Italian Reality Check: Six False Assumptions

Italy has a new populist government that promises to pursue radical new approaches to improve the country’s economic lot. Nobody doubts that Italy needs reforms.

But to get onto a successful reform path, it is vital to start with a correct analysis of the country’s actual problems and pitfalls.

Unfortunately, indications are that the 5 Stelle/Lega government bases its plan of action on five false assumptions. That does not augur well for its success.

Assumption #1: Democracy good. Financial markets bad?

Every country is free to express its democratic will. It is also free to demand whatever it wants. The question is whether it is able to get that.

Italy’s new government would do well not to focus so much on the supposed nastiness of the much-maligned financial markets (which do have their definite dark sides). As regards Italy, they have actually often proven to be the country’s friend in the past.

Not only have they often provided the country and its citizens with additional financing. Once Italy was under the euro’s umbrella, they have also furnished Italy with considerably lower interest rates than Italy could ever receive on its own.

That provided the country with additional financial leeway to manage its own fate. Unfortunately, the safety margin that this provided to set Italy’s economy on a safe path was essentially thrown away.

Moreover, it was Italian over-borrowing and the misallocation of the borrowed funds that have kept the country in trouble.

Assumption #2: Italy good. Brussels bad?

Italian citizens have great reason to be frustrated, but not so much about Brussels than about their own politicians. The latter mostly excel in securing for themselves absurdly high salaries as members of parliament.

In fact, they earn the highest salaries of any parliamentarians in the European Union in absolute terms as well as in relative terms (5.3 times the country’s average earnings).

But instead of looking at reforms on the home front, Italy’s populist parties are united in blaming “Brussels.”

In so doing, they are actually mimicking the approach of the Brexit voters in the UK. They complained about “Brussels,” when the true reason of feeling let down throughout the UK was – and is – the dominant role which London plays all across the British lands.

Instead of honestly pointing the blame where it belonged, Brussels was thus made the convenient scapegoat. But that only distracts from cleaning up at home.

How much of a problem such a false baseline analysis is likely to be in Italy’s case becomes evident yet again if one looks at the British case of deep EU antipathy among the Tories. The British government, to this day, doesn’t have any workable plan to exit from the EU. Rather, it is still largely beholden to pipedreams that are roads to nowhere.

Italy’s populist government, if it stays together, may replay this game – and get nowhere.

As to claims for more money, the EU has provided plenty, especially to support the Mezzogiorno. It is telling that 5 Stelle’s electoral success down south is based on great frustrations there that no progress is being made.

Corruption is still stifling down South – and the full implementation of the rule of law remains a good idea. The problem is definitely not a lack of money. Nor is it Brussels. It is proper Italian governance.

Assumption #3: Italy good. Germany bad?

“La Merkel” is deemed a nasty oppressor (soon moustached, à la Hitler, as was seen in Turkey?). Now, the German chancellor certainly has her downsides, but – in her ardent pursuit to avoid conflicts – she also excels at being an accommodationist.

Moreover, contrary to the fairy tale of German industry exploiting Italy, one should note that the republic of Northern Italy functions very much in the vein of German industry. It, too, generates a handsome current account surplus. In fact, in 2017 Italy had the third-largest current account surplus in the EU, following Germany and the Netherlands.

Also, the fact that Germans – back in 1998 – gave up their resistance to allow Italy to enter the euro area on January 1, 1999 indicates German accommodation. At the time, it wasn’t just German economists who pointed out that Italy as a country wasn’t cut out for a common currency.

With the benefit of hindsight, pretty much everybody realizes that Italy needs more flexibility than a common currency can provide.

Assumption #4: The EU’s north always beats down the south?

False. The biggest negative fallout from the potential path chosen by 5 Stelle and Lega will be experienced by other countries in Europe’s South – think Spain, Portugal and Greece. That is all the more galling to these countries, as they already have made huge sacrifices and are prepared to stay the course of economic reform in order to reap the benefits.

So it is clearly not the “North” that doesn’t show solidarity with the “South” – but rather it is Italy, the lead country of the South, which is sticking it to its Southern partners.

Assumption #5: A new approach for Italy?

The biggest false assumption by Italy’s new populist government is that it is going in a new direction. In reality, its emphasis on a supposedly more sovereign economic agenda has been tried aplenty in the past, albeit under different monikers (such as scala mobile, devaluation and high inflation).

The economic record shows clearly that this kind of display of full economic “sovereignty” has never resulted in any social progress for Italy. All it achieved was to paper over temporarily the problems inherent to Italy’s political economy. They remain very real – and are almost entirely homemade.

In particular, too many entrenched interests stand in the way of meaningful reform. Tackling them requires a full frontal effort, as France indicates.

Assumption #6: More “respect” needed?

This is the “à la Turca” (or Russia) approach. Erdogan and Putin always demand being treated with more “respect.” Trouble is, in contrast to the assumptions of these two autocrats, in most of the free world, “respect” is what you earn – not what you demand.

Italy’s populist government has not taken kindly to suggestions that they, too,might come the way of Alexis Tsipras, Greece’s prime minister. He has seen the advantages of departing from his radical firebrand ideas.

In exchange for that, his country remains under the umbrella of the euro, which – like it or not – provides Greece with a powerful form of life insurance that it would not have on its own. And the Greek economy is on the growth path again.

Conclusion

Only nations that want to go their own independent way are fully at the mercy of financial markets, which – in the case of weak countries or economies – can extract a harsh price if things go wrong.

It was precisely that consideration which led Italian decision makers at the time to crawl under the euro’s umbrella. That the new populist government now wants to move even further away from imposing the domestic discipline that it takes to remain under that umbrella makes no sense.

The political temptation to blame everybody else (outside Italy) is understandable, but only pushes real reforms further into the future. Undertaking them is in Italy’s genuine national interest. It is the only way forward.