Italy’s resistance to changes leads to slow economic recovery

Italy’s resistance to changes leads to slow economic recovery

A report in WSJ Wall Street Journal points at the weak spots in Italy’s economic recovery

Italy, like the 18 country Euro Zone, is slowly recovering from a six year slump, leading some experts to believe Europe’s crisis is receding, writes the WSJ, and continues: “But the difficulty of economic renewal, say economist and business leaders, means the crisis has not been solved – it has merely mutated from an acute to a chronic condition.”

The deeper malaise, say some economists and policy makers, is a long term decline of Europe’s economic growth rare. In societies whose populations are not growing, sustainable growth comes from improving productivity, or the efficiency of the economy’s supply side. These require constant change.

The EU Commission warned last January that the Euro Zone’s long term productivity growth has been slowing since the mid-1990s, and that the crisis years have done further damage to the region’s ability to grow.

Italy has emerged as a multiple example of the problems. Its growth has been stuttering for 20 year. Since 2008, its economy has shrunk by 9 %, and this year it is struggling to expand by even one percent.

Without faster growth, Italy will struggle to tame its public debt of over EUR 2 trillion (around USD 2.77 trillion), or 133 of GDP Gross Domestic Product. If its debt mountain keeps rising, fears for Italy’s solvency could return, reigniting the capital fight that nearly tore the Euro apart in 2011-12.

Italy’s new Prime Minister Matteo Renzi (39) with big plans to cut taxes and stem regulation, shot to power with widespread support from a public yearning for someone to break the country’s impasse. Yet, many sympathisers doubt he can reinvigorate Italy’s growth.

The roots of the problem in the eyes of many Italians, lie in how vested interests in the private and public sectors gum up the economy, preventing change that replaces old practices with new, more efficient ones, and repeatedly frustrating political attempts to shake up the country.

According to Tito Boeri, professor at Milan’s Bocconi University and one of Italy’s top economist, stated: “It adds up to “deep-seated cultural obstacles to growth. In Italy you define your identity in terms of your membership or some specific interest group, making it hard to rally support for any notion of the common good.”

Outside perceptions of Italy’s enviable lifestyle mask a stubborn resistance to change. Smaller family companies led by aging owners rebuff outside investors even when they lack the money or vision to compete. Regulate professions such as lawyers and pharmacists consistently beat back efforts to break their cartels. Powerful bureaucrats bog down the implementation of new laws for years. And Rome’s political class is so quarrelsome that governments last little more than a year on average.

It used to slightly matter, Italy’s economy grew rapidly in the post war era, despite a stonewalling bureaucracy, legions of tiny companies and a fragmented, often corrupt political system. But growing was easier then. Relatively poor Southern European countries mainly had to copy technology from more developed economies such as the U.S., and use it to churn out goods cheaply.

Fabbiano Schivardi, an economist at Rome’s Luiss University, who has studied the stagnation of swaths of Italy’s business sector, remarks “Italy’s institutions were good enough for an economy that was catching up, but these are not good enough anymore.”

WSJ continues, some of Italy’s best know companies, such as Prada SpA, Ferrero SpA and Luxottica Group SpA, have flourished globally, showcasing the county’s prowess at fashion and food. Yet, according to the Bank of Italy, 98 % of Italian companies employ fewer than 15 people.

Red tape is one factor that deters businesses from growing. Esselunga, the supermarket chain, explains that it has scaled back plans for new stores after several frustrating experiences involving building permits and other permissions, although, it will finally open its long awaited Florence store this coming fall.

What maddens local people can baffle foreign investors. In 2012, British Gas PLC threw in the towel on a EUR 500 million gas import terminal in southern Italy, and after struggling for over a decade to get the necessary permits.

Not to speak about Italy’s court system that some name a spooky business. Routine contract disputes take more than three years on average to resolve in court, and much longer, if there are appeals.  Italy’s lawyers, outnumbering their colleagues in France, have resisted efforts to streamline a judicial system that offers rich opportunities for lengthy proceeding. At the end of 2012, there was a backlog of 9.7 million cases, according to IMF, the International Monetary Fund.

Also the Unions often dug in their heels to resist change, a good example for that is the nation’s airline Alitalia struggling to bring its labour costs down. However, there are some signs of change. Natuzzi SpA, one of Italy’s leading sofa makers, grappled with union issues to stay afloat. The company had strained against lower cost foreign competition once the EUR has been introduced. For years, it did too little to address high cost, even as losses mounted. But in 2013 it reached finally a deal with unions to cut labour costs and buy out hundreds of staff, in order to keep production in Italy.

Companies’ demands to cut labour costs grate with workers whose take-home pay has already suffered from the long downturn and tax hikes. Italian households’ disposable incomes fell by 13 %, or about EUR 2400 per worker since 2007, one of the biggest declines in the Euro Zone, according to the state statistical agency.

Prime Minister Renzi has made cutting payroll taxes among his highest priorities, with a pledge to trim EUR 10 billion in payroll taxes this year. Taxes on labour are particularly high. One reason i8s that taxes that would normally help spread the burden, including on incomes of SMEs and the self employed, are widely dodged.

Italian entrepreneurs evade over 50 % of the income taxes they owe, while people living off investment income skip over 80 %, these are the estimates of the country’s central bank. The heavy taxes on payrolls deter companies from hiring and weaken consumers’ spending power, according to economist.

With other words, due to the reluctance of Italians to change, there is yet now remedy to accelerate growth in Italy, except a miracle is taking place and only God knows, when!

www.wsj.com


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