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Addio,Dolce Vita A survey of Italy | November 26th 2005

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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. In truth, happy sign of family harmony or attach- ve years on, he still faces legal problems neither of the two main groupings in Ital- ment to mamma’s cooking. Many young (of which more later), and he has done lit- ian politics oers much hope to those who Italians stay at home because they cannot tle to resolve his conicts of interest: in- believe that the country needs radical (and nd work or because they do not earn deed, because the government owns RAI, painful) reform. enough to aord a place of their own. the state broadcaster, Mr Berlusconi now Yet Italy is approaching a crunch. Social trust, a concept that is admittedly controls or inuences some 90% of Italian Rather like Venice in the 18th century, it hard to measure, seems unusually low in terrestrial television (which does not stop has coasted for too long on the back of its Italyone reason, perhaps, why family him complaining about his critics on TV). past success. Again like Venice, it has lost rms have always played such a big part in Our verdict of April 2001 stands. many of the economic advantages which the economy. And respect for the rules, Yet, as we acknowledged at the time, in underpinned that success. For Venice, it and even the law, never high, appears to 2001 there was nevertheless a case to be was a near-monopoly on trade with the have fallen further in recent years. Both tax made for electing Mr Berlusconi’s centre- East that paid for the creation of its beauti- evasion and illegal building, encouraged right coalition. Italy badly needed a dose ful palaces and churches; today’s Italy has by repeated amnesties, seem to be on the beneted hugely from a combination of rise. Organised crime and corruption re- low-cost labour and a switch of workers main entrenched, especially in the south. Europe’s laggard 1 away from low-productivity farming (and To cap it all, Italy’s demographics look Average annual GDP growth, 1990-2004, % the south) into manufacturing (mostly in terrible. The country has one of the lowest the north). But such good things invariably 0 0.5 1.0 1.5 2.0 2.5 3.0 birth rates in western Europe, at an average come to an end. of 1.3 children per woman, and the popu- Spain That is what happened to La Serenis- lation is now shrinking; yet Italians are liv- Germany sima at the end of the 18th century. Venice ing ever longer, so it is also ageing rapidly. was contemptuously swept away by Na- The economic consequencestoo many Britain poleon, and the last doge voted himself pensioners, not enough workers to main- France out of oce. The serene republic is now lit- tain themare worrying enough on their Italy tle more than a tourist attraction, however own. What makes them worse is Italians’ beguiling. Could this become the fate of It- Source: National statistics low rate of participation in work. Only 57% aly as a whole? 7 The Economist November 26th 2005 A survey of Italy 3

The search for scapegoats

Economic troubles are always someone else’s fault

OME of the ills that have made Italy the S new sick man of Europe may be be- The wages of sin 2 yond its control. The present government Germany Spain France Italy certainly likes to suggest that they are. Min- Export volume of goods and services Relative unit labour costs† isters point out that the whole of the EU, 1999=100 Q1 1999=100 and especially the euro zone, has also 150 110 been struggling economically, especially since the terrorist attacks on America of 140 105 September 11th 2001. Italy’s nance minis- ter at the time, Giulio Tremonti, was quick 130 100 to blame the terrorists for Italy’s sluggish 120 95 economy. When he returned to his old job two 110 90 months ago, after the sudden resignation of Domenico Siniscalco, Mr Tremonti soon 100 85 * found two new scapegoats at which to 1999 2000 01 02 03 04 05 1999 2000 01 02 03 04 05 † point an accusing nger: the euro and Sources: European Commission; OECD *Forecast Relative to euro-area average China. The political subtext was none too subtle. It was the opposition leader, Rom- not in quite the way that Mr Tremonti and sion at the time of the switch-over. Restau- ano Prodi, who as prime minister in 1998 some of his colleagues like to argue. Many rants and bars were certainly guilty of took Italy into Europe’s single currency; Italians sincerely believe that the change- cashing in: hence the often-heard com- and who as a former president of the Euro- over from the lira to the euro triggered a plaint that the price of a cup of coee dou- pean Commission could be charged with burst of ination that cut living standards bled overnight. The government should favouring globalisation and opening up and eroded competitiveness. These pro- have done more to stop such proteering. the European market to Chinese imports. blems, they feel, were exacerbated be- But this sleight-of-hand does not support Certainly the macroeconomic back- cause the euro rose against the dollar. Per- the argument, which even senior politi- ground of the past few years has been un- suaded by this argument, some in the cians like to trot out, that many Italian helpful to Italy. A near-stagnant, ageing Northern League, notably Roberto Maroni, businesses chose to convert all their prices Italian population has done little for do- the welfare minister, are now saying that at 1,000 lire to 1, not the correct rate of mestic demand. Fiscal policy has of neces- the lira should be brought back. Mr Maroni 1,936 lire to 1. sity been constrained: the previous gov- has even tried to collect enough signatures ernment had to cut the budget decit for a referendum on the matter. Mario A dierent model sharply in order to qualify for the euro, and Monti, a former European commissioner What is undeniable is that the euro has the present one has had its hands tied by and now president of Bocconi University perforce broken Italy’s habit of frequent the EU’s stability and growth pact. In its in Milan, points out that the Northern devaluation. In eect, membership of the early years the European Central Bank’s League has performed a complete about- single currency has forced Italy to change monetary policy has, arguably, been too turn. In the mid-1990s it was so enthusias- its entire economic model. Instead of rely- restrictive for countries such as Italy and tic about the single currency that it wanted ing on high ination, high budget decits Germany, reecting the diculty of set- the north (Padania) to join alone if the and currency devaluations, it has had to ting a single interest rate to suit 12 hugely country as a whole found itself unable to learn to live with low ination, low budget diverse economies. meet the conditions. decits and a xed single European cur- But Italy’s biggest weakness over the In reality the euro has not been nearly rency. It is not surprising that such a mas- past few years has been its export perfor- as bad for Italy as the critics suggest. Ina- sive adjustment has been painful, and so mance (see chart 2). The country’s largest tion, which came down sharply ahead of far remains incompletenotably because market is Germany, whose domestic econ- Italy’s entry into the xed-exchange-rate wage and price ination are still higher omy, and hence appetite for imports, has regime in 1999, has remained low; indeed, than in other euro-zone countries. recently been far from hale and hearty, al- this has been one of the key benets of Does that mean that Italy should have though its exports are booming. Italy suf- euro membership. The switch to euro made a dierent choice? Mr Maroni and fers from the opposite problem: its domes- notes and coins three years later had a neg- his allies like to point to Britain to show tic consumption is holding up reasonably ligible eect on the general price level, ac- that a country can thrive inside the EU but well, but its competitiveness has been slid- cording to Italy’s generally reliable statisti- outside the euro. Yet the comparison is ing, which has led to a fall in its share of cal oce. Admittedly the price of a few misleading. Britain has not followed a world exports. everyday goods and services rose steeply path of high ination, a high budget decit This is where the euro comes in, albeit as some tradesmen exploited the confu- and frequent devaluation outside the euro,1 4 A survey of Italy The Economist November 26th 2005

