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A new Italian Renaissance?

Italian Prime Minister Matteo Renzi seems to be on the right track. But more reforms are needed besides changing the infamous Articolo 18.

“The end of recession”: This overly optimistic title was featured on many Italian newspapers’ front pages at the end of February. The Italian statistical institute ISTAT had forecasted a growth of 0.1% in the first quarter of 2015. This would be the first sign of economic development in three years. Enough to make the day of many Italians. Optimism is back.

Attracting investments

Yet the line between optimism and illusion can be very thin, and this may well be the case here. It is not yet clear, for example, which economic reform Italians should thank. Nothing significant has been introduced: Politics is still a work in progress, although Prime Minister Matteo Renzi is finally managing to bring order to the situation. Nevertheless, it seems clearer than anything that the main reason for the tiny amount of progress is collapsing energy prices more than anything else.

The attention from Germany is focused on a reform to be passed later in March: the modification of the infamous Articolo 18. This law (present also in many other countries) basically forbids laying off workers for any reason if the company has more than 15 employees. If a worker is “fired without reason”, he can receive compensation and eventually be reinstated in his job. In Renzi’s reforms, the element of compensation still remains in most cases, but workers will be hired back only if the firing was due to “discrimination”.

Articolo 18 has been seen for years as the main problem affecting the possibility of Italian growth, and this may also be true. It is not by chance that 97% of Italian companies have fewer than 15 workers: Entrepreneurs try to avoid going beyond the 15 limit for as long as possible. The situation is different if we consider the total percentage of Italian employees protected by Articolo 18: It is an astounding 65.5%. Around 7.8 million people work in “larger” companies.

Advocating a reform of this law is just, and no wonder Germany is looking forward to it, as are Italian entrepreneurs. Nevertheless, there is reason to be skeptical about whether the reform will facilitate a new Italian Renaissance. The problem? In a nutshell, if you facilitate firing people and do not facilitate the expansion of new businesses, people will be fired – and possibly will not be hired back, because of a “lack” of newly formed companies.

Of course, one could argue that making working contracts more flexible would attract investments. But it has been proven that Articolo 18 is not the main element preventing the expansion of businesses. Entrepreneurs and foreign investors believe it is much harder to face other Italian specialties such as staggeringly high taxation, unpredictable judicial processes, harsh bureaucracy, slow internet and lagging infrastructures – or a mix of the above.

Healing the scars

The two-decade-long stagnation of Italy has left scars that will not be healed soon. A prolonged contraction of the economy does not mean only that business activity is somehow less lively than before; it means that the industrial structure has been affected. A simple car trip from Rome to southern Italy gives a perfect depiction of the problem, with a frequent display of abandoned industrial districts. Decaying ghost towns around abandoned warehouses are a heartbreaking portrait of the situation. In these areas, industrial culture is not dormant: It has been erased and is not to be resurrected. There is no chance of “economic growth” as before.

An additional risk concerns the possible effect of the ECB’s quantitative easing, promoted by the bank’s president, Mario Draghi. New money pumped into economies facilitate economic growth, provided that you have something to invest in. In other cases, the money will be used to ignite speculation (Spanish real estate, anyone?) and will create inflation. The final consequence is a broadening of economic polarization.

This is the case of Italy: QE cannot rely on a reliable “connection chain” between banks and businesses, mostly because of the risk of opening businesses in Italy. The ECB move may have very few positive effects if nothing is attempted in Italy: Banks will provide financing for “safer” investments (land and houses) and not for ventures.

And what will it take to introduce reforms?

Matteo Renzi has proven so far to possess an unparalleled political sensibility (I guess it is clear, if you want to become Prime Minister in your late thirties…), and the value of the Articolo 18 reform lies also in the ability to reform it. Such a move had been attempted for decades by other governments to no avail. Even Berlusconi never managed to do it. Renzi did, and this leaves hope. The challenge is on: Will Italy be able to restructure its tax structure and its judicial system?

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by Stefano Casertano
02.04.2015
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