ROME - Antonio Fazio, the disgraced former governor of the Bank of Italy, warned half-jokingly in 1998 that the euro would not be paradise but a "purgatory" that would demand years of pain and sacrifice.
Currently appealing a conviction for improperly trying to
influence a bank takeover in 2005, Fazio is not much listened to
these days, but his words have turned out to be frighteningly
prophetic for Italy.
The country has gained much from its membership of the
single currency over the past decade, notably generously low
borrowing costs and freedom from the wild gyrations that plagued
its old lira currency on foreign exchange markets.
But it has not used the time to purge itself of faults which
have made it the most stagnant economy in Europe for a decade.
Its towering public debt is stifling growth and it is buckling
under the pressure of competing on equal terms with Germany’s
forbiddingly efficient export machine.
“Italy hasn’t grown in the last 15 years,” said Lorenzo Bini
Smaghi, a former member of the European Central Bank Executive
Council, now teaching at Harvard University.
“The markets are currently asking ‘what is Italy doing to
tackle the fundamental problems that have prevented it from
growing?'” he said.
The question is expressed in borrowing costs that are
hovering around six percent on 10 year debt, dangerously close
to the levels that pitched Silvio Berlusconi from power last
year and brought in the technocratic government of former
European Commissioner Mario Monti.
The answer appeared clear when Monti took office promising
to control public finances, open up the economy to more
competition and reform Italy’s sclerotic labour market to get
more young people into permanent jobs.
It is less so now that the tangled realities of Italian
politics have got in the way, eroding support for reform and
fostering an increasingly bitter public mood best expressed in
the angry diatribes of comedian-turned-campaigner Beppe Grillo
and his rebel Five Star Movement, which wants out of the euro.
All that many ordinary Italians have seen of Monti’s
promised reforms are higher taxes, rising unemployment,
declining incomes and yet another year of recession that has
hardened resistance to more sacrifice.
Isolated by politicians gearing up for elections due early
next year, Monti is seeking a Europe-wide solution to the
crisis, with more emphasis on growth and new tools like jointly
issued eurobonds backed by the whole bloc, including Germany.
But Italians, who once trusted Europe far more than their
own scandal-ridden political class, have begun to turn away from
the euro as the single currency has come to be associated with
terms like austerity, tax hikes and pension cuts rather than
stability and low interest rates.
“For years Europe represented ‘something more’ but now it
represents ‘something less’,” said former Prime Minister
Giuliano Amato, who piloted a series of reforms at a time of
severe crisis in the early 1990s.
MAVERICK
Opinion polls have shown steep falls in support for the euro
in Italy but the clearest illustration of the new mood in has
been the runaway success of the maverick Grillo, who wants Italy
to default on its debt and drop the single currency altogether.
“If we had the lira in one night we could write two lines on
a piece of paper and devalue by 30 percent, and then we could
start over. As things are now, we can’t make it,” Grillo said
ahead of spectacular successes at local elections last month.
He has bellowed his defiance in town squares across Italy,
blasting Monti, the euro, bankers and corrupt politicians in a
campaign that has turned his Five Star Movement from a fringe
group to the second biggest political force in the country.
Traditional parties denounce him as a demagogue but they
have been terrified by the explosion of popular anger against
politicians and are scrambling to come up with a response.
Berlusconi, who still controls Italy’s largest centre-right
party, the People of Freedom, is also trying to ride the
anti-European wave, saying leaving the euro was “not blasphemy”
and he did not see why it should make Italians poorer.
In his long political career Berlusconi has frequently
blamed the single currency for Italy’s difficulties, famously
declaring in 2005 that “Prodi’s euro has screwed us all,” in
reference to former centre-left leader Romano Prodi.
This time, out of office and desperate to regain lost
popularity, it may turn out to more than just words.
Monti has acknowledged that the changing mood is now
reflected in Italy’s parliament, which he said “has
traditionally been pro-European, and no longer is”.