2 and nor would it have been possible for It- similar fate for Italy. Yet the analogy with leave the euro, devalue and perhaps de- aly to do so. The sharp devaluations of the Argentina might have been closer still had fault? In a country that is a member of the lira in 1992, and again in 1995-96, brought Italy retained the lira, and thus been sub- rich G7 club, such an event would be cata- furious responses in other European coun- ject to the same sort of speculative pres- clysmic, which may be why nancial mar- tries, especially France. Had Italy persisted sure that eventually broke Argentina’s link kets do not seem to expect it. The spread of with its previous practice, it is hard to see to the dollar. For example, an Italy outside Italian debt over German debt remains rel- how the single European market could the euro would not have escaped rela- atively small. But it has widened in the have survived. tively unscathed from the recent resigna- past year or so, and credit-rating agencies tion of Mr Siniscalco and the associated have begun to sound the alarm over Italy’s Don’t cry for me, Italia controversy over the governor of the Bank government debt, the third-biggest in the More dramatically, Italy might have come of Italy (see box in the next article). world. Italy remains highly unlikely to a cropper too. For there is another, more Indeed, it is membership of the euro leave the euro, voluntarily or otherwise. unnerving example of a country that has that has made Italy’s public-debt burden Even so, the country should pay heed to preferred to go its own way: Argentina. The bearable by cutting its servicing costs the warnings it is starting to get from the worrying parallel is not that Argentina is a sharply. Mr Siniscalco declares that, when markets. country with a strong Italian heritage, or he was nance minister, he thanked God Paradoxically, although euro member- that it was once rich but has become rela- every day for the euro, without which his ship has made it more urgent for Italy to tively poorer, but rather that it adopted an job would have been even more impossi- deal with its structural faults, it may also extreme variant of the old Italian model: ble than it was already. Most Italian busi- have made it easier to avoid doing so, by high ination, high public spending, high nesses also strongly support Italy’s con- cutting interest rates and eliminating ex- budget decits and frequent devaluations. tinuing euro membership. change-rate crises. As the OECD puts it in All this came to a halt in 1991, when Argen- This implies, however, that to remain its most recent report on Italy: It is some- tina adopted its convertibility plan to x competitive without recourse to devalua- what ironic that EMU membershipmay, the peso against the dollar, the equivalent tion, Italy must introduce structural re- in eect, have relaxed the perceived need of Italy’s decision to join the euro in 1998. forms to boost productivity and hold for structural adjustments on both the sup- Yet in Argentina, ination, high public down costs, as well as sorting out its public ply and scal sides. spending and budget decits persisted. nances. The euro has, in eect, exposed It- Something similar happened in Argen- The result was a loss of competitiveness aly’s true weaknesses, which are micro- tina after it adopted its convertibility plan: and a wrenching recessionand, in Janu- economic in nature. They include rigidities people started to believe that biting the ary 2002, the sudden demise of the in product and labour markets and insu- bullet of a permanently xed exchange convertibility plan as Argentina simulta- cient competition. These structural pro- rate was enough, on its own, to cure the neously devalued and defaulted (which, blems are to some extent shared by all economy’s problems. In both countries, incidentally, proved costly for Italian sav- countries in the euro zone, but in Italy they the new xed-exchange-rate regime came ers, many of whom were heavily invested often seem worse. They will be discussed to be seen as the end point of the reforms, in Argentinian debt). in more detail in the next article. rather than a prelude to broader structural It makes a grim story, and there are If nothing is done, might Italy end up adjustments. The need for these in Italy is plenty of gloomy analysts who predict a on the same track as Argentina, forcing it to now greater than ever. 7 Structurally unsound

So easy to pinpoint what is wrong, so hard to put it right

VER the past decade or two, the struc- world war, the family was considered an thirds of manufacturing workers are in Otural failings of the Italian economy asset, not a liability, in Italian business. rms with fewer than 100 employees, have become brutally clear. What makes This can be seen most clearly in the prolif- compared with 37% in America and 31% in them especially hard to deal with is that eration of (often family-owned) small Germany. Italy has more small and me- for years many of them were seen not as rms across northern Italy, many of them dium-sized enterprises than any other weaknesses but as strengths. Asked to ex- grouped in clusters: woollen goods in country in Europe: some 4.5m, or roughly plain what is wrong with Italy, Francesca Biella, cotton textiles in Varese, shoes in one-quarter of the total in the EU 15 (see Bettio, an economist at Siena University, Ascoli Picena, knitwear in Carpi, women’s chart 3, next page). has an instant answer: the family. It is clothing around Treviso (home of Benet- The ip-side of having lots of small responsible for the fact that most Italian ton, among others), and so on. At one time rms, however, is a dearth of big ones. For companies are small and privately owned; these clusters gured in business-school a member of the G7, Italy has remarkably it has contributed to a low female partici- studies as a key source of Italy’s economic few big companies: for many years the list pation rate in the workforce; and it is at strength, especially in the north, now one barely ran beyond Fiat, which at one time least partly to blame for low social and la- of Europe’s richest regions. accounted for almost 5% of Italy’s GDP. bour mobility. Indeed, Italy as a whole became a case One reason for this is the heavy weight of Yet for many years after the second study in small is beautiful. About two- the state, which used to own most of the1 The Economist November 26th 2005 A survey of Italy 5

2 big banks, utilities and even many indus- trial rms. IRI, the giant state holding com- pany originally created by Mussolini, was once run by none other than Romano Prodi. Even today, many of the big compa- nies in Italy are formerly state-owned utili- ties and banks. Over the past two decades, while Italy’s nifty small rms were garner- ing so much praise, the country has lost much of its presence in industries such as chemicals, pharmaceuticals, computers and food processing.

When bigger is better What is wrong with having lots of small rms? There are two answers. One is that globalisation and competition from Asia (especially China) have put a bigger pre- mium on size. In the 1960s and 1970s it was enough to supply the home market, or at most reach out to such near neighbours as France and Germany, and to rely on your local bank for nance. Now to be success- ful a company such as Benetton has had to grow to the point where it supplies a world market and obtains its products far beyond Italy; it is quoted not only on Milan’s stock- Last of the line market but New York’s too. Italy’s stockmarket is tiny in relation to nance in the wake of the scandal is cur- fridges, cookers and washing machines. Its the size of the economy, with fewer than rently becalmed in parliament. founder, Vittorio Merloni, who is still 300 quoted companies. The market’s chief The other problem with Italy’s small chairman, notes that almost half the com- executive, Massimo Capuano, has plenty rms is that too many of them are in the pany’s products are made abroad, includ- of ambition to lure more, not least through wrong industries, relying for too long on ing in China, which he rst visited back in a special second market for smaller enter- cheap labour for their competitive advan- 1975. China is also, he complains, a source prises. But many owners of such rms re- tage. The textile rms in the north that of counterfeit goods, complete with the sist any loss of control and even dislike re- have spent much of the past year bleating Made in Italy label and even the wash- lying on external nance. Restoring public for protection are classic examples. They ing-machine guarantee. condence in a market that was hit hard in had ten years’ warning of the demise of Another successful example is Cerutti, December 2003 when Parmalat, one of It- the World Trade Organisation Agreement a maker of sophisticated printing presses aly’s biggest food groups, went bust is also on Textiles and Clothing that limited im- based in Casale Monferrato, near Turin. Its proving challenging. Parmalat had ports from developing countries. Yet when chief executive, Giancarlo Cerutti, remem- claimed to have large cash balances that the agreement expired at the start of this bers that when his father founded the rm turned out to be ctitious. Government year, many rms rushed to Brussels to de- after the second world war, it had seven ri- legislation to improve corporate gover- mand voluntary restraints on Chinese vals. Now there is just one other maker of exports. Others joined the chorus attack- big printing presses, and Cerutti has al- ing Italy’s membership of the euro. Very most 60% of the world market. It supplies Too much of a good thing? 3 few seemed willing to accept any blame many of the newspapers and magazines in Number of small and medium-sized enterprises for failing to establish new niches based on Europe, as well as several in America. Re- 2003, m good design, marketing or the use of tech- cently it bought a production facility in Number of big companies* nology, rather than cheap labour. China. It also has a technical centre in In- 2.0 2.5 3.0 3.5 4.0 4.5 Yet there are many examples of suc- dia, employing some of the country’s n- cessful Italian rms, even small ones, that est engineers. Italy 47 have made just such adjustments. Fifteen Italy’s agship computer rm, Olivetti, Germany 49 years ago Benetton produced almost 90% went under in the mid-1990s, but there are of its clothing in Italy; now the share is some Italian success stories in information Spain 37 down to less than 30%. Geox, an innova- technology tooand not only in the north. tive and successful shoemaker, produces Near Catania, in Sicily, ST Microelectron- France 68 most of its goods abroad, as does Luxot- ics, a chipmaker, is part of a vibrant high- tica, the world’s leading maker of sun- tech cluster. ST was founded in the 1960s, Britain 129 glasses. In white goods, Merloni (now In- but was on the verge of bankruptcy when Sources: European Commission; *In the FT Europe 500, by desit), which was set up 30 years ago, has Pasquale Pistorio, now its honorary chair- Financial Times market capitalisation, 2005 become Europe’s third-biggest supplier of man, rescued it in the early 1980s. Mr Pisto-1 6 A survey of Italy The Economist November 26th 2005

