UKNEWCOVER CMYK Cyan Magenta Yellow Black Addio,Dolce Vita A survey of Italy | November 26th 2005 Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist C B M R Y G K W C B M R Y G K W The Economist November 26th 2005 A survey of Italy 1 Addio, Dolce Vita Also in this section The search for scapegoats Economic troubles are always someone else’s fault. Page 3 Structurally unsound So easy to pinpoint what is wrong, so hard to put it right. Page 4 Fazio’s folly A central banker too independent for comfort. Page 6 You can’t win Why Italian politics is impossible. Page 8 The strange cases of Silvio Berlusconi A prime minister with nine legal lives. Page 10 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 Southern cross muster, says John Peet What can be done to make it more bearable. Page 11 T FIRST blush, life in Italy still seems family-owned rms that have been the Asweet enough. The countryside is backbone of the economy, are under ever- stunning, the historic cities beautiful, the increasing pressure. Costs have risen, but Reform or die cultural treasures amazing, and the food productivity has remained at or even de- Does Italy need a crisis to get things moving? and wine more wonderful than ever. By clined. Membership of the euro, Europe’s Page 13 most standards, Italians are wealthy, they single currency, now rules out devalua- live for a long time and their families stick tion, which for many years acted as a impressively together. The boorish drun- safety-valve for Italian business. Italy’s kenness that makes town centres in many competitiveness is deteriorating fast, and other countries unpleasant is mercifully its shares of world exports and foreign di- rare in Italy. The trac may be bad, and rect investment are very low. The World places such as Venice and Florence are Economic Forum in its annual competi- Sources and acknowledgments This survey has drawn on many sources and interviews, not overrun by tourists, but if you go o-sea- tiveness league table recently ranked the all of them cited in the text. The standard history of post- sonor merely o the beaten trackyou country a humiliating 47th, just above war Italy is in two volumes by Paul Ginsborg: A History of can have a more enjoyable time in Italy Botswana. The economy has also proved Contemporary Italy, 1943-1980 (Penguin, 1990), and Italy and its Discontents, 1980-2001 (Penguin, 2003). than practically anywhere else. highly vulnerable to Asian competition, Three other books were also helpful: The Dark Heart of It- Yet beneath this sweet surface, many because so many small Italian rms spe- aly by Tobias Jones (Faber and Faber, 2003), Berlus- things seem to have turned sour. The econ- cialise in such areas as textiles, shoes, fur- coni’s Shadow by David Lane (Allen Lane, 2004; the author is The Economist’s business and nance correspon- omic miracle after the second world war, niture and white goods, which are taking dent in Italy), and Silvio Berlusconi by Paul Ginsborg culminating in the famous 1987 sorpasso the brunt of China’s export assault. (Verso, 2004). Other useful sources were the OECD’s latest (when Italy ocially announced that its country report on Italy (May 2005), Italy Today: Social GDP Pictures and Trends (Censis, 2005), What Italy Needs to had overtaken Britain’s), is well and Down at heel Do (Goldman Sachs Economics Paper 130, September truly over. Italy’s average economic The eects of decline are starting to show. 2005), Oltre il Declino by Tito Boeri and colleagues (Il growth over the past 15 years has been the Increasing numbers of Italians are nding Mulino, October 2005), and Italy: a New Commitment to Growth (Harvard Business School Case Study 703-007, slowest in the European Union, lagging be- their living standards stagnating or even August 2002). The author would like to thank the Italian hind even France’s and Germany’s (see falling. The cost of living is widely be- embassy in London for its assistance. chart 1, next page). Its economy is now lieved to have risen sharply since euro only about 80% the size of Britain’s. Earlier notes and coins replaced lire in January A country brieng on Italy is at this year Italy briey tipped into recession; 2002. Property prices have certainly shot www.economist.com/italy for 2005 as a whole, its economy is likely to out of reach for many rst-time buyers in be the only one in the EU to shrink. Growth Rome, Milan and even Naples. Many Ital- An audio interview with the author is at next year is expected to be anaemic at best. ians are cutting back on their annual holi- www.economist.com/audio Italian companies, especially the small, days, or even going without. Others are1 2 A survey of Italy The Economist November 26th 2005 2 putting o buying new cars or even new of those in the 15-64 age range are in em- of pro-market reforms, liberalisation, pri- suits, a real deprivation for such design- ployment, the smallest proportion in west- vatisation, deregulation and a shake-up of conscious people. Supermarkets report ern Europe. Germany, by comparison, has the public administration, all of which Mr that spending now falls in the fourth week an employment rate of 66%, and Britain Berlusconi had promised. He even of every month before the next pay one of 73%. Although overall unemploy- pledged to cut taxes. A majority of Italian cheque arrives, a sure sign that families are ment in Italy is not too bad by west Euro- voters, backed by much of Italian business, struggling to make ends meet. pean standards, it is disturbingly high were willing to overlook both his legal en- A lacklustre economy is causing among the young and in the south. tanglements and his conicts of interest broader problems too. Italy’s infrastruc- and give him a chance to reform the coun- ture is creaking: roads, railways and air- Berlusconi’s legacy try. But as the next election approaches, ports are falling below the standards of the What has gone wrong with the Italian very little of what he promised has been rest of Europe, and public and private economy, and how can it be put right? delivered, so many of his erstwhile sup- buildings are looking ever shabbier. Edu- These are the main questions this survey porters are feeling disillusioned. cational standards have slipped: the coun- will seek to answer. But it will do so in the Even the apparent political stability try comes out badly in the OECD’s PISA context of Italy’s unruly political scene. Sil- that Mr Berlusconi has fostered is decep- cross-national comparisons, and no Italian vio Berlusconi’s centre-right government, tive. His six-party centre-right coalition university now makes it into the world’s elected in May 2001, seems likely to man- has come close to collapse more than once, top 90. Spending on research and develop- age the rare feat of staying in oce for a full usually thanks to squabbling between ment is low by international standards. term (ending next spring)a rst for a post- Umberto Bossi’s Northern League and Italy has also suered more than its fair war government in Italy. Mr Berlusconi is Gianfranco Fini’s National Alliance. Last share of corporate scandals, notably the immensely proud of this. But he has much April a row with a smaller ally, the Union bond default by Cirio and the collapse of less to be proud of when it comes to the of Centre and Christian Democrats, forced Parmalat. And the public nances are in a economy. In his 2001 election campaign, Mr Berlusconi to resign and form a new shambles. Respectable estimates put the he promised to apply the business acumen government. underlying budget decit for next year, ig- that had helped him to become Italy’s rich- On current form the centre-left opposi- noring one-o measures, at 5% of GDP, est man to make all Italians richer. This he tion under Romano Prodi looks the likeli- way above the 3% ceiling set by the euro has conspicuously failed to do. est victor in the election planned for April area’s stability and growth pact. The pub- The Economist’s view of Mr Berlusconi 9th 2006. But even if he manages to win, lic debt stands at over 120% of GDP and is is well known. We declared in April 2001 Mr Prodi will nd it hard to introduce re- no longer falling. that he was unt to lead Italy, because of formsnot least because his coalition em- Even Italy’s social fabric is coming un- the morass of legal cases brought against braces no fewer than nine parties, several der strain. The family remains strong and him at various stages of his business career of which will obstruct change. It was an divorce rates are relatively low. But the fact and because of the conicts of interest in- ally of Mr Prodi’s, Fausto Bertinotti, and that 40% of Italians aged 30-34 are report- herent in his ownership of Italy’s three his unreconstructed Communists that edly living with their parents is not just a main private television channels. Almost pushed him out of oce in 1998.