A conversation about Italian austerity

Italians are let down by the politicians and insiders who make up an unethical caste running the country. But the people must make better choices

You chose austerity so why protest?
Tim Hedges
On 26 July 2013 06:43

‘Do you think this austerity is a good thing or a bad one?’, I was asked. It is of course one of those questions to which you can only give an unsatisfactory answer: no one thinks it’s good, but if it’s bad, why are we doing it? And it was delivered to me with a little bit of sourness in the tone; as if I might somehow be involved.

‘There are two solutions to the problem facing Italy and austerity is the one the Italians have chosen’, I answered, knowing it would cause trouble.

‘But nobody voted for austerity!’

‘No, but you voted against the alternative. Let’s look at the problem first,’ I picked up one of the ubiquitous metal holders for paper napkins, which are the accoutrement to every bar in the country (the pouring sugar pots having been banned on health grounds). It was stamped ‘Made in Italy’, in English.

‘Let’s say this costs 1 euro to make in Italy. The problem is that it only costs 70 cents to make in Germany, even if,' I said quickly before the mob got to me, 'even if the Italians are paid less than the Germans. This has been an Italian problem ever since I can remember, and a British one too, and what we both used to do was devalue the currency.

We did that in 1992 when neither country could keep up with the Exchange Rate Mechanism. But it isn’t a great solution because it can cause inflation, and in any case now that Italy is in the euro it is not an option.

So we are left with the two choices I mentioned. Either we improve efficiency so that the item can be made for 70 cents, or we force costs down. Austerity is this latter course: economists sometimes call it ‘internal devaluation’. In a recession people spend less in a bar so the bar cannot afford to pay as much for its napkin holders (or replaces them less often).

Workers in the Italian steel plant are paid less (by laying some of them off) as are the workers in the metal bashing company. The upshot is that there are more unemployed spending less money and those in work are paid less. The economy spirals downwards until it is producing at such low cost that exports increase (assuming the manufacturing companies are still in existence).’

‘So it could just go on for ever.’?

‘Correct. That is what seems likely to happen in Greece. The manufacturing base has been all but wiped out, but wages are getting down to the level they should be.’

‘So why didn’t we choose the other option, or didn’t we have a choice, is this just what Germany wants?’ You don’t have to dig too deep in Southern Europe to find a bit of anti-German feeling.

‘The other option wasn’t chosen because ‘non conviene’ ‘ (it is hard to find an exact translation here; it means ‘it doesn’t suit Italy’s book’). Too many people would be upset and would block the measures. I read somewhere that a simple packet of headache pills cost 20 times as much in Italy as in England because the pharmacist lobby won’t allow the government to let these things be sold in supermarkets. So without competition the price stays high for the pharmacies.

And protectionism by these vested interests is all over. ENEL the electricity company carefully protects its virtual monopoly, even buying power stations to stop other producers getting hold of them and undercutting. So electricity costs 40 percent more in Italy than in England or Germany. The huge 30 percent government holding in ENEL, worth around €10 billion, means it has political friends who defend its actions whom, of course, it can afford to pay handsomely. The consumer and ENEL’s industrial customers suffer, making goods such as the napkin holder more expensive.

The cartel of lawyers makes it impossible to settle a civil case in less than three years; the average is nearly four years and some take seven. The backlog of cases runs to 5 million, it is said. So if you invest in Italy and your client doesn’t pay (the Government is the worst offender for this) you’re stuck. So you don’t invest. Fewer jobs for Italians.

The unions make it almost impossible to lay workers off without excessive costs, causing one British manager to use British workers on a 2 year contract, paying the flights and the hotel, because it was cheaper. Fewer jobs for Italians.

In the World Bank Economic Survey of Ease of Doing Business in 185 countries, Singapore was first, Britain 7th, Germany 20th, France 34th and Italy 73rd, behind the Kyrgyz Republic, Azerbaijan and Ghana. For ‘Getting Electricity’ it was 107th, beaten by Sri Lanka and Egypt and for ‘Resolving Contracts’ 160th out of 185, beaten by Cambodia and the Lebanon.

Anyone who has spent time in Italy will tell you that the Italians don’t deserve this. As well as being extremely nice people they are notably hard working and clever. They are let down by the politicians and insiders who make up an unethical caste running the country. It is this, not the money supply or the debt levels, which needs to be tackled. But this is where we meet the resistance. Life is good for these people; they don’t want the merry-go-round to stop.

Berlusconi, of course, had his own vested interests to pander to, just as the centre left did and the Christian Democrats before them, but what of Mr Monti’s coalition and the present one, run by Enrico Letta? Couldn’t they have a crack at it?  Don’t make the mistake of thinking they don’t know about all this: these are intelligent men who have seen something of the outside world.

They know what is going on but they haven’t the courage to tackle it. They have given up. The people, albeit indirectly, chose them, which is why I say the people chose austerity.

They desperately need to choose something else.

Tim Hedges had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer

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