Wall Street Journal Europe
December 14, 2009
by Irwin Stelzer
Reports of the recovery in the euro zone conceal a wide divergence in the outlook for the area's individual members, which is why we have been examining the prospects for individual nations, as we have been doing in recent weeks. This week: Italy.
The outlook for the economy seems to be of less interest to the news media than the legal trials and marital tribulations of Prime Minister Silvio Berlusconi, the to-be-appealed murder conviction of American Amanda Knox, and the bribe conviction of Tessa Jowell's husband. Unfortunate diversions, worth overcoming.
Start with the poor performance of the Italian economy, which for a decade or more has grown at an annual rate of around 1.5%, well below the euro zone's 2.2%.
A red-tape-creating bureaucracy, powerful trade unions, and enough changes of government to create the sort of policy uncertainty that isn't conducive to high levels of investment, have kept Italy a laggard in the race to grow.
Many of the Italian businessmen with whom I speak see things differently. The villain, they say, is the euro. In what many Italians regard as the good old days of the lira, Italy could devalue its way out of recession. Or so the merchants and manufacturers, or at least many of them, fondly recall. Never mind that the government had to add increasing numbers of zeros to the lire, or that in the long run periodic devaluations didn't do much to fuel economic growth.
Besides, that was then and this is now. In part because of past excesses, Italy is in a better, or perhaps more accurately, less-bad position than other countries. It had its house-price bubble—and its bursting—before the current global recession began to bite. In recent years, house prices increased at rates less than half those of, say, Spain, so the continuing correction is much less severe and consequential for the overall economy.
Italy also had its runaway fiscal-deficit problem early on. That prevented the government from responding to the recession with a major stimulus program—not a bad thing given the uncertain effects of the programs adopted in the U.S., U.K. and other countries.
Then there is the employment picture. Italy's unemployment rate is the lowest of all the large euro-zone countries, a bit below Germany's and Britain's, and well below the rate in France. This relatively good performance is due in part to a development that some see as a negative, others as a positive. The fastest growing segment of the work force includes part-time workers and workers employed under temporary contracts—such workers accounted for about 18% of the labor force in 1995, and 27% in 2007 (the last date for which data are available).
Depending on your point of view, that is either a negative—more workers in precarious, risky employment—or a positive—a sign that the traditionally rigid Italian labor market is becoming more flexible, and the inability to devalue is placing pressure on employers and workers to bring labor costs down to more internationally competitive levels.
All in all, the outlook for the Italian economy is nowhere near as bleak as it was at the start of the century. Economists at Goldman Sachs expect the Italian economy to grow 1.6% next year —"solid by historic standards.... With a savings rate slightly above 14% and mortgage debt that is a modest fraction of real disposable income, Italian households remain among the least leveraged of the euro zone…" That should allow the household sector to contribute to a robust recovery.
The economists also note that the increase in the unit value of Italy's exports—"the Gucci effect"— might enable Italy to avoid competing with China and other low-labor-cost countries.
Believe it or not, government policy is also seen as a plus. Outstanding public debt is being kept on "a manageable path," Goldman Sachs says. But because annual growth is projected to be in the modest 1.2% range, the health of public finances will depend heavily on reining in spending and actually collecting taxes, rather than on rapid economic growth.
Another bit of good news comes from a survey by the Janus Capital Group. Roughly 54% of Italians surveyed say they prefer more income and less leisure time, while only 8% prefer the reverse. This compares with a 43%-to-11% split in all of Europe.
Downside risks remain, of course. The two main banks, Intesa Sanpaolo SpA and UniCredit SpA, are exposed to Eastern Europe, and private-sector companies are having a hard time obtaining credit. Perhaps even more important, it is difficult to predict what the effect on Italy will be when the European Central Bank decides to sop up the excess liquidity it has created.
The euro zone's one-size-fits-all monetary policy just might be a bit too tight a fit for Italy to wear comfortably.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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