2 rio not only turned the company round, largest in Europe. Mr Pistorio reckons that an option it unwisely took out to buy the but expanded it by opening production the Berlusconi government has failed to whole company, and it has insisted that its plants near Naples and in Bari. He has create the right conditions to attract invest- banks convert some of their loans into nothing but praise for the skill and high ment, whether from domestic sources or equity. Whether it has a long-term future quality of Italian engineering graduates. from abroad, and has not done enough to will depend on its new models, notably Yet Mr Pistorio also concedes that Italy encourage innovation. the new Fiat Punto. has plenty of problems. He notes that The theme is taken up vigorously by Sitting in his oce above the glitzy Fer- high-tech exports make up only 12% of the Luca Cordero di Montezemolo, chairman rari production line in Maranello, south of total, half the European average. Italy of both Fiat and Conndustria, the Italian Modena, Mr Montezemolo says that Italy spends only 1.1% of its GDP on research business lobby. Mr Montezemolo knows will pay a high price if it fails to introduce and development, compared with the EU all about business turnarounds: he res- structural reforms. Top of his list is more average of almost 2% and as much as 3.2% cued Ferrari and has helped to pull Fiat competition, which among other things in Japan. Bureaucracy and the judicial sys- Auto back from the brink. Yet Fiat’s recov- will involve more privatisation. His other tem are slow, liberalisation is incomplete, ery owes much to nancial, not mechani- priorities for reform are educational infrastructure is poor, and the tax wedge cal engineering. It has extracted cash from change, including in the universities; infra- that pushes up labour costs is one of the GM to allow the American car rm to drop structure, throughout the country; public1

A central banker too Fazio’s folly independent for comfort

T USED to be an article of faith among It- nances were, its bid fell apart and ABN Domenico Siniscalco, called for his res- Ialy-watchers that, however incompe- Amro won the day. ignation. When Mr Siniscalco failed to tent the country’s other institutions might For Mr Fazio, the story is by no means win the cabinet’s backing, he quit (al- be, at least the Bank of Italy could be re- over. His intervention was attacked from though not solely over the Fazio aair: lied upon. In the 1990s it even supplied all sides. His friends were quick to detect problems with the 2006 budget also two prime ministers, Carlo Azeglio an anti-Catholic, masonic or even Jewish played a part). Following Mr Siniscalco’s Ciampi (now the country’s president) conspiracy against him (Mr Fazio is an ar- departure, even the prime minister, Silvio and Lamberto Dini. But the central bank’s dent Catholic who goes to mass every Berlusconi, called for Mr Fazio to go, and credibility has been shot to pieces by the day). Exasperated members of the gov- suggested that the European Central Bank intransigent behaviour of its governor ernment, including the nance minister, might boot him out. since 1993, Antonio Fazio. The trouble is that, in the mid-1990s, Mr Fazio has long opposed foreign the Italian government, in its eagerness to takeovers of Italian banks. Even so, earlier join the euro, made its central bank more this year, a Spanish bank, BBVA, and a independent than any other in Europe. Dutch one, ABN Amro, made bids for two Mr Fazio’s appointment is for life. He Italian banks. Mr Fazio promoted rival do- thinks he has done nothing wrong and is mestic bids for their targets, leading the reluctant to sacrice his job as the best- European Commission to ask whether It- paid central banker in Europe. He can be aly was discriminating against other EU removed only by the board of directors of countries. Central banks in other Euro- the Bank of Italy, which is technically a pean countries may have their own ways private institutionand he chose most of of discouraging foreign bidders, but none the board members himself. is as explicit about it as Mr Fazio. The government has drafted a new As it happens, Mr Fazio has pursued law to renationalise the Bank and make some perfectly sensible policies, promot- its governor subject to a term limit, but it ing privatisation and mergers among Ital- is languishing in parliament. A deant Mr ian banks. Yet his response to the bid by Fazio has shown that he has friends in ABN Amro for Banca Antonveneta was high places, not only in the Vatican but in outlandish. He overruled his advisers by the Northern League, the National Alli- endorsing a rival bid by Banca Popolare ance and even in some opposition par- Italiana, a shaky institution run by a close ties. The odds are that, whatever the friend, Gianpiero Fiorani. Wiretaps pressures on him, he will stay until the leaked by prosecutors recorded Mr Fazio next electionand he might not quit even phoning Mr Fiorani after midnight to say then. After all, at 69, he is two weeks he had just approved the bid. But when it younger than Mr Berlusconi. Why should became clear just how rocky BPI’s - Secure in his job he give up any sooner than Il Cavaliere? The Economist November 26th 2005 A survey of Italy 7

