Thursday, June 25, 2009

“Fidarsi è bene, non fidarsi è meglio” How serious is the recession in Italy?

Popular wisdom in Italy advises us that “to trust is good, not to trust is better” and this, in a very down to earth phrase is what has ruined the Italian economy over the last two decades and for the moment at least, saved it from some of the more acute pain of the present recession.

But now the hard reality of the world economy and Italy’s structural problems is catching up on the country. It is not the banks and the financial sector that are the problem but the old favorites: excessive public spending and debt and poor productivity. There are actually two economic crises gnawing at Italy – one is the world recession and the other is the longstanding structural faults which have been hamstrung Italy for decades. The government is hiding behind the first to mask its inability to deal with the second.

For most of this year, the OECD has been scathing in its criticisms of the management of the Italian economy. In March their report Economic Policy Reforms: Going for Growth 2009, they said that it was slipping further and further behind other wealthy developed countries. There was poor use of labour especially among the young, the old, women and the south. They reckoned that Italy needs to reduce public property and obstacles to competition. Taxes, especially on lower incomes should be reduced. There is a need for more education, especially at the university level. These are comments that we have heard for the last 40 years, maybe more. On the Heritage Foundation index of economic freedom, Italy sank from an already dismal 64th in 2008 to 76th in world ranking, behind Turkey and just making it into their “moderately free” category.

The OECD came back on the attack last week with a report on an Italian economy in “sharp recession” despite “a relatively healthy banking system”. They repeat the usual faults, a “weak underlying fiscal situation” and “poor productivity”.
Just yesterday, the OECD reported that Italy’s pension spending was too high at 14% of GDP in 2005, the highest in the OECD, almost a third of public spending and almost double most other countries. In 1995 Dini began pension reform but neither centre-left nor centre-right has had the courage to continue in any significant way. Italy huge commitment to pensions means that there is less welfare money available for education and to cushion the effects of job losses.
National organisations confirm this pessimism.

Confcommercio says that GDP this year will be 94.8% of 2007 figure (compared to US’s 98.2%, the UK’s 95.6% and Spain’s 98%. The lower GDP will mean less tax income and therefore a much greater increase in the public debt if there are to be any serious stimulus packages. It is due to rise from 105.7% last year to 114.7% this year and 117.5% in 2010, almost double the supposed eurozone limit of 60%.

The Confindustria’s president Emma Marcegaglia said last week that their studies reckoned that unemployment will go to 8.4% in ’09 to 9.3 in ’10. A million or so, still less than in ’91-’92 but for the government a timebomb on a short fuse. So far there has been almost no activity on the unemployed front but in September, with the holidays over and hundreds of thousands of workers with no work to go back to, there is bound to be unrest. This will be made worse by the natural deadline of contract renewal for large sectors of the economy.

Earlier in the year, Berlusconi showed his usual optimism and declared with a big smile that Italy had no toxic assets, Italian houses were not suffering from negative equity and there was (almost) no credit crunch, all of which was more or less true. Today, Italian businesses do have serious difficulties finding credit as the banks become even less trusting. Finance Minister Giulio Tremonti has made it very clear to Berlusconi that there is no money for big public works and very little even for earthquake reconstruction.

Berlusconi dismissed the stories about his parties and prostitutes as “rubbish”. He cannot brush aside the economic problems as “rubbish” nor that they are “a private matter”. The Berlusconi circus will keep people smiling or tut-tutting according to their point of view but without the bread he will have difficulty staying in power.
The Berlusconi Follies

Berlusconi as a Roman emperor is not an original image; the first cartoon that I can find of him as Nero fiddling is from July 2003 (with the EU burning). There are probably earlier ones and for sure there have been dozens since. But for all its predictability, the parallel is a valid one. Italy has had a stagnating economy for more than a decade and now with the recession, there is a strong likelihood that the dull and chronic decline will become loud and acute. And yet, for the Prime Minister, everything would be fine if only the foreign press and a couple of Italian papers stopped talking about his sex life or lack of it.
I will deal with the more serious aspects of the recession in a second posting but here I want to look at the effects of the “Folies Berlusconi”, the show which has been given more coverage abroad than here.

What is all the fuss about? The immediate debate is whether the Prime Minister was paying prostitutes to come to his parties. One woman, coyly described as an “escort”, a new anglo-euphemism in Italian, has said that she was promised €2,000 to spend the night with Berlusconi. The last two months have also revealed his relationship with a then 17 year old from Naples, the use of Air Force flights to bring in guests and entertainers to his Sardinian villa and the reasons for the conviction of David Mills for having received a $600,000 bribe from Berlusconi. None are discussed at the moment. Older elements of Berlusconi’s life are even less in the public eye – from the uncertain origins of his wealth to his unsavoury friends and employees in the past, to laws passed to protect his interests, to his very clear conflicts of interest. Today’s discussion about Berlusconi’s private life is partly about the hypocrisy of a politician who presents himself as a respected and faithful family man, defending Catholic morals who then apparently indulges in Fellini-like debauchery. It is about the possibility of blackmailing the Prime Minister. It is about figura, keeping or losing face, especially abroad. Berlusconi has outdone himself and all the reality shows on his various channels by giving Italy and the world his own reality show. It is about responsibility in politics, or lack of it. It is about the inebriating mix of sex, power and big money in one of the top ten richest countries in the world, which has often been a political innovator; there is the risk that the Italian model might be picked up elsewhere.

