Italian Elections: End of the Berlusconi Era?

Well the leadership of the EU seems more than happy with having Prodi back:

Silvio Berlusconi may still be Italian prime minister for another two months, but some corners of Europe have all but consigned him to history.

The French and Luxembourg governments and José Manuel Barroso, European Commission president, did not even wait for the official results from the Italian election before congratulating Romano Prodi, the man who barely bested Mr Berlusconi.

Why, the FT asks, where they so keen:

One theory is that, as a former European Commission president, Mr Prodi will provide valuable support for European integration.

In an article in today's Le Monde newspaper, Mr Prodi says that Italian foreign policy should be based on three principles: encouraging a strong and united Europe; developing a solid relationship with the US; and supporting multilateral efforts to solve global problems.

Another school of thought is desperate for the new government to implement much-needed structural reform. No sooner had the election result been declared than Joaquín Almunia, the EU's economic and monetary affairs commissioner, called on Mr Prodi's team to get Italy's budget deficit under control and proceed with the rapid implementation of reforms.

The key issue, of course, is on whose votes Prodi will depend to carry out his reforms. If he has to depend on Bertinoti, then they may not be very 'reforming' reforms to say the least. But he may have other alternatives.

Inside Italy a number of Berlusconi's old allies continue to fidgit restlessly. Manuel Alvarez-Rivera of Election Resources writes:

you may already be aware of this, but just in case I should point out that the Italian news media reported earlier today (Wednesday) that one of Berlusconi's allies, the Union of Christian Democrats and Center Democrats (UdC) came out against the idea of a "grand coalition" government that Berlusconi's been floating as of late: according to them, if the center-left has the means to govern, then they should govern.

and

The UdC definitely wants something. The party's secretary said today that the challenged ballots won't change the outcome of the election, rebuking Berlusconi once again. And on top of that, Fini's National
Alliance is also distancing itself from the fraud allegations.


As Charles Grant, director of the Centre for European Reform in London, says, "it will be hugely significant to learn whether the new government will be capable of structural reform.....Unless there's a real effort to reform soon, a serious debate will start on whether Italy should stay in the euro and that's something that's very important for the EU."

Italy Long Term GDP

It's A Long Winding Road....

Well the FT are reporting that negotiations for the new government are now underway, despite the obstinacy Berlusconi is still demonstrating. It does however look like the new government won't be formed until late in May since Carlo Azeglio Ciampi, Italy’s president, has the constitutional duty to swear in premiers butwants his successor to appoint Mr Prodi because his own seven-year term ends on May 18. This is the classic situation where a country would see the indecision leading to a run on its currency, but since Italy is in the Euro this can't happen. This is both good and bad. It is good as it enables people to take their time in the negotiations about the new government, and if Prodi were to be serious about trying to set up a stable government which can carry out serious reforms this time will be needed, but it may be bad if the time is just frittered rather than gainfully employed. This, of course, has been Italy's experience with the euro to date, where it has been a shield against reform rather than a stimulus for it.

The big fear is that is one day reality does burst through the shield, then the resulting correction may be a big one.

Some indication of the scale of the problem can be read from the following:

"Mr Prodi’s precarious position in the Senate will rest on the support of Communist Refoundation, a hardline party led by Fausto Bertinotti, who instigated the downfall of Mr Prodi’s previous government in 1998.

Asked by reporters if he feared a “Fausto factor” would destroy his next government, Mr Prodi replied: “There’s no Fausto factor. There’s a strong agreement.”

He was referring to the programme on which he fought the April 9-10 ballot in alliance not only with the communists but with a multitude of parties ranging from Catholic centrists to Greens and secular radicals.

An early hint of trouble emerged on Wednesday when 12 dissidents in Communist Refoundation threatened to split the party and go into opposition if the party leadership supported a Prodi government.

In a statement, the dissidents said a Prodi-led government would be “anti-worker” and founded on “a programme of blood and tears” dictated by Italian big business."