2 administration, including the tortuously slow judicial system, which he sees as a The trouble with jobs 4 big deterrent to foreign investors; and, Italian productivity and employment, 1996=100 Employment rate † Unemployment rate echoing Mr Pistorio, more innovation and 2004, % National definition, latest, % investment in R&D. 110 Employed workers 55 60 65 70 75 Mr Montezemolo makes it clear that 108 Italian business is deeply disappointed Netherlands 6.6 with Silvio Berlusconi’s centre-right gov- 106 Britain 4.7 ernment, which had promised so much 104 United States 5.0 when it took oce in 2001. At the time Mr Germany 11.6 Berlusconi told Conndustria that your 102 programme is my programme, but he has Productivity* France 9.8 100 not delivered. However, Mr Montezemolo Spain 9.3 does not conne his criticism to Mr Berlus- 1996 97 98 99 2000 01 02 03 Italy 7.7 coni: he attacks all the politicians who † have run the country in the past two de- Sources: OECD; CENSIS *Value added per employed person Persons aged 15 to 64 in employment as % of the working-age population cades for failing to take tough decisions. Nor does he accept that reform-minded ers have been brought into the workforce. banca, a secretive Milan-based investment governments always lose elections, citing It is the combination of poor productivity bank, pulled many strings from afar. Mi- counter-examples such as Britain. growth and rising wages that has caused It- nority shareholders were mostly ignored. It would be wrong to say that the Ber- aly’s unit labour costs to rise so much More recently, Italy’s stuttering economy lusconi government has done nothing in faster than those in other euro members in has exposed a series of corporate scandals the way of reform. In two areas, pensions the seven years since the euro started. that have weakened investor condence. and the labour market, it has been quite Finance, a crucial area for an econ- bold, although it has built on changes set So much to do omy’s competitiveness, is another big Ital- in train by previous governments. Given Mr Siniscalco, who quit as nance minis- ian weakness. The banks have changed a its demographic outlook, Italy still needs to ter in late September, praises the govern- lot over the past 15 years: an industry that do more to reduce its formidable pensions ment’s pension and labour-market re- was mostly state-owned and highly frag- burden; and the government has timidly forms, but acknowledges that too little has mented is now 90% private, and the Bank put o the start of some of its more painful been done to increase competition, to lib- of Italy has fostered a spate of domestic reforms until 2008. But by raising the re- eralise protected parts of the economy or mergers. A few banks have emerged as tirement age, cutting pension values and to privatise (indeed, the centre-left govern- kingpins: Banca Intesa; Unicredit, which encouraging private pension funds, it has ment before Mr Berlusconi’s sold more as- this year took over Germany’s HVB; San- done more than some other EU countries sets than he did). As for the EU’s Lisbon paolo IMI; and Capitalia. Yet the Bank of It- to tackle this looming problem. agenda of economic reform, Italy has con- aly has tried to keep out foreign investors, Reforms in the labour market have sistently come out bottom in the score- which may help to explain why bank been even more striking. The Biagi law, cards of the London-based Centre for Euro- charges (and prots) are among the highest named after Marco Biagi, a labour-market pean Reformalthough that may change in Europe. The governor of the Bank of It- adviser who was assassinated for his now that a liberal-minded Europe minis- aly, Antonio Fazio, did himself and his in- pains, exempted many new jobs from ter, Giorgio La Malfa, is in charge of Italy’s stitution no good by trying to prevent a rules that required most work to be full- Lisbon strategy. takeover of an Italian by a foreign bank time and permanent. This has led to a The obstacles to greater competition in earlier this year (see box, previous page). boom in temporary and part-time posts. Italy are legion. The OECD reckons that It- Banking is not alone in beneting from The privatisation of labour exchanges and aly suers from the heaviest product-mar- protection by its own regulator. There is changes to apprenticeship contracts will ket regulation in Europe. Energy markets not enough competition in services in gen- inject even more exibility into the Italian need a lot more liberalisation to match the eral, which matters because the share of labour market, promises Maurizio most open in Europe; Italian energy prices services in the Italian economy, as else- Sacconi, the minister responsible. are correspondingly high. The govern- where, is going upthey now account for Mr Sacconi claims that, in the past ve ment remains the largest single share- two-thirds of GDP. Small shops, taxi rms, years, Italy has created a net 1.2m new jobs, holder in ENI, the big oil company, and pharmacies, notaries, tradesmen: in the 700,000 of them for women, a better re- Enel, the main electricity rm. It still has a land that invented guilds in the Middle cord than any other country in Europe (in- golden share in Telecom Italia, although it Ages, most are still protected from compe- cluding Britain). Yet although unemploy- has at least pushed through the sale of its tition by special rules, often administered ment for Italy as a whole, now just under remaining shareholding in the company. by local authorities. As an example, Vito 8%, is relatively low by European stan- Antitrust enforcement in general is patchy. Tanzi, formerly Italy’s director at the IMF in dards, Mr Sacconi acknowledges that it re- Murky corporate governance in Italy Washington, DC, tells the tale of a man mains high among the young (almost has also been a deterrent to investment, who wanted to open a sh shop in a small 23%), the old and in the south. and perhaps even to the creation of suc- town in Apulia but was turned down by Moreover, Italy’s strong employment cessful companies. For years even quite big the council on the ground that the town record has a downside: zero or even nega- rms were controlled by small groups of had one already. tive productivity growth (see chart 4), as shareholders, often through a cascade of Tourism is another area that would more marginal and less productive work- dierent holding companies. Medio- benet from both more investment and1 8 A survey of Italy The Economist November 26th 2005

2 more competition. For a country that has ture. Italians may be entrepreneurial and customers better. A prime example is Mr so much to oer in the way of culture, na- creative, but they are by no means pro- Berlusconi, whose business success was ture, climate and cooking, Italy’s tourist in- market. Neither of the two main post-war based largely on the help and protection of dustry is surprisingly undevelopedand political parties, the Christian Democrats certain Italian politicians. hotel and restaurant prices seem unduly and the Communists, could be described This cultural preference for favour- high. In 1970 Italy was the world’s top tou- as economically liberal. Nor is the Catholic seeking and the creation of protected rist destination. Today it comes fth, after Church, still a huge inuence in the coun- monopolies over free-market competition France, Spain, America and China. try, which has always aected to disdain could take a long time to shift. It is, natu- One general problem is that the whole prot. In any case, many businessmen in rally, also reected in Italian politics. Why notion of service is rather undervalued. In- Italy do better by exploiting contacts and have Italian politicians, on both sides, deed, Italy often seems to suer from a per- seeking favours from the state than by been so slow to embrace reforms, and vasive anti-business, anti-customer cul- building up companies or trying to serve what are the prospects for change? 7 You can’t win

Why Italian politics is impossible

ANY countries have complex politi- right grouping won the election in 1994, into the euro, but the coalition then suf- Mcal systems that reect their past only a few months after the establishment fered a t of internal squabbling. Mr Prodi more than their present. But Italy’s politics of Forza Italia. But his government lasted was ousted and, in May 2001, Mr Berlus- is unusually hard to fathomjust as its gov- only eight months before being brought coni’s House of Liberties coalition won a ernments have been unusually fragile. In down by one of his allies, Umberto Bossi’s convincing majority over the Olive Tree fact, considering the umpteen govern- Northern League. coalition in both houses of parliament. ments and prime ministers the country The rst Berlusconi government was has got through, the system was for many followed by a technocrat-led one. The next Go, Berlusconi! years surprisingly stable. three governments were headed by centre- This was the moment that Italian business Until the 1990s, Italian politics was left prime ministers, the rst of whom, had been waiting for. Here, at last, was a dominated by two parties: the Christian Romano Prodi, led his Olive Tree co- coalition of the right with sucient politi- Democrats and the Communists. Because alition to victory over Mr Berlusconi’s cal clout to bring in long-overdue reforms. by common consent during the cold war House of Liberties in the 1996 election. Yet, as we have seen, they were destined to the Communists were kept out of govern- Mr Prodi brought in painful budget cuts be disappointed. The House of Liberties ment, every administration from 1946 to and a special tax to ensure that Italy got coalition has implemented reform only in the early 1980s was led by a Christian limited areas, and the economy’s poor per- Democrat. There followed a decade of co- formance and the country’s loss of com- alitions, all of which included the Chris- petitiveness have continued unchecked. tian Democrats, but some of which were Budget decits have been kept down led by a Republican, Giovanni Spadolini, mainly by one-o measures. And for the and others by a Socialist, Bettino Craxi. past 18 months or so, the centre-right has This stable system was blown apart by been trounced every time Italians have three events that reverberate still. The rst been allowed near a ballot box, starting was the collapse of Soviet communism in with the European elections in June 2004 the late 1980s, which led to a split in the and culminating in the rout at the regional Italian Communist Party. The second, elections last April, when the centre-left starting in Milan in early 1992, was a series won every region being contested except of bribery cases known as tangentopoli Lombardy and Veneto. (bribesville), led by a group of magistrates This dismal performance has four ex- who became known as mani pulite (clean planations. The rst is that, right from the hands). These cases led to the conviction start, the Berlusconi government was dis- and ight of Mr Craxi, as well as to the de- tracted by the time and energy it devoted mise of most of the old parties. The third to measures to deal with the prime minis- event grew out of the second: the decision ter’s own interests and to fend o judicial by Silvio Berlusconi, a media magnate, to cases against him (see box later in this arti- enter politics and found a new party, Forza cle). These included laws to downgrade Italia (roughly, Go, Italy!). the oence of false accounting, to make it Thanks in part to his money and his harder to use evidence from abroad, to pro- media empire, and in part to Italians’ dis- vide for cases to be moved to a dierent illusionment with the old system, Mr Ber- court if there is any suspicion of judicial lusconi enjoyed instant success. His centre- Berlusconi hangs on bias, and to shorten the statute of limita-1 The Economist November 26th 2005 A survey of Italy 9

