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A worker welds in a factory in Gravellona Lomellina, near Milan, June 11, 2013. Italy’s economy, the euro zone’s third biggest, is mired in a recession that has been dragging on since mid-2011, driving up unemployment and forcing the closure of thousands of companies. (STEFANO RELLANDINI/REUTERS)
A worker welds in a factory in Gravellona Lomellina, near Milan, June 11, 2013. Italy’s economy, the euro zone’s third biggest, is mired in a recession that has been dragging on since mid-2011, driving up unemployment and forcing the closure of thousands of companies. (STEFANO RELLANDINI/REUTERS)

In Italy, desperation as every statistic heads the wrong way Add to ...

In Italy, the tragic stories of suicides apparently linked to the deep recession are becoming all too frequent. Last month, a former factory worker hanged himself near Turin because he could not find work, his relatives said. In May, a young man committed suicide outside of Rome shortly after he lost his job. The next day, Italian President Giorgio Napolitano begged the government to deliver “the utmost attention for situations of greatest malaise and need” to help stop the wave of suicides.

The euro zone is finally emerging from its worst downturn since the Second World War. Almost every day, enough encouraging economic data are published somewhere in the 17-country region to offset the negative bits. In the past two quarters, for instance, hirings in Greece have exceeded firings, even though the economy remains in recession. French manufacturing has apparently stopped contracting and Spanish unemployment, the highest in the Western World, has fallen a bit.

The exception is Italy. Almost every number is going in the wrong direction and a sense of desperation is hitting everyone from retailers and cabinet ministers, who have gone begging to the European Union for job-creation funds, to consumers and manufacturers, whose factory output has fallen by a quarter since the European crisis started in 2008.

Italy matters because it is the euro zone’s third-biggest economy, with a gross domestic product about 20 per cent bigger than Canada’s. Its national debt load, at €2-trillion ($2.7-trillion), is Europe’s biggest. Jobs are vanishing by the minute. Youth unemployment is 40 per cent; it’s 50 per cent in southern Italy, to the delight of crime syndicate recruiters. Confederscenti, the Italian retailers’ association, says that three shops close for every one opening. Parts of some of Italy’s normally vibrant cities are becoming retail deserts.

On May 31, Bank of Italy Governor Ignazio Visco said the recession “threatens to erode social cohesion.” He is evidently worried that Rome could burn like Athens did in the infamous riots of 2012.

Italy can still fund itself. But after a healthy plunge in sovereign bond yields in the past year, thanks to Italy’s patron financial saint at the European Central Bank, Mario Draghi, they are rising again. Should Italy become too risky to fund because its economy cannot reverse course, the euro zone project would be dead. Look at the damage that tiny Greece inflicted on the region. Multiply that by ten if Italy were to be shut out of the debt markets. It would have no choice but to default and reprint the lira. Financial and economic chaos would overwhelm the continent.

Sadly, there is almost no chance of Italy climbing out of the volcanic muck any time soon. For that, you can blame the ghost of former prime minister Silvio Berlusconi and the country’s shockingly uncompetitive labour costs and productivity.

Italy is capable of economic reform. It got its financial house more or less in order in the early 1990s as it prepared to join the exchange rate mechanism, the precursor to the euro. Pension reform was the big accomplishment because it had to be; Italy has one of the lowest birth rates on the planet and far too many old people to support. At one point, it even hit bank deposits with a one-off fiscal cleanup tax, though a small one, inspiring the haircut now being used to help rescue the Cypriot banks.

Then came Mr. Berlusconi, who held office three times between 1994 and 2011. The man did deliver political stability – the country had averaged a government a year since the Second World War – but it came at a cost. Economic reform, though promised, went nowhere. Mr. Berlusconi seemed to spend most of his time insulating himself from criminal prosecutions and protecting his vast media and property empire. Since Italy joined the euro, its growth rate has been close to nil, a remarkable achievement when virtually every other Western economy has surged.

Italy steadily lost competitiveness as unchecked greed took over. Rising labour prices are a good thing if they are mostly offset by improved productivity. They weren’t. According to a recent report by economics professor Paolo Manasse of the University of Bologna published on the economists’ Voxeu.org site, unit labour costs in Italy rose by 35 percentage points between 2000 and 2012. In Germany, the equivalent figure was three percentage points. Over the same period, Italian labour productivity gains were 14 points lower than Germany’s. No wonder Italian industrial production is collapsing, to Germany’s benefit.

Mr. Manasse’s conclusion: “It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, the euro and austerity measures for the current recession. … [But its persistence] is the legacy of more than a decade of a lack of reforms in credit, product and labour markets, which suffocated innovation and productivity growth and resulted in wage dynamics that were completely decoupled from labour productivity.”

Italy was its own worst enemy. In a currency union, that spells bad news for everyone. The euro zone will not truly be safe from destruction until Italy gets its economic act together. In the meantime, expect more tragic headlines about the desperate acts of the desperately unemployed.

Follow on Twitter: @ereguly

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