Why do a majority of Italians still accept him and many still adore him? His party did very well in last Sunday’s local elections and only dropped a couple of points in the European elections a fortnight ago. We’ll have opinion polls again after the election pause and no doubt they will give him high ratings. The opposition of course gives Berlusconi a constant boost with their lack of leadership, of programme and their internal divisions. But Berlusconi’s popularity is not only due to the centre-left’s ineptitude. Italy on the whole is very tolerant of misbehaviour be it on the roads, in building regulations or in filing tax returns. Like Mithridates, Italians have been taking doses of poisonous corruption for years and very little shocks them. Berlusconi is a role model for many and not only men who can only admire someone who increases his hair and decreases his wrinkles the older he grows.

Role of the media. Of course control of the media helps. Over the last week, the mass viewer channels, Berlusconi’s and RAI 1 and 2 have given scant coverage to the scandals and in the past the story has more often been the Prime Minister’s reaction rather than the allegations against him. He refuses to talk to the opposition papers, Repubblica and Unità journalists and uses family publications and friendly television employee-presenters to put forward his point of view. He has accused Repubblica of organising a plot against him and they have replied with a libel suit. But there is a peculiar naivete in his media management, he is so used to controlling everything that often he is gloriously unspun and genuine. This makes him very attractive to his supporters but gets him into trouble abroad. A few months ago he played one of his inane practical jokes on the then mayor of Florence; on the inaugural run of the new high speed link between Rome and Florence, he donned a ticket collector’s cap and and asked the mayor “how do you like the railwayman prime minister?” Without waiting for a reply, Berlusconi grinned and said “I myself prefer the whoremonger [puttaniere] PM”. A remark he must be regretting now.
Restrictions on telephone taps. There is a bill before Parliament which will greatly reduce investigators’ authority to use intercepts and amendment which, if passed, would retroactively prevent the taps being used as evidence. Much of the evidence in the Bari investigation depends on taps so could not be used.

Difficulties ahead.

G8 at L’Aquila
. Berlusconi’s first big hurdle is to get through next month’s summit without major damage. Inevitably the international press will still be chasing the sex and other scandals and at least some the local press will be doing the same. Foreign journalists cannot be silenced in quite the same way as local ones so he will have to tread carefully at the press conferences.
Worse would be if a significant number or Aquilani decide that a demonstration at the summit is the best way to ensure promises for reconstruction. When Berlusconi moved the summit to l’Aquila, he thought it was a smart move because the violent no-globals could hardly smash their way through survivors’ tent cities. But if it is the survivors themselves who are demonstrating, Berlusconi can hardly send baton-wielding riot police to break up a crowd of homeless women children and old people.

Criticism from the Church. Last week the Conference of Italian Bishops daily, Avvenire asked for “clarity” on Berlusconi’s alleged behaviour; this week Famiglia Cristiana’s editor complained of the “moral decadence” in the country.

Criticism from allies. Even one of his closest allies, the rumbustious editor of Il Foglio, Giuliano Ferrara gave Berlusconi a dire warning last week when he compared the present situation with 24th July. This was the day before Fascist leaders overthrew Mussolini in 1943. Strong medicine as Berlusconi is not Mussolini and Italy is not in the middle of a world war but an indication that not everyone is happy in the centre-right.

Verdict on immunity law. Last year Berlusconi passed a law giving himself immunity from prosecution as long as he is in office. The Consitutional Court is due to give its verdict in the next two or three months. Last time, in 2004, the court declared the immunity law unconstitutional – we will see whether the new law fulfills their conditions. If it does not, then Milan prosecutors will immediately re-open the Mills case and there is a good chance that he will be involved in the Bari investigation for corruption and prostitution.

A million unemployed by Christmas. All the indicators suggest that the recession is going to get worse before it gets better (see subsequent post). With close to 10% unemployment and reduced incomes in most of the rest of the economy, the government will be under serious pressure. Berlusconi’s optimism will not put food on the tables of the unemployed.

Contract negotiations. Even for those who have a job, there will be tension as some of the biggest unions will be negotiating new contracts in the autumn. More potential trouble.

Increased pressure from Umberto Bossi and the Northern League. The only clear winners in the European elections were the League. Umberto Bossi has repeated his support for the government but obviously will be upping the stakes over the next few months, either by pushing for more ministerial posts or for greater devolution in the Fiscal Federalism bill going through Parliament. He is very unlikely to sink the ship as he did in 1994 but he could certainly make it change direction.

The cracks in Berlusconi’s real and political makeup are hardly visible but they are there and the end will certainly be even more dramatic than the other reality shows.