clear. But most parties seem resigned to the than its predecessors. Within the EU, it has new system. been less deferential towards France and The big problem, as Mr Siniscalco Germany. If Mr Prodi returns to oce, he is knows from bitter experience, it that push- likely to switch the emphasis back towards ing through potentially unpopular re- backing the Franco-German duo. forms is extremely hard when every party Mr Berlusconi’s government has been within a coalition has a veto. Although more staunchly pro-American (and pro-Is- Forza Italia is the biggest party on the cen- rael) than most previous ones. The one tre-right, Mr Berlusconi has had to keep on blot in foreign policy has been Mr Berlus- board the National Alliance, the Northern coni’s partiality for Russia’s Vladimir Pu- League and the Union of Centre and Chris- tin, whom he appears to see as another tian Democrats. Each of these has its own businessman-turned-politician under un- constituency to protect, and none is a natu- fair attack from the media. During Italy’s ral supporter of free markets. six-monthly presidency of the EU in 2003, The fourth point is perhaps the most Mr Berlusconi caused consternation in important: that Mr Berlusconi himself is Brussels by refusing to criticise Mr Putin at not a true believer in free markets either. an EU-Russia summit meeting in Rome. He His own business success was built on the also lost international credibility for his creation of near-monopolies that, far from chairing of the EU summit in Brussels in Prodi waits for the call being attacked by antitrust authorities, December 2003 that failed to agree on the beneted from political friendships. The text of a draft EU constitution. 2 tions after which oences are automati- most notorious example is his Mediaset On defence, although like many other cally expunged. To top it all, in mid-2003 a television empire, which needed the European countries Italy still spends too new law was passed to give the prime min- strong support of a Socialist leader, Mr little, it has in the past few years made a ister, as well as four of his associates, blan- Craxi. But even his early business career useful contribution in places such as Ko- ket immunity from prosecution while in depended on favours, such as diverting the sovo and Afghanistan as well as in Iraq. oce. This law was, deservedly, struck ightpath out of Linate airport to boost the The defence minister, Antonio Martino, is down by Italy’s constitutional court. value of his properties near Milan. Mr Ber- also seeing through a plan to abolish con- The second reason that reform has lusconi’s instincts are those of a trader in scription and to overhaul the arms-pro- proved dicult is the state of the economy. favours and privileges, not of a competitor curement system. If Mr Prodi returns to of- As other European countries have found, it in unfettered markets. That is a useful ce, there is a serious risk that his is much harder to deregulate product mar- qualication for a politician, but less so for government might choose to pull troops kets or promote more competition when building a successful liberal economy. out of Iraq too quickly, as Spain’s then new there is little or no growth. Low growth Despite all this, the Berlusconi govern- prime minister, José Luis Rodríguez Zapa- also confounds the budget arithmetic and ment has done some things right, and not tero, did after March 2004. leaves no scope for higher spending or tax only in labour-market and pension re- Mr Martino is one of Italy’s few avowed cuts to cushion the short-term impact of form. The education minister, Letizia Mo- liberals, but his inuence on economic changes. The catch-22 is, of course, that re- ratti, has worked hard to promote research policy has, sadly, been small. Still, the gov- forms become essential precisely when and to improve Italian universities, though ernment has at least brought in some tax the economy has run out of steam. The there is still a long way to go. As one Italian cuts. Its stewardship of the public nances, Berlusconi government is not alone in Eu- university professor disarmingly puts it, however, has been dreadful. It inherited a rope in failing to resolve this conundrum. the nice thing about this job is that you useful primary budget surplus (ie, before A third factor is, however, more pecu- don’t have to do any work. Pay and pro- interest payments) of as much as 5% of liar to Italy. The country has moved to- motion are largely determined by senior- GDP, but it has frittered that away to zero wards a bipolar system of two broad ity, and Italy has proportionately fewer (see chart 5). Moreover, although Mr Tre-1 groups, the centre-right and the centre-left, foreign academics than most other coun- in part thanks to an electoral reform in the tries. Recent street protests in many cities 1990s which provided for some 75% of the led by university professors denouncing Down, down, up again 5 seats in parliament to be elected on a rst- Mrs Moratti must be a sign that she is doing Italy’s general-government debt as % of GDP past-the-post basis. This was meant to dis- something right. courage splinter parties, yet the inuence 135 of smaller parties remains disproportion- America’s friend, and Russia’s 6.1 ately strong. It may even increase if, as On the whole, the government’s foreign 130 seems likely, the government succeeds in policy must be counted a success too. Mr Primary changing the electoral law to move back to Berlusconi braved the wrath of many of balance* as 125 % of GDP full proportional representation. The op- his EU allies and his own public opinion 120 position has cried foul over this reform, by sending troops to join America and Brit- nil which seems tailor-made to disadvantage ain in Iraq, though he is now trying to ar- 115 the centre-left. As things stand, it will also gue that he had misgivings about the war introduce a complicated system of thresh- and sought to talk George Bush out of it. † olds for representation in parliament the His government has generally been more 1997 98 99 2000 01 02 03 04 05 † eect of which on smaller parties is not yet assertive about Italy’s role in the world Source: OECD *Excluding interest payments Forecast 10 A survey of Italy The Economist November 26th 2005

The strange cases of A prime minister with nine Silvio Berlusconi legal lives

ILVIO BERLUSCONI proudly points friends have fallen foul of the law. Mar- The second friend in trouble is Cesare S out that, for all the legal cases brought cello Dell’Utri, a Forza Italia senator from Previti, formerly Mr Berlusconi’s personal against him over the years, he has never Sicily who once ran Publitalia, the ad- lawyer and defence minister in his 1994 been convicted. He seems to see this as vertising wing of Mr Berlusconi’s Media- government. Mr Previti was convicted in evidence that the magistrates involved set empire, was convicted in 2004 by a a judge-bribing case, but Mr Berlusconi must be biased, part of a left-wing or even court in Palermo of aiding and abetting himself escaped under the statute of limi- a Communist conspiracy. Yet the picture the Maa ( he is appealing against the ver- tations. Mr Previti is appealing, but the is not quite as simple as he maintains. dict). Prosecutors in Palermo do not sus- government has been trying to rescue Over the past few years, The Economist pect either him or Mr Berlusconi of being, him with a new law, known as the Salva has studied the charge sheet against Mr or having been, maosi. But they know Previti bill, to shorten the statute of limi- Berlusconi extensively. We published our that the Maa strongly supported the tations. The bill might not now save Mr ndings in the issues of April 26th 2001 establishment of Forza Italia, and that it Previti, but it could help Mr Berlusconi in and July 31st 2003. (On the second date, may have found Mr Dell’Utri a useful his latest case, on charges of tax evasion much of the detail was published only on channel. In the 2001 election, the centre- and misappropriation of funds. If it is our website, www.economist.com.) right captured every one of the 61 rst- passed, it will bring further discredit to The table summarises Mr Berlusconi’s past-the-post seats in Sicily. Italian public life. legal travails. Two points stand out. The rst is that, even though he has not been denitively convicted in all of these cases, The charge sheet Mr Berlusconi has not been denitively Case Business Charge Verdicts (after appeals*) cleared, either. In several cases he was ini- Villa Macherio Property Tax fraud; false accounting Acquitted on three counts, tially found guilty but then acquitted sim- statute of limitations† on one ply because the statute of limitations had Medusa Films False accounting Acquitted kicked in. AC Milan player Football False accounting Statute of limitations† The second point is that his election All Iberian Offshore company Illegal financing of political party Statute of limitations† victory in 2001 enabled his government Mediolanum, Mondadori, Finance, publishing, Corruption; bribery of Acquitted to change the law in various ways that Videotime, Telepiu films, TV financial police have made it easier for him to escape fur- Mondadori Publishing Corruption; bribing a judge Statute of limitations† ther convictions. The most notable exam- Fininvest 1&2 Holding company False accounting Statute of limitations† ple was the oence of false accounting, SME Food Corruption; bribery of judge Acquitted on three counts, which was downgraded and had its stat- statute of limitations† on one ute of limitations shortened early in the Mediaset Television, films Tax evasion; misappropriation of funds Preliminary hearing present parliament. Source: The Economist *If applicable †Under the Italian penal code, the statute of limitations extinguishes the crime Even so, two of Mr Berlusconi’s closest

