from mafia or emigration. Good luck Mr. Monti, good luck Italy.