Essentially, to make an effective reform government Prodi needs to reach across the divide, and find some points of support among some of the moderate centre right members of the 'House of Freedoms'. Failing that it is hard to see how his government can work given Italy's important economic problems.

These are nicely outlined in an article in Business Week today:

Prodi's urgent first task will be attacking Italy's spiraling budget deficit, which could hit 4.5% this year and its towering national debt, which has been rising steadily for two years and is headed for 107% of gross domestic product. That means curbing government spending and raising new taxes pronto. But those are hardly popularity-enhancing moves. The task is all the more difficult with Italy's economy forecast to grow at a feeble 1.2% in 2006.

The question is, how much capital will Prodi have to spend on such belt-tightening moves just to stabilize government finances, before he can even begin to tackle economic reform? Given his razor-thin majority in the Senate, tough measures are likely to prompt political infighting. Far left coalition partners, including two communist parties, make up nearly 10% of Prodi's support base. And firebrand communist leader Fausto Bertinotti is once again an ally despite having torpedoed Prodi's 1998 government.

One of the biggest reform challenges facing Prodi will be injecting greater flexibility into Italy's rigid labor market. Like France, where massive protests reversed passage of a law that sought to encourage companies to higher younger workers by making their employment terms more flexible, Italy already has a large number of workers employed through temporary contracts.

Italy's labor market remains extremely rigid because the country lacks a comprehensive unemployment insurance system. Government payouts to laid-off workers are decided on a case-by-case basis and tend to only cover larger companies. That makes routine restructuring at the bulk of smaller companies -- which comprise 70% of the Italian economy -- nearly impossible. "It's a major obstacle to restructuring," notes labor expert Boeri.

Prodi's platform also includes a plan to create a kind of "tenure track" for workers, which would help them clinch a job on a flexible contract that over time adds increasing protections for the worker. The idea is not to create a new labor contract for the disenfranchised, as France tried, but to adjust the existing contract in a way that would permit companies to hire workers on a flexible basis and compel them to grant an increasing amount of protection over time.

Economists also point to reforms that would not cost the government anything but would unleash fresh competitive energy in Italy's economy, such as liberalizing Italy's high-cost service sector including energy, transportation, communication, retail trade, and a variety of professions. The idea is to rid the system of guild-like rules that have their origins all the way back in the Middle-Ages.


Well, much of this sounds interesting in theory, seeing it in practice though will be what is important. The bottom line is that I cannot avoid the feeling that Italy has an extremely tough time ahead of it. I would, of course, wish to be proved wrong.

Italian Elections Backdraft

At the time of writing Berlusconi is still filibustering, but it seems to be that, rather than any serious attempt to question the outcome of the electoral process. Meantime the financial markets are realigning themselves:

Italy Ratings

The yield gap between Italian and German 10-year bonds earlier widened one basis point to 31 basis points after Romano Prodi claimed victory in Italy's closest election since World War II. Prime Minister Silvio Berlusconi demanded a recount.

Goldman Sachs Group Inc. last week recommended investors avoid bonds sold by Italy, the euro region's second-most indebted nation, because slowing growth means the country's credit rating may sink. Moritz Kraemer, head of European sovereign ratings at Standard & Poor's in London, said at a Feb. 8 press conference the company will judge whether to lower Italy's rating after a new government is formed.

``The prospect now for any reform of Italy's public debt must be close to zero,'' Marc Ostwald, a fixed-income strategist at broker Monument Securities Ltd. in London, said in an interview. ``I wouldn't want to hold Italian bonds until they get to a spread that acknowledges those risks, and they certainly don't at the moment.''

The Financial Times also takes a very realist stance:

As the nervous excitement mounted on Monday in Italy’s general election, it fell to Standard & Poor's, a credit ratings agency, to strike a sober note of realism. Half an hour after the first exit polls predicted triumph for Romano Prodi – a forecast later overtaken by events – S&P warned that it might cut Italy's long-term credit rating this year “unless there are signs of a sustainable and coherent strategy to reduce the public debt”.

It was a reminder of the hard work that lies ahead for the next government, whatever its political complexion.