2 monti’s repeated tax amnesties have a programme of liberalisation. Such mea- to speed up the processing of cases and re- seemed to keep annual budget decits sures would, on his estimates, yield as duce queues, and his government has in- within bounds, the price of this may have much as 200 billion a year. Some of these troduced reforms which it claims will do been to increase Italy’s already high level assets are, admittedly, in the hands of local this, but no one else seems to agree. of tax evasion. Opposition politicians authorities, but it remains striking how re- Would the opposition be a big improve- claim that tax evasion now adds up to as luctant Mr Berlusconi has been to sell any- ment? It would undoubtedly encourage much as 200 billion ($234 billion) a year. thing. Patronage, it seems, retains its allure. people to be more law-abiding, although This bears heavily on those in paid em- Another undesirable legacy of the Ber- even Mr Prodi has had minor brushes with ployment, who nd they have to pay lusconi government is a devaluation of scandal. Yet there is something dispiriting higher taxes than they otherwise would. civic and public ethics. When a prime min- about the fact that Italian voters next April Nor has the government made much of ister attacks his country’s magistrates as are likely to face the same choice as they a dent in public spending. It is not hard to part of a left-wing conspiracy, passes laws did ten years earlier, between two candi- come up with ideas for cuts, just as it is not that benet his own interests and issues re- dates in their late 60s. Mr Prodi says many hard to nd things to privatise. Giovanni peated amnesties for people who have of the right things about introducing more Tamburi, an investment consultant based evaded taxes and ignored planning con- competition and liberalisation, but you in Milan, has produced a detailed list of trols, he sends a message to the average cit- would hardly call him a liberal or a re- possible asset sales, including of founda- izen: do not bother to obey the rules. The former. Moreover, like Mr Berlusconi, he tions that still own some banks, as well as judicial system badly needs modernising will be hostage to other parties in his own1 The Economist November 26th 2005 A survey of Italy 11

2 coalition. He notes that, unlike in 1996, the He once declared that Mussolini had been Communists under Fausto Bertinotti are the greatest statesman of the 20th century. now formally part of the centre-left co- But for the past ten years he has been alition, as opposed to backing it from out- increasingly distancing himself from this side, and denies that he is some sort of Mr past, denouncing Mussolini, cultivating Is- Prodinotti. But he knows that he will not rael and serving as a briskly ecient for- nd it easy to keep all the small left-leaning eign minister. Along the way he has shed parties behind him. some of his harder-line supporters, includ- He has made several eorts to increase ing the Duce’s grand-daughter, Alessan- his chances. The rst was to suggest that dra, and cemented his position as the most the parties of the left should campaign on popular leader of the centre-right. a single platform. This was shot down by The only political leader who is even one of his closest supporters, Francesco more popular than Mr Fini is Walter Vel- Rutelli of the Democracy and Freedom troni, an ex-Communist who served as Party. However, the idea may now be re- Fini looks to the right culture minister under Mr Prodi in the vived, partly thanks to Mr Prodi’s second 1990s and is now a successful mayor of plan: to hold a primary of all Italian voters after a few hiccups and with a few reserva- Rome. When Mr Berlusconi and Mr Prodi to endorse the centre-left’s candidate for tions, his coalition partners now seem to eventually retire, Mr Fini and Mr Veltroni the election. This was duly put into eect, endorse his candidacy. may be well set to take over as the next and last month Mr Prodi overwhelmingly What would happen to the centre-right generation of political leaders. won the ballot, on a surprisingly high turn- if Mr Berlusconi loses the election? Pre- One thing that Italy lacks is a truly lib- out. That has left him rather better placed sumably he would quit, and few would eral-minded party. The closest are Giorgio not merely to face Mr Berlusconi but per- then expect Forza Italia to survive in its La Malfa’s Republican Party, a tiny group haps also to keep a grip on his own co- present form. There are no obvious succes- that has thrown in its lot with the centre- alition if it wins. sors to lead the centre-right. Mr Casini is a right; and the Radical Party of Marco possibility, but a more plausible candidate Pannella and Emma Bonino, which is not What next? for the leadership might be the present for- now represented in parliament. Mario Mr Berlusconi now seems sure to be the eign minister and leader of the National Monti, at Bocconi University, caused a stir candidate facing Mr Prodi. Earlier this year Alliance, Gianfranco Fini. recently by questioning the ability of ei- he irted with the idea of stepping down Mr Fini is certainly a man to watch. ther coalition to implement reforms. Many to make way for somebody more popular When he rst joined Mr Berlusconi’s gov- saw this as a call for a new centre party, but to lead his alliance, most likely Pier Ferdi- ernment in 1994, he was only just emerg- Mr Monti seems to have no serious plans nando Casini, the speaker of the Chamber ing from the neo-fascist MSI party, which for one. More’s the pity: Italy badly needs of Deputies. But he changed his mind, and formed the basis of the National Alliance. more believers in the free market. 7 Southern cross

What can be done to make it more bearable

T IS easy to think of European countries (notably for health care) over the past de- of these is IRAP, a form of local value- Ithat have trouble with their regions. cade, largely in response to the Northern added tax on business that is of question- There is Spain, with Basque and Catalan League’s demands. Cities have elected able legality under the EU treaties and is aspirations for independence; Germany, mayors, some of whomsuch as Walter due to be abolished. For the time being, a with feistily autonomous Bavaria and a Veltroni in Romeare gures on the na- big part of the regions’ money will con- depressed east; perhaps France, with Cor- tional stage. The government recently tinue to come from central-government sica and other little pockets of indepen- brought in a set of constitutional changes, grants. This is a recipe for duplication, dent-mindedness. But Italy seldom gures now passed by both houses of parliament, waste and unaccountable spending, and it on the list, and indeed it does not suer to give regions even more powers over may make Italy’s already messy public - from serious or violent separatismeven education and social services. nances harder to control. the Northern League’s talk of a breakaway This is said to be the biggest change to It- Even so, if designed sensibly, more fed- Padania is really just a way of pressing aly’s constitution in 50 years. But the cen- eralism would be a good thing in a dispa- for more regional devolution, not indepen- tre-left opposition is against it, and the rate country that was united less than 150 dence. Yet Italy has a regional problem that measure needs approval in a referendum, years ago. Piedmont and the Veneto feel ut- is in some ways more serious than all the probably after the next election. Moreover, terly dierent from Apulia or Sicily. Feder- rest: its south, or mezzogiorno, with its it fails to settle what is always the trickiest alism also pleases the Northern League chronically troubled economy. issue in any devolution of power: money. and its supporters. But it will not do much Italy’s regions have been given signi- The regions and provinces do control for the mezzogiorno. The two big problems cant extra powers and substantial budgets some taxes, but one of the most important of the Italian south are a poorly perform- 1 12 A survey of Italy The Economist November 26th 2005

