Austerity Italian Style

Spain’s unemployment rate hovers over 25%, so Italy’s 11.7% is relatively modest. Peel back the onion skin, however, and the news is much, much worse. Unemployment among youth is 38.7%. In a $2 trillion annual economy, 2012 saw an average of 1,000 small-to-midsized businesses going belly-up every day. This slow erosion of the lower value-creating segment – the biggest part of the Italian economy – is likely to impose long-term damage on this vulnerable job-producing market segment.

The most recent election produced a government unlikely to be able to form a sustainable coalition to govern, probably necessitating new elections in the very near term. Despite his constant legal embarrassments (including a recent conviction that is on appeal) and questionable behavior, media mogul Sylvio Berlusconi generated surprising large poll results, and a stand-up comic in newly-formed party stunned the electorate. The social safety net that defines life in Italy is rapidly losing the financial capacity to sustain itself, and too many of the nation’s most wealthy mavens make tax evasion seem like a national sport. The government itself seems to be a “slow pay” or a “no pay” to its own vendors, with a staggering $100 billion or so of unpaid bills to the private sector.

“Italy’s political quagmire might not roil global financial markets right away,” [former IMF economist and Harvard Professor Kenneth Rogoff notes]. But it raises the specter of the European crisis ‘grinding on and on,’ he said, and would certainly make it harder for European leaders to cut deals ‘on the big-picture things that are needed to stabilize Europe.’… The afflictions of Italy’s economy, one of Europe’s largest, are not necessarily new, of course: a lumbering bureaucracy, stifling labor regulations and a heavy reliance on companies with 50 or fewer employees that are struggling to compete in the global marketplace…  As the 17-nation euro currency union’s economy was expanding an average of 1 percent for much of the last decade, Italy grew at only half that rate, according to the International Monetary Fund.” New York Times, March 11^th.

The subtext is that the European crisis is no longer just a “debt crisis.” Much larger than any of the other under-performing Euro-economies, Italy symbolizes the growth crisis that has infected so much of the world, made infinitely worse by the German-mandated debt-reduction austerity program. The blend of highly divergent economic sovereigns – each with profoundly differing cultural views of labor and economics – seems almost irretrievable in these harsh continuing times. As the UK has maintained its own currency while the eurozone is mired in its euroblend, it is the UK that is showing signs of life while its euro neighbors seem completely unable to solve their most basic economic issues. Italy is the poster child for failure; its economy contracted 2.4% last year as its own recession threatens to deepen further.

While larger industrial units Italy are rising slightly, the backbone of Italian output is slowly strangling the rest of the country. “[I]t is businesses … with fewer than 50 workers, which constitute the vast majority of Italy’s economy and long provided much of its vitality — that are buckling as banks halt lending and taxes rise. Credit issued by Italian banks fell in 2012 to the lowest level in more than a decade.” NY Times. The European Union, particularly the eurozone, seems like an experiment that is on track to unravel, compounding the problem unless, somehow, EU leaders figure out how to reignite growth and stem rising social unrest. And if the EU falls apart, the consequences for the global economy during the period of readjustment will be dire.

I’m Peter Dekom, and whether we like it or not, our own economic recovery is in significantly dependent on Europe’s fate… Europe’s hopes ride in significant part on what happens in Italy.