S&P cut Italy's rating to AA- in July 2004, making it the first eurozone country to suffer this humiliation. Last year the Italian debt rose to 106.4 per cent of gross domestic product, its first increase since 1994.

Moreover, Italy's budget deficit climbed last year to 4.1 per cent of GDP, and the centre-right government disclosed during the election campaign that it was raising this year's deficit forecast to 3.8 from 3.5 per cent.

The challenge that now faces Italy is how to restore discipline to the public finances, when it seems unlikely that either Mr Berlusconi’s centre-right coalition or the centre-left opposition will have legislative majorities commanding enough to force cuts in public expenditure.

Why Do Most Italian Youths Live With Their Parents?

Now here's an interesting question. Well according to a new study by a pair of under-40 Italians who teach economics — Marco Manacorda at London School of Economics and Enrico Moretti at the University of California, Berkeley — a large part of the blame lies with the parents. After a 1992 social security reform that raised the national retirement age to 64, parents continued to earn enough to keep their adult children at home longer. The researchers found that a 10% increase in parental income resulted in approximately a 10% rise in the proportion of children living with their parents.

The full paper is:

Why Do Most Italian Youths Live With Their Parents? Intergenerational Transfers and Household Structure , by Marco Manacorda and Enrico Moretti, Journal of the European Economic Association, forthcoming

The Future Of Italy's Young

Thank's to Roberto at Wind Rose Hotel for pointing me to this piece in Time Europe:

"Italy is now on course to become quite literally the oldest of countries. Beset by economic and social stagnation that makes it among the most ossified slices of Old Europe, it is stuck with a stubbornly low birth-rate that means Italians are not even replacing themselves. In a more fundamental way, the nation has not figured out how to make use of the energy and ingenuity of its young. Faced with bleak job prospects and a lack of young leaders to look to, Italians in their 20s and 30s risk falling into a nationwide generational rut. Many are afflicted with a pervading sense of hopelessness and malaise that contrasts with the youth-driven vigor boosting states like Sweden or Slovenia."

I'm not sure that this isn't a rather idealised picture of Sweden and Slovenia (who also have their ageing issues coming) but it certainly seems to be fair comment about Italy. And especially this part:

At the core of the dilemma lies Italy's aging but long-lived population. For the past generation, the birthrate has remained at or near the bottom of world rankings, stuck last year at 1.3 children per woman (compared to 2.7 in the mid-1960s). That has fundamentally tilted the economy: in the past 10 years, the ratio of retired to working Italians has jumped from 23% to 28% — the second highest in the world — clipping productivity and jeopardizing the solvency of the pension system. Without an unexpected surge in births, that ratio is expected to double by 2040.

Italy is hardly the only industrialized nation to face a demographic time bomb. But elsewhere in Western Europe, the declining birthrate tends to be caused by eager young people striking out on their own who are too focused on satisfying immediate ambitions to take on the burden of rearing children. In Italy, says Francesco Billari, 35, a demographer at Milan's Bocconi University, the empty cradles are the fruit of exactly the opposite phenomenon: an adolescence prolonged well into the 30s.

Nowadays, the average Italian man is 33 when his first child is born, making Italian men the oldest first-time fathers in Europe. There are plenty of reasons: drawn-out university studies, inadequate child care and, frankly, not enough young adults willing to grow up. "Italians take a long time to assume responsibilities," Billari explains. "Everything," from moving out of the parental home to marrying and having kids, "starts late."

A peculiarly Italian part of the problem is the stay-at-home son, or mammone. More than 80% of men aged 18-30 still live with their parents, enjoying the coddling of doting mamas who take care of all the boring details of daily life, leaving the son free to spend his time and his income on pleasing himself. Who'd want to give that up before he had to? Nowadays, the typical young Italian mammone has even become a figure of ridicule.

Essentially what we are seeing is a society which is insufficently able to flexibilise institutionally (whether at the government, employment market, corporate or family levels) to be able to confront the problems posed by rapid ageing.

Addio, Dolce Vita, Or Twilight of the Idols?

