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Eurozone set for more pain — and it’s Italy’s fault

Italian voters have rejected austerity, opting instead for Berlusconi and comedian Beppe Grillo at the weekend’s election. This will not end well for the Italian economy, or the eurozone.

Italians are their own worst enemies, once again seduced by Il Cavaliere — and also by Beppe Grillo, a comedian preaching an anti-politician line. At the Italian election, centre-Left group leader (and outgoing PM) Mario Monti was a worthy but uninspiring politician who made even the most boring of speakers seem charismatic. Rather than acknowledging the weak economy, the need for more change and the challenges facing the country, Italians voted for the easy way, out of tax cuts and the ending of higher imposts and other changes imposed by Monti.

Reform ended up a dirty word, the future was ignored, even though there’s more pain ahead, no matter who won the polls (there is now an impasse). Rank opportunism has replaced prudence and policy-making, or rather has returned with the continued presence of Silvio Berlusconi (surely the basest of all political and business opportunists of the past 30 years) allied to the non-political grouping led of that other opportunist, comedian Beppe Grillo and his Five Star Movement.

That will lead to more recession, more unemployment and more misery for millions of people who should know better after 17 years of Berlusconi.

The protest vote about the changes brought in by the caretaker government led by Monti has done nothing to change the situation; Monti’s tax changes will remain, and the lack of a clear political decision means no party has the will to continue to try and reshape Italian political bureaucratic and economic life for the better. Petty self-enrichment will remain the order of the day to win votes and make political headway. In that respect the poll was a blast from Italy’s past in the 1960s and ’70s.

And for those critics of Monti, led by US economist and Nobel prize winner Paul Krugman, who claim the vote was a rejection of austerity and that spend, spend, spend is the way for Italy to take, there’s more grim news. Electoral confusion, weak leadership and the presence of Berlusconi in the background, seeking to protect his media and other empires and remain out of jail, means the current recession will continue. Austerity might be tough, but the easy way out of spending, changing laws and refusing to cut wages (and cut the levels of government) is long gone.

The protest vote that gave Grillo’s Five Star Movement 25% of the vote and representatives in the Parliament (none of whom have any experience) will die away when people realise that he is not part of the solution but an outgrowth of the problem and blocking the way for the changes needed.

Graft, corruption, patronage, abuse of social and legal norms, pandering for votes and influence at the highest levels of the country, unnecessary intrigue, political decisions made to benefit the fewest number of people (try just one, Berlusconi), abuse of the tax system, tax evasion, tax avoidance — you name it.

Significant change is needed, no matter what Krugman might think. Economists point out that since Italy joined the eurozone in 1999 (at a very generous exchange rate of one to one), economic growth has stagnated. The Italian economy is no larger than it was in 2000.

The population is ageing faster than many thought would happen — 20% of the population of 60 million is aged 60-plus, and that’s expected to soar because the birthrate has been falling for decades. Without immigration (legal and illegal) in the past five years or so, Italy’s population would now be contracting.

The economy was forecast to return to growth later in the year, but economists say the political indecision will mean Italy will be lucky to see any positive growth until 2014. Sustained economic growth (which builds income and wealth) remains a distant mirage for the country. Financial Times writers summed up the Italian problem in a piece this morning on the website:

But the absence of liberalising economic reform is, in large part, a political and institutional problem. It is the consequence of a system of democracy, constructed after 1945 in response to the national disaster of fascism, that distributes influence among political parties, industrial groups, banks, trade unions, courts and other centres of power so carefully that no government can cut through the thicket of vested interests.

Corruption in politics, business and state administration feeds more poison into the system, clotting the arteries that might supply the blood of reform to the nation’s heart and brain. It was an election that exposed discontent with austerity but also illustrated that the road to economic salvation must pass through a decontamination and renovation of Italian politics.”

Ordinary Italians were unwilling to do this, so they and the rest of the eurozone and Europe (and possibly the world economy) now have to go through months, if not years of tension, instability, volatile markets, weak growth, high unemployment and a sense that the crisis set off by the GFC refuses to end.

Unlike the self-absorbed Italian voters, their counterparts in Spain, Greece, Portugal and Ireland, not to mention France and the Netherlands, have all voted against governments that were around at the start of the GFC and started the austerity campaigns. But the replacements, most of the them centre-Left, have continued the cuts and spending freezes, even reversing promises made in election campaigns because they were quick to realise there are no quick and easy alternatives — that doing nothing or continuing to spend was no solution, and that if that continued, going broke and years of recession were the only outcome. They accepted there was no substitute for making tough decisions now, albeit lightened with some changes in spending and targeted taxes against the wealthy.

Yields on Italian bonds jumped last night because of the election impasse to peak around 4.85% for the 10-year securities. That’s a long way from the 7% crisis levels we saw when Berlusconi was ousted as PM in late 2011. But unless Italy gets its act together and produces a united, forceful government, those days will return in the immediate future.

2
  • 1
    Marty
    Posted Wednesday, 27 February 2013 at 1:50 pm | Permalink

    So Glenn, perhaps you can explain why Krugman is wrong instead of simply asserting it to be the case? Austerity measures have failed in Spain and everywhere else, why do you think that reducing aggregate demand in the economy is somehow going to increase employment?

  • 2
    Malcolm Street
    Posted Wednesday, 27 February 2013 at 7:49 pm | Permalink

    How on earth could so many vote for Berlusconi? What does he have to do for the Italians to wake up to him?

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