Italy's battle with a Leftist legacy that destroys jobs

Italy is plagued with outdated labour legislation, introduced around 1970 in a Europe-wide orgy of social protection that has left the country uncompetitive. Worryingly, Labour in Britain would envy their job-destroying policies

Matteo Renzi. Italy's Tony Blair?
Tim Hedges
On 24 September 2014 11:33

Italian leader Matteo Renzi, still not yet 40, is beginning the biggest fight of his career. It is not too much to say that the future of Italy, not just of Renzi, depends on it. The battle is, largely, with his own Left-leaning party, and concerns his Jobs Act.

Italy is plagued with outdated labour legislation, introduced around 1970 in a Europe-wide orgy of social protection, but which, since globalisation and the gradual liberalisation of work in much of Europe, has left the country uncompetitive.

Of tremendous symbolic importance is the much talked about and much misunderstood Article 18 of the Statute of Workers. This makes it prohibitively expensive to fire or lay off workers who are on a permanent contract in companies employing more than 15 people.

There is substantial compensation involved and often the courts will decree that the workers will have to be re-hired. Such was the case recently with some troublemakers at a FIAT plant in the south.

Few workers have been taken on in these difficult times – Italy’s unemployment levels have increased by half in the last four years – but most of those are on short-term contracts. Less than half of Italian workers have contracts of indeterminate length, compared to 70 percent in Britain.

If you take on seasonal workers, say in agriculture or tourism, you have to make sure they leave your employ. You can then take on others, but keeping the same ones means they become permanent. So just as you have got an employee trained, you have to fire him.

Thus the legislation, designed to help workers, has the perverse effect of stopping companies taking on new employees and leaving new workers without job security. This is a defensive wall around those who have a job at the expense of those who have not.

However, Article 18 has tremendous symbolic importance in Italy. The campaign against its abolition or amendment is led by Pier Luigi Bersani, veteran socialist campaigner and former leader of the Democratic Party. He has recruited the trade unions, only too willing to defend such an iconic piece of legislation.

But if Article 18 is a totem of workers’ rights in Italy, it has an even greater significance outside the country. To many investors it means, incorrectly, that if you take someone on in Italy you have got them forever, and that if your project doesn’t work you have massive decommissioning costs in the form of compensation to the employees.

And the symbolism is even greater in Brussels and Berlin. The antiquated Italian employment legislation is regarded as part of Italy’s refusal to join the modern world. This is felt particularly strongly in Germany where they had the Hartz reforms in the early years of this century. A reform of Article 18 would do wonders for their opinion of Italy. They want to believe in Renzi and this is just the ticket to make him flavour of the month in Europe.

Renzi’s plan is not to abolish worker protection but to make them assume their rights gradually: the amount of protection they have would increase with their time in the job. New recruits would have little or no protection, making it more attractive to hire young people.

Renzi knows that labour reform will not create instant growth. That will take further reforms to labour, the legal system and other vested interests and it will take time. But if he can get one serious reform enacted, he believes German Finance Minister Wolfgang Schaeuble and European Central Bank boss Mario Draghi will allow him to be flexible with the 3 percent deficit limit of which Italy is not yet in breach but may be soon.

As the economy shrinks, the ratios of deficit to GDP and debt to GDP get worse even if the deficit were to be zero.

Renzi needs to pump some money into the economy to create jobs and growth and his idea is that as he enacts further reforms he will be able to borrow more.

Borrowing in order to reduce borrowing; we have been through this argument in Britain. My own belief is that it is now too late. Italy is in a debt trap and can never repay its external borrowings. It must reschedule and leave the euro, albeit temporarily. I very much hope Matteo Renzi proves me wrong.

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer. You can read more of his articles about Italy here

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