According to the Economist:

"For all its attractions, Italy is caught in a long, slow decline. Reversing it will take more courage than its present political leaders seem able to muster"

These words come from John Peet Europe Editor of The Economist. You can hear a podcast interview with him here (windows media player).

As the economist survey says:

AT FIRST blush, life in Italy still seems sweet enough. The countryside is stunning, the historic cities beautiful, the cultural treasures amazing, and the food and wine more wonderful than ever.....

Yet beneath this sweet surface, many things seem to have turned sour. The economic miracle after the second world war, culminating in the famous 1987 sorpasso (when Italy officially announced that its GDP had overtaken Britain's), is well and truly over. Italy's average economic growth over the past 15 years has been the slowest in the European Union, lagging behind even France's and Germany's (see chart 1). Its economy is now only about 80% the size of Britain's. Earlier this year Italy briefly tipped into recession; for 2005 as a whole, its economy is likely to be the only one in the EU to shrink. Growth next year is expected to be anaemic at best.


Just how anaemic this growth has been can be seen from this chart (from the Economist article):



Part of the problem is that as populations age growth seems to slow down. My best guess is that as this ageing continues growth may slow down even further, and even turn negative at some point. Some evidence for this statment can be found in the most recent performance of the German, Japanese and Italian economies (the world's three oldest countries) which I have posted about here and here (on the Demography Matters blog).

Meantime last November Time Asia took time out to compare the relative evolution of China and Italy, and the comparison, of course, did not run in Italy's favour:

Italy is the sick man of Europe these days—its economy has shrunk by 4% since 1999 after adjusting for inflation...... Along with Germany and France, the nation has been struggling with weak consumer spending, waning productivity and rising government deficits. But unlike its neighbors, Italy lacks robust large corporations that can export their way out of trouble. Many of the thousands of small and medium-sized companies that once gave the Italian economy its flexibility and dynamism are poorly equipped to deal with the challenges of a fast-changing world. Most don't have the scale, the funding or the commercial know-how to become global players. What they produce is beautiful, but it's neither particularly sophisticated nor difficult to replicate. In other words, Italy's economic structure is almost perfectly shaped for an attack by China, which excels in moderately sophisticated manufacturing—and can turn out products far cheaper than is possible in western Europe. In sector after sector—from textiles to shoes to furniture—companies have been losing ground.

When Italian manufacturers ran into competitive problems in the past, there used to be an easy fix: currency devaluation, which made Italian exports cheaper relative to those of other countries. But that solution is no longer a panacea, because Italy swapped the lira for the euro, which has risen against most other currencies. "We used to say small is beautiful, but that's no longer true," says Adalberto Valduga, president of the regional chamber of commerce in nearby Udine, the provincial capital. While the strong euro is penalizing firms, he says the real challenge is a more fundamental one: "We need to change our way of thinking." The International Monetary Fund agrees. In a tough report last month, it castigated Italy's economic policies and said the nation's waning competitiveness was due to "deep-seated inefficiencies" as much as to foreign competition. China looks set to overtake Italy this year as the world's sixth-largest economy after several years of jockeying for the spot.

Elections 2006 and The Italian Economy

Well, Italy seems to be having difficulty resolving its political future. It is too early yet to really be clear about what will be the final outcome of the April 2006 elections. At the time of writing Romano Prodi and his centre-left opposition are claiming victory, but the degree of uncertainty is still huge.

First thing Tuesday morning the outcome is still in doubt, and those who were sceptical about the early exit polls were right to be so. As I say, Prodi is now claiming victory, but this is being challenged vigorously by the Berlusconi camp. The margin is wafer thin for the lower house (the Chamber of Deputies, or 'Camera'), with Prodi's having 49.80 per cent of the vote as compared to 49.73 per cent for Berlusconi's House of Freedoms (a difference of a mere 25,000 votes). Naturally calls for a recount abound. The position of the Senate is still in doubt. There is currently a one seat difference between the camps (in favour of Berlusconi) but six more seats based on overseas votes are still to be allocated.

