Nation states no longer work. Benjamin R. Barber

A New Italy?

Italy’s government is celebrating the country’s recent economic growth, but not all indicators point to success. What happens in the future will depend on how solidly Renzi can prevent the “Berlusconization” of today’s political culture in Italy.

Just how fragile is the Italian economy? Italy has been celebrating an “exit from the recession” on the data of the first quarter of 2015, signaling a +0.3% in the GDP growth. The positive data comes after the longest recession time since WWII. In the same period — thanks to some reforms introduced by Matteo Renzi’s government — the number of permanent working contracts issued increased by 206,000, and an additional 61,000 contracts were converted from temporary to permanent.

The government has been celebrating the news through a tweet with a picture of a red arrow pointing up and destroying a brick wall. Is this enough to start being optimist about the future of Italy? The leader of the “Five Star Movement” Beppe Grillo (the second Italian party by preferences, at 21%) commented laconically: “all b*llshit”. With which perspective does the truth lie?

Deflation and Continued Unemployment

Of course, one cannot complain about positive news — and indeed the resurgence in permanent contracts is a good thing. Yet, we cannot overlook that some other data may inspire less enthusiasm concerning the condition of the country. Istat, Italy’s statistical institute, noticed that inflation is not picking up — despite economic growth and the ECB plan to print money and buy public debt. On an annual basis, prices are set to decrease by 0.1%.

One may think that deflation is a mere consequence of decreasing energy prices, and in part this is the explanation. Nevertheless, deflation still signals the presence of structural problems yet to be solved. Employment is always the main issue: if we consider working age people, the EU average of employed persons is 69.2%, whereas Italy reaches a mere 59.9%. Only Greece and Croatia are in worse condition, at 53.3% and 59.2% respectively.

The first explanation is in the numbers as such. The incredible burden of taxes has not made possible an actual increase in employment, whereas job reforms have facilitated the transition from temporary to permanent contracts. In March, unemployment in Italy reached 13% (from 12.7% in February). In the OECD area unemployment is at 6.9%. Just for comparison, Germans are horrified by those lazy Berliners living in a city where unemployment is at 11% — 2 percentage points less than in Italy.

The main issue is that things like employment and a small recovery in business activity technically constitute “economic growth”, but have not had an impact of the “hard” data of investment and long-term industrial production. The big surprise of the period is not just Italy’s unexpected performance, but also the situation of Germany, whose growth had been forecasted at 0.7% and totaled a mere “Italian” 0.3%. In general terms, the Club Mediterranee is performing better than continental Europe, except of course for Greece.

A New Modus Operandi?

What lies ahead? The Italian government has been busy with the introduction of a new electoral law, trying to fix the damages of a previous version introduced by one Mr. Berlusconi. This fight sucked up all available political capital, preventing accelerated reforms in other sectors. As usual, it seems that Italian political life has been too busy with politics to be able to think about the economy.

The real risk of the current situation is a “Berlusconization” of the context. Decreasing rates on public debt may convince the ruling parties that reforms are not that urgent in the end. Nevertheless, it seems now clear that ECB’s quantitative easing strategy has been approved building on some sort of “gentlemen’s agreement” about Italian reforms. Renzi, in other words, is no Berlusconi.

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