LIECHTENSTEIN SWITZERLAND ALTO 0.1 FRIULI- AUSTRIA VENEZIA GDP per person*, 2002, % VALLE ADIGE 2.7 GIULIA D’AOSTA 140.0-160.0 80.0-99.9 TRENTO 1.2 0.1 120.0-139.9 60.0-79.9 0.5 3.9 SLOVENIA 3.0 LOMBARDY 3.2 100.0-119.9 FRANCE 9.1 VENETO 0.0 Population, 2004, m Milan 4.0 4.5 Turin Venice 0.0 Unemployment rates, 2004, % PIEDMONT 4.2 2 Source: Eurostat *% of EU-25 average at PPP ing economy, too dependent on the public 4.3 Genoa EMILIA-ROMAGNA 5.3 sector; and pervasive corruption and or- 4.0 C LIGURIA A R ganised crime. These cannot be solved 1.6 I 3.7 O d A BOSNIA 5.8 T SERBIA merely by giving the regions greater auton- Florence r I A MARCHE i omy. In many ways, Italy, once many Ligurian TUSCANY 1.5 a 3.5 T UMBRIA 5.3 t countries, is now two: the auent 37m Sea NEGRO 5.2 0.8 i TE c N who live in the north, and the much poorer 5.7 O 20m who inhabit the south. A ABRUZZI M 1.3 MOLISE Corsica 7.9 Rome S (to France) 0.3 ALBANIA In search of a cure e LAZIO L 11.3 a APULIA Over the years, many cures have been pre- 5.3 4.1 7.9 CAMPANIA scribed for the southern economy. The 15.5 5.8 Y rst was migration: a disproportionate Naples 15.6 BASILICATA share of Italian emigrants in the late 19th SARDINIA 0.6 and early 20th centuries came from the 1.6 12.8 13.9 south. Large numbers of southerners also Tyrrhenian CALABRIA went north to work in new car plants and 2.1 factories. But although emigration can pro- Sea 14.3 duce a ow of remittances, it removes M e d Ionian i t some of the brightest and most energetic e r r a Palermo workers and does nothing to create a dy- n Sea e a namic economy at home. n SICILY In any case, the south now faces an en- S 5.1 Catania e 17.2 tirely dierent migration problem: the a huge numbers of illegal immigrants trying Pantelleria TUNISIA to enter the country from northern Africa ALGERIA 250 km across the Mediterranean. Many of them Lampedusa come in leaky boats, hoping to land on the islands of Lampedusa or Pantelleria. Italy Farther south, Basilicata has lots of small growth. The universities in Naples have a is less used to handling immigration, furniture-makers. But the entire mezzo- high reputation for engineering. She con- whether legal or illegal, than most other giorno is suering from low-cost Chinese cedes that Naples’s image needs revitali- EU countries; for many years it allowed competition. And this is not a region fam- sation, but the recovery that was set in people to enter fairly freely in the expecta- ous for its strong entrepreneurial spirit or train in 1994 by her predecessor, Antonio tion that most would merely pass through its exible labour market. A big reason Bassolino, has continued. The city’s infra- on their way to their nal destination, Ger- why unemployment is so high is that structure is improving, and the local econ- many or elsewhere in northern Europe. wages tend to be set nationally, when they omy has recovered from the near-demise But as a member of the borderless Schen- really ought to be much lower in the south. of its biggest bank, Banco di Napoli, which gen group, Italy has now been forced to In a region with little respect for the law, is now part of San Paolo IMI. tighten its controls, especially in the south. the underground economy is also large. Two centuries ago Naples was one of Ironically, this comes at a time when the It is not all hopeless, however. Gian- the biggest cities in Europe and capital of a country’s population is shrinking and it franco Miccichè, the Italian government’s prosperous kingdom (hence the vener- shouldlike the rest of Europebe looking minister for the mezzogiorno, points to suc- able, note-issuing Banco di Napoli). Its set- for more, not fewer immigrants. cessive OECD and IMF reports which have ting below Vesuvius is spectacular, its ar- The second attempt at curing the acknowledged that public administration chaeological museum world-beating, and south’s economic troubles came in the in the south is improving. He also claims the San Carlo opera house claims to be Eu- form of investment in factories, often state- that the unemployment gap with the rope’s oldest. Naples ought easily to outdo owned. These included giant steel and north is shrinking: in 2001, he says, unem- such other Mediterranean cities as Barce- chemical works, the Alfa Sud car plant, ployment in the south was 21%, but it has lona in tourism and as an investment loca- shipbuilding and others. These plants be- since come down to only 14%. Over the tion. Yet Barcelona, boosted by the 1992 came known as cathedrals in the desert. same period, he adds, the rate of take-up of Olympics, has left Naples in the dust. Mr They suered from chronic low productiv- available EU regional funds has risen from Bassolino, now regional president of Cam- ity, low-quality output and relatively high a paltry 40% to almost 100%. The eastern pania, made much of his city’s hosting of costs, as well as growing competition from regions seem to be doing better than the the G7 summit in 1994, but the legacy has other countries. Most of them have been western ones. The biggest problems are endured less well. Naples may have es- closed down over the past three decades. now concentrated in Campania, Calabria caped from the deep quagmire it found it- The third prescription was to encourage and Sicily. self in 15 years ago, but the city still has small rms to set up in or move to the The south is not without its successful plenty of catching up to do. south to replicate their success in the industries and cities. The mayor of Naples, Perhaps its biggest problem is its reputa- north. The region around Naples, espe- Rosa Russo Jervolino, agrees that the city tion for violent crime and corruption. Last cially around Mount Vesuvius, is littered has suered from a loss of basic industries year it was hit by a wave of gangland and with small textile companies, many of over the past decade, but points to aero- drug-related killings. Although the police which resemble the sweatshops of Asia. space and high technology as areas of seem to have stopped these, the Camorra1 The Economist November 26th 2005 A survey of Italy 13