Wikipedia have a substantial entry on the elections themselves, and another on the Italian parliament, which may prove useful in understanding things if the final out come is ultimately a 'hung' parliament.

New Economist had a worthile post on Berlusconi at the end of last week, focussing on how, as the Economist said, "the winner must face up to the fact that Italy's economy is in dire need of reform".

He also quotes a New York Times article which made the following perfectly valid points:

But Italy's economic growth was even slower than the disappointing rate shown by many European countries......Italy's real gross domestic product in the final quarter of 2005 was just 1.6 percent above the figure for the second quarter of 2001, when he won the election. It was well below the average for countries using the euro, which was 5.7 percent.

Even that growth has come because the government has been willing to run budget deficits. Households are spending for consumption at a rate just 1.7 percent above the rate when Mr. Berlusconi was elected. But the government consumption number is up 6.9 percent.

All this means that Italy, on a relative basis, is becoming poorer. In 2000, its G.D.P. per person was 2 percent higher than the average of all 25 countries now in the European Union. Last year it was 2 percent below that average. On that per person basis its economy was 24 percent larger than Spain's in 2000. Now the margin is 15 percent.

The slow growth has come as Italy has struggled to stay competitive, both within Europe and abroad. Italy used to periodically regain its competitive position through a sometime violent currency devaluation. But now that it is in the euro zone, that is impossible.

Since Mr. Berlusconi took office, Italian inflation has run above that of other European countries, and he has taken to blaming his opponent this year, Romano Prodi, for allowing the country to join the euro at a euro-lira exchange rate that was too high.

Italian exports have risen, but not as fast as imports, and the current-account surplus that Italy enjoyed before the last election has turned into a deficit.

Mr. Prodi, a former Italian prime minister and former president of the European Commission, has ridiculed Mr. Berlusconi for making new promises after failing to keep promises he made five years ago.

Blogroll Update

I've updated the blogroll, and put a number of weblogs which originate in Italy up. There is Roberto at Wind Rose Hotel, Marco at Se Me Lo Dicevi Prima, Wobegon at, naturally, Wobegon, and Hans, at I, Hans.

Roberto and Hans have been helping me out a lot with info on Italy prior to the elections, and Roberto has a considerable number of posts in English on this topic.

His latest post, Italian Elections 2006 (6) has a look at some of the arguments which are going on about the present state and likely future of the Italian economy.

Interestingly Roberto finds solace in the words of Korean Economist Pio Song (written in The Korea Herald). The solace that Roberto needed was from the wrenching experience produced by the reading of two articles, The Economist's "Addio, Dolce Vita", and Time Asia's Twilight In Italy (see this post, below).

The words which gave Roberto most solace I think were these ones:

[i]n the 1970s, Italian political and social issues were strongly debated and argued. Today in my opinion the situation seems difficult, but not so desperate as it was depicted at that time or it has been described recently. Italy and Italians have experienced more difficult times than the actual moment. The agenda of the new government should be long and complex. Problems to face and solutions to implement are hugely unpopular but even more necessary. Now that monetary policy has been handed over to the European Central Bank, Italy can rely only on fiscal policy in tuning its economy by itself.

Surely a sort of Rooseveltian New Deal is needed. Italian infrastructure system should be modernized and renovated. The ailing national air company Alitalia, railways, highways, schools and hospitals need a remodeling.

Now my answer to Pio Song would be yes and no. Yes he is right that the social and political crisis in Italy was much worse in the 1970s, yes he is right that what Italy badly needs is some modern version of the new deal, but no, he isn't right in thinking that this can be so easy for Italy. We are not in the 1930s, and Keynesian type fiscal policies are all but excluded for Italy now, essentially for demographic reasons. And for these reasons the economic crisis is much more severe than it was back then. Rejuvenating an ageing Italy will not be easy, and the political gridlock we are seeing at the moment hardly augurs well.

You can also find:

Italian Elections 2006 (5)
Italian Elections 2006 (4)
Italian Elections 2006 (3)
Italian Elections 2006 (2)
Italian Elections 2006 (1)

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