As Italians confront their most dangerous economic crisis, they fear for their future and their children’s. How will Italy need to change if this fear, which paralyzes economic activity, is to be overcome?
Based on the experience of other crisis countries thus far, Italians’ fear is justified by facts. Italian unemployment is up by forty percent since the crisis erupted, but the unemployment rate in Greece, Ireland, and Spain, where the adjustment is still far from over, has already doubled or tripled. Domestic demand in Italy is down five percent since its peak in 2007, but it has already fallen by between ten percent and twenty-five percent in the other crisis countries.
Do these comparisons apply? No one can know exactly. It is true that Italy has a smaller fiscal deficit and its banks are in better shape than any of these problem countries, but Italy has a high debt, has lost competitiveness and the capacity to grow, and, moreover, is in a much earlier phase of its adjustment.
Everyone knows that Italy must restore its fiscal balance and reestablish growth. Achieving fiscal balance is tough, but reigniting growth in austerity and without devaluing is even tougher. In fact, it cannot be done quickly and a recession this year appears inevitable. However, given time, productivity can be boosted, resources can shift from the sclerotic public to the private sector, and from the moribund domestic sector—such as services and construction—to the traded sector, towards the world’s most dynamic sources of demand, especially to emerging markets. So Italy needs to step up its investment in machinery, tourism, design, other exportable services, and in food processing and agriculture. A big part of the difference between a dynamic Germany and a stagnant Italy is that the former’s share of exports in GDP has increased by seventeen percentage points of GDP since 2000, while the share of Italy’s exports in GDP has increased by just two percentage points.
How does one make sure these needed changes occur as rapidly as possible and in a way that minimizes the pain? Experience in both advanced and developing countries points to the following four lessons:
There is a connecting thread across these lessons—they entail reforms that are intrinsically equitable—favoring the people instead of specific groups.
For precisely these reasons, the reforms are already and will be increasingly resisted by special interests of all stripes—government agencies, firms, unions, and professions—who all benefit from the currently uncompetitive and inequitable system. So, expect Italy’s highly respected new government to come under more intense attack from multiple directions as the adjustment takes place. The political opposition meanwhile will bide its time.
Italy’s success will ultimately depend on whether its citizens—who know that there is no serious alternative to the current course—make their voices heard. They will be the drivers of Italy’s change.
This article was originally published in Italian in L'Espresso.
2012 has the markings of a difficult year. The future of the euro is inscrutable and Europe is likely already in recession. Growth is slowing in the major emerging economies, and the recovery in the United States remains slow and fragile.
No one is fully knowledgeable about the state of the Syrian economy, how exactly it has been affected by the events taking place in the country, or how to interpret the choice economic indicators issued by Syrian officials.
The U.S. pivot to the Asia-Pacific has created both tension and opportunity in its relations with China.
The gap between the efforts to deepen integration in order to save the euro and what most people really think should happen is wider than it has ever been before.
The Russian political system is likely to undergo some changes this year, perhaps even serious ones — not because Putin wants them, but because elements of Putin's inner circle are convinced that the government must take some of the protesters' demands seriously.
Sign up for Carnegie announcements and publications—including Carnegie This Week—by filling out the form below. Note—fields marked with an asterisk (*) are required.
Enter your email address in the form below to receive an email with a link to your profile.
Comments