The Northern League, which seven years ago tried to promote
a referendum to take Italy out of the euro, is also returning to
its euro-sceptic roots, meaning that at least three large
parties may fight the next election on an anti-euro ticket.
The rising tide of anti European sentiment has come at a
dangerous time with Greece teetering on the brink, Spain
dependent on international support to keep its banking system
afloat and Italy, the euro zone’s third biggest economy, now
once again the next front line in the crisis.
“Nothing irreparable has happened yet but a serious accident
is possible,” said Giampiero Auletta Armenise, chairman of
Rothschild in Italy and former chief executive of UBI Banca.
THROWN AWAY
Italy avoided the frenzied real estate speculation that
ruined Spain and Ireland and has a far stronger economy than
sickly Greece. But it has slid further into stagnation, choked
by one of the world’s heaviest public debts.
“We threw away the euro dividend in those years,
particularly at the start of the 2000s,” said Emma Marcegaglia,
former head of Italy’s main employers federation Confindustria,
who returned to her family-owned steel group this year.
“We went from paying interest rates of 10-12 percent to
rates of 2-3 percent and instead of taking advantage of this by
cutting taxes, investing in research, reducing spending and
building up surpluses, we did the opposite. We threw it away.”
Official data shows gross domestic product has risen by an
average of 0.4 percent a year since 2000, hourly productivity
levels have been stagnant, and in the last five years average
family incomes have fallen 7 percent in real terms.
In 2000, Italy’s unit labour costs, one of the main gauges
of productivity in the economy, were 12.75 percent lower than
Germany’s. Today, they are 6.6 percent higher.
In the same period, Italy’s public debt burden, the heaviest
in Europe after Greece, has climbed from 108 percent of GDP in
2000 to 120 percent in 2011, leaving it perilously exposed to
the changing moods of the bond markets.
Looking forward, the picture gets no better. Growth between
2012 and 2017 will average just 0.5 percent, the Paris-based
Organisation for Economic Co-operation and Development forecast
last month, the lowest rate of 41 countries it assessed.
Italy has not been helped by a political system dominated by
special interests and tainted by corruption and cronyism that
has proved singularly inept at pushing though reform.
“It’s a system which has always been very fragmented and
which has always given small groups a disproportionate power of
veto,” said Amato.
BOGGED DOWN
A swiftly approved mix of tax hikes and pension cuts at the
end of last year helped calm the immediate financial crisis, but
since then the government has been bogged down in wrangling over
wider structural reforms to the economy.
It is only now getting around to planning serious spending
cuts and has been slow to tackle a bloated public administration
and deregulate markets shackled by special interest groups
ranging from lawyers to pharmacists and taxi drivers.
The labour market reform degenerated into a fight about the
rights of sacked workers to win reinstatement in court and has
still not been approved by parliament after three months.
The growing ambivalence towards the euro among the political
classes underscores doubts about Italy’s willingness or ability
to accept the rigid fiscal discipline that would be demanded as
part of a truly European solution to the crisis.
“For now, discussion of euro bonds in Italy is only about
the benefits but not the duties,” said Bini Smaghi.
He noted the Italian parliament has dragged its feet over
approving the so-called “fiscal compact”, a German-driven
budgetary pact which would be a first step towards euro bonds
and which European Union leaders signed up to last December.
The intensifying euro crisis may ironically help Monti,
according to Amato, who took office in 1992 after Italy had been
expelled from the European Monetary System and as the political
class was reeling from the “Bribesville” corruption scandals.
“These moments of risk are always good moments because if
there’s no risk it’s difficult to move, you can’t convince
anyone,” he said.
More immediately, many Italians are hoping for a clearer
signpost out of the crisis from a European Union summit at the
end of the month. If not, said Marcegaglia, the consequences for
Italy and the euro zone as a whole could be dramatic.
“I think either something substantial comes out in June or
else we are really at a very serious crossroads,” she said.