2 (the Neapolitan version of the Maa) re- in the mezzogiorno, it is the economy and mains powerful. It did well out of relief high unemployment that are the most seri- money sent to Naples after the 1980 earth- ous challenges. As Pietro Busetta, an econ- quake. If you want to know why the omist in Palermo, puts it, Sicily has 5m peo- streets of Naples and the roads up Vesu- ple, but only 1m in workreplicating the vius are covered with rubbish, the answer general southern (and Italian) problem of lies with this organised-crime group. too low a rate of participation in the work- And the Camorra is not alone. Calabria force. Mr Busetta sets great store by the has the ’Ndrangheta, reputedly the tough- plan recently approved by the Berlusconi est and hardest-to-penetrate of the south- government to start work on a much-dis- ern criminal groups. It is believed to have cussed bridge across the Messina straits, been responsible for last month’s assas- connecting Sicily and Calabria. Critics see sination of the deputy chairman of the re- this as a boondoggle that will greatly bene- gion, although no clear motive has yet t a few construction companiesand no been discovered. Mr Berlusconi was doubt both the Maa and the ’Ndrangheta. heavily criticised for his failure to speak One thing on which Sicily should work out against the attack or to attend the fu- much harder is its tourist industry. The is- neral. Both the Italian president, Carlo Aze- land ought to be the jewel of the Mediter- glio Ciampi, and the opposition leader, ranean. It has a superb climate, wonderful Romano Prodi, were there. scenery, an active volcano, delightful beaches and excellent food and wine. Its Cosa Nostra at work abundant cultural treasures range from the And then there is the Maa in Sicily. Of all extraordinarily well-preserved Greek tem- the organised-crime groups in Italy, it is the ples and theatres at Segesta, Agrigento and Maa that has most directly challenged Taormina to the Baroque beauty of Cata- the state in the past 20 years. The challenge nia and Noto. Even the Maa tradition has been partly beaten back, thanks to the Good at laundering might attract tourists to places such as Cor- bravery of a string of dedicated and hard- leone. And yet, complains Mr Busetta, Sic- working magistrates in Palermo. Many top court said he had merely been friendly ily gets far fewer tourists than Ibiza, and maosi have been convicted and jailed, of- with it. Marcello Dell’Utri, a close col- about the same number as Malta. ten on the basis of confessions by pentiti, league of Silvio Berlusconi, who was Sicily is a paradigm for what is wrong former Maa members who have turned intimately involved in the establishment with the mezzogiorno, and indeed with the state’s evidence. Yet the price has been of Forza Italia, was convicted of the same whole of Italy. It has a high-tech cluster fearful. Outside the Palace of Justice in Pa- oence, though he has launched an ap- near Catania and some good universities. lermo is a moving memorial to the 12 Sicil- peal. Magistrates in Palermo believe that But its tourist industry and its entire ser- ian magistrates who have been assassi- the Maa, which was weakened in the late vice culture are underdeveloped. The nated since the 1980s. 1990s, has grown stronger in the past four same is true right across the southa re- The magistrates have not been over- years, partly because Mr Berlusconi and gion that should have been at least as well whelmed by help from Rome. One former his friends have undermined the work of placed as Spain to benet from the boom (Christian Democrat) prime minister, Giu- the judiciary. in European tourism over the past 40 lio Andreotti, was tried but not convicted The Maa certainly adds to the cost of years. In a very Italian way, it has mani- for complicity with the Maa; the appeal doing business in Sicily. Yet, as elsewhere festly failed to realise its full potential. 7 Reform or die

Does Italy need a crisis to get things moving?

AN Italy reform itself, or is it doomed rst slowed some two decades ago, and its rms and its lack of big companies may C to decline? It is always dangerous to demographics have looked ominous for seem a weakness right now, but in future it project a trend set by a few years’ under- many years. might prove an advantage again, providing (or over-) performance far into the future. But time can be a great healer. In the exibility to cope with change. Both Japan and Germany, once thought long run, Italians’ natural air, inventive- In the short term, though, there are unstoppable and then, not so many years ness and creativity should be enough to good reasons for remaining gloomy about later, irredeemable, now seem poised to rescue what is still a rich country in every Italy. As in the rest of the euro zone, only recover, and Britain’s sorry post-war per- sense. After all, this is where much of Euro- more so, the country desperately needs formance has been forgotten in the eupho- pean capitalism began, complete with structural reforms to liberalise markets, in- ria of the past 15 years. Italy’s problems are modern banking and double-entry book- ject greater competition and shake up a as deep-rooted as any: its potential growth keeping. The country’s plethora of small bloated, inecient and sometimes corrupt1 14 A survey of Italy The Economist November 26th 2005

2 public sector. Currency devaluation to o- set deteriorating competitiveness is no longer an option, and the vulnerability of small manufacturing rms to cheaper im- ports from Asia, especially China, has be- come painfully clear. Faced with such huge structural pro- blems, Mr Berlusconi’s centre-right co- alition government has done nothing like enough to put matters right. Unfortu- nately, even if the centre-left under Rom- ano Prodi wins the election next April which looks likely, but by no means cer- tainit too will nd that reforms are hard to get past some of the more recalcitrant small parties in its coalition, to say nothing of Italy’s entrenched special interests. Let’s go, but where? In some ways, things may need to get worse before they get better. Giuliano is Spain. Thirty years ago, the notion that The dierences between the two coun- Amato, a canny centre-left politician who Spain, as it emerged hesitantly from the tries are palpable even to the passing visi- served as prime minister in the early 1990s Franco era, might set Italy an example tor. There is a buzz of optimism in Madrid and again in 2000-01, observes that tim- would have seemed laughable. The Span- and Barcelona that often seems lacking in ing is an essential variable in economic ish economy is still far smaller than Italy’s, Rome and Naples. When the Guggenheim matters. In his rst term he was able to and living standards are lowerbut they Museum in New York was looking for a push through a ruthless budget, slashing are catching up. The Socialist government new foreign outpost a few years back, a spending and drastically reducing the de- of José Luis Rodríguez Zapatero that came natural choice would have been Venice, cit, because Italy’s ejection from the Euro- to power in March last year has kept up the which already has a Peggy Guggenheim pean exchange-rate mechanism in Sep- momentum of economic reform inherited gallery. But it spent years dithering over tember 1992 produced a consensus that from its centre-right predecessor. the site, so the prize was snatched away by tough measures were unavoidable. That Bilbao in Spain’s Basque country. budget laid the foundation for the mea- The gain in Spain Italy is not about to be overtaken by sures introduced by Mr Prodi’s 1996-98 Spain’s public nances are also a lot Spain. But if it is to stay ahead for long, it government to ensure that Italy could join healthier than Italy’s, which is one reason needs bolder political leaders who are pre- the euro from the start. why it has been able to aord such impres- pared to override opposition to reform Mr Monti at Bocconi University oers a sive infrastructure investments as the even in the absence of an immediate crisis. similar conclusion. He says that Italian high-speed railway to Seville or the bur- At the end of I Pagliacci, Leoncavallo’s ve- governments can take tough decisions, but geoning airport at Madrid (bigger than any rismo opera about Sicily in the 1870s, Ca- only if two conditions are met: there must in Italy). The biggest Spanish companies, nio the clown, who has just stabbed his be both a visible emergency and strong such as its two largest banks and Telefón- wife and her lover to death, concludes: La pressure from outside. In the 1990s, the ica, have built up a stronger global pres- commedia è nita. It is time for Italy, too, to emergency was the impact of the scal po- ence than their Italian counterparts. get serious. 7 sition on interest rates and the exchange rate; the outside pressure stemmed from Future surveys the desire to get into the euro. Oer to readers Reprints of this survey are available at a price of Now, says Mr Monti, such a moment of £2.50 plus postage and packing. Countries and regions truth is lacking. Italy is suering from slow A minimum order of ve copies is required. Canada December 3rd 2005 growth and a steady deterioration of its Saudi Arabia January 7th 2006 competitiveness, but both started long be- Corporate oer Germany February 11th 2006 fore the Berlusconi government came to Customisation options on corporate orders of 500 Chicago and the American heartland oce. As for external pressure, the Euro- or more are available. Please contact us to discuss March 11th 2006 pean Central Bank, the European Commis- your requirements. China March 25th 2006 sion and the nancial markets are all doing Send all orders to: Business, nance and economics and ideas their best to apply some. But Italian enthu- The Rights and Syndication Department The evolution of man December 24th 2005 siasm for things European has cooled 15 Regent Street, London SW1Y 4LR Corporate organisation January 21st 2006 markedly, and membership of the euro Tel +44 (0)20 7830 7000 Wealth and philanthropy February 25th has had the perverse eect of dissipating Fax +44 (0)20 7830 7135 2006 some of the market signals that might oth- e-mail: [email protected] erwise have forced change. Italy needs to look to the example of Previous surveys and a list of forthcoming other countries that have successfully in- surveys can be found online troduced reforms, and not just Britain. A www.economist.com/surveys more telling case across the Mediterranean