16 February 2016

The long-term Italian crisis

Federico writes*

The financial crisis that originated in the United States had a profound impact on Europe and questioned the stability of the Eurozone. In the first instances, Italy was considered to have a relatively stable economy and a contagion was not to be expected. Yet, the peninsula was hit first by the contraction of the interbanking loan market and then by a speculative attack on its public debt, where investors withdraw their financial capital from the economy. In this short essay I will discuss the fact that Italy already had long-term economic instabilities and that its current weakness is not only a result from the current crisis.

The 90’s were marked by an increase of new market economies and therefore of greater competition all throughout the world. Most Western European countries challenged the competition with high investments in highly specialized sectors, where capital is more necessary than a cheap labor force. This gave the rise of a high technological industry in Europe and an increase of the overall productivity. Italy did not experience this change and it barely specialized in high-tech sectors. Italy’s politicians preferred to protect the symbolic industries like Fiat, which at that point of time started to be artificially supported by the state. This was of course a big mistake, as other European countries would reap the benefits of the new sector. By the end of the 90’s, some reforms were introduced that aimed to restructure the labor market by making wages more flexible and therefore decrease the overall labor cost. However, these reforms changed the model of development, which provided a low growth of productivity, low investments on capital, but a high use of the labor force. Of course the goal was to increase the employment levels and to bolster again the manufacturing sector, but the results were not as promising as expected.

The economic situation was furthermore aggravated with the introduction of the Euro, which brought initially positive results in foreign direct investments but caused an increase of prices. In the early 2000s Italy was already starting to lose against the pressure of the global competition. Italy’s long-standing textile and machinery industry, once jewels of the Italian industry, were then lost to the competition. The prevailing liberal culture that resulted in this Italian economic miracle era of the 50s paradoxically created the structural problems that are now difficult to change. In the past 25 years, the Eurozone members spent more than Italy on research and development, with an average gap of 1 percent of GDP. In addition, strong patent laws mean that technological knowhow is not as widely spread in Italy. The resulting weakness in national innovation discouraged investments Italy's high-tech sector.

In conclusion, the long period of low occupational growth without a significant increase in productivity is one of the most fundamental problems of the Italian economy. The increase of prices caused by the introduction of the Euro, and the increase of competition from the emerging economies also severely affected Italy. The lack of incentives for innovation and policies of protectionism that only worsened the level of competition of key companies did also certainly not help and a fragility of the real economy was to be expected. The necessary reforms were dragged from government to government. As a result, the current economic crisis is just a mere reflection of Italy's failure to change in the past decades.

Bottom Line The Italian economic crisis is a result of bad politics of the 90’s that affected the model of production in Italy, in which a cheaper labor force was preferred over high investments in capital. This made Italy miss the opportunity to develop its industrial markets.
* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

5 comments:

  1. Very enlightening piece of literature. Thank you

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  2. I couldn't agree more. In fact, the only remark I might make is that, in my opinion, the partial reform of the labour market was aimed at decreasing labour cost by attacking salaries and unions instead of decreasing taxes on employees payed by the employer. The outcome was a segmentation of labour market, resulting in a division between pre-reform employees (defended by unions) and 'reformed' workers with no rights whatsoever. The outcome of this was a huge loss of salary and 'buying power' for my generation, that put our welfare state at stake.

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  3. The crisis is indeed older. I do not agree with many points in the text. However, I do share the basic idea.

    We also had a man who further screwed the country. There was an excellent 16 page detailed account of this in an issue of "The Economist", in June 2009 if I remember correctly. Not all originated from him, but he did make things much worse.

    A shorter account of this is here http://www.economist.com/node/18805327

    Again, I do not agree with all, e.g. not with the "growth mania" (to use H. Daly's wording) that informs this magazine's line of thought, but I do agree with the gist of it.

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    1. I agree. At times it is easier to point fingers; the truth is that none of the politicians (elected or not) never had the courage and/or the vision to reform Italy as needed.

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  4. Very interesting article that leaves many questions alongside answers. It would be interesting to know whether this is a pattern of thought to an average Italian politicians , or is it actually the result of inaccurate observations that continued to grow to monstrous proportions.

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