On November 27th the Italian Senate expelled the three-time former Prime Minister Silvio Berlusconi, following his conviction for tax fraud, and in doing so deprived him of parliamentary immunity.
Everyone who has long considered Mr. Berlusconi unfit to lead Italy might now wonder what effects this would have on Italy’s economic crisis.
Among large parts of the electorate and within the centre-left Partito Democratico (Democratic Party) there is the widespread opinion that Mr. Berlusconi was the origin of all problems, in particular of the deep economic crisis Italy is stuck in.
The end of Mr. Berlusconi’s political life should thus be the end of Italy’s problems. Sadly, the situation is not so simple.Italy’s economic crisis is independent of, although aggravated by, the crisis affecting other Eurozone countries.
Since the 1990’s, Italy has suffered from a dramatic misallocation of resources, which resulted in total factor productivity turning negative in the 2000’s.
At the basis of the misallocation of resources is a lack of labour-market flexibility and rigid non-meritocratic management practices that tend to reward people equally, irrespective of performance level.
The Italian labour market is rigid. It favours incumbents and thus damages, above all, young people. Italy suffered a sharp decline in competitiveness as wages became unrelated to labour productivity.
They grew at 2.5% per annum (in the private sector) while productivity remained largely unchanged and wages in the public sector rose at an even faster pace.
In comparison, in Germany between 1998 and 2008 productivity rose by 3% and wages only by 1% per annum.
The ultimate cause of the Italian rigidity is the large role played by the State in the economy. Over decades it built a bureaucratic apparatus meant to satisfy its own needs and preserve its power, rather than serve citizens and businesses.
A complex regulatory environment and the high cost of conducting business thwarts economic activity while preserving incumbents and the role of the State and State-connected enterprises in the economy.
According to the 2013 Index of Economic Freedom, Italy is the 83rd freest economy in the world and it is ranked 36th out of 43 countries in the European region. In the European Union, only Greece ranks lower.
Corruption, extremely slow court proceedings, and a legal system vulnerable to political interference are among the most urgent issues.
Unless the State protects the rule of law and significantly withdraws from the economy, a culture of meritocracy cannot grow and Italy remains condemned to economic stagnation, with all its socio-political consequences.
Hence, Italy needs to create a functioning judicial system, to liberalize the economy and to sell the shares it holds in many enterprises. It is, however, very difficult to implement the necessary reforms in practice.
A very large part of the electorate benefits in some way from the role played by the State and believes that such benefits outweigh the disadvantages.
The majority of Italians live in the illusion that they can exist at the expense of all others, which makes the political cost of reforms very high and goes to the advantages of those politicians who want to maintain the status quo.
Mr. Berlusconi and the centre-left parties managed to maintain the status quo over the past 20 years and Mr. Berlusconi’s judicial problems as well as his scandals served to distract the citizens from the real pressing issues.
Italy’s woes are very serious; Italy is at the ground, it is dying, but no one seems really interested in curing it.
It is much easier to focus on Mr. Berlusconi and his threat to continue to fight outside Parliament. Yet, his expulsion from the Senate does not mean the end of Italy’s problems: we are all going together towards the end.
forbes.com
Everyone who has long considered Mr. Berlusconi unfit to lead Italy might now wonder what effects this would have on Italy’s economic crisis.
Among large parts of the electorate and within the centre-left Partito Democratico (Democratic Party) there is the widespread opinion that Mr. Berlusconi was the origin of all problems, in particular of the deep economic crisis Italy is stuck in.
The end of Mr. Berlusconi’s political life should thus be the end of Italy’s problems. Sadly, the situation is not so simple.Italy’s economic crisis is independent of, although aggravated by, the crisis affecting other Eurozone countries.
Since the 1990’s, Italy has suffered from a dramatic misallocation of resources, which resulted in total factor productivity turning negative in the 2000’s.
At the basis of the misallocation of resources is a lack of labour-market flexibility and rigid non-meritocratic management practices that tend to reward people equally, irrespective of performance level.
The Italian labour market is rigid. It favours incumbents and thus damages, above all, young people. Italy suffered a sharp decline in competitiveness as wages became unrelated to labour productivity.
They grew at 2.5% per annum (in the private sector) while productivity remained largely unchanged and wages in the public sector rose at an even faster pace.
In comparison, in Germany between 1998 and 2008 productivity rose by 3% and wages only by 1% per annum.
The ultimate cause of the Italian rigidity is the large role played by the State in the economy. Over decades it built a bureaucratic apparatus meant to satisfy its own needs and preserve its power, rather than serve citizens and businesses.
A complex regulatory environment and the high cost of conducting business thwarts economic activity while preserving incumbents and the role of the State and State-connected enterprises in the economy.
According to the 2013 Index of Economic Freedom, Italy is the 83rd freest economy in the world and it is ranked 36th out of 43 countries in the European region. In the European Union, only Greece ranks lower.
Corruption, extremely slow court proceedings, and a legal system vulnerable to political interference are among the most urgent issues.
Unless the State protects the rule of law and significantly withdraws from the economy, a culture of meritocracy cannot grow and Italy remains condemned to economic stagnation, with all its socio-political consequences.
Hence, Italy needs to create a functioning judicial system, to liberalize the economy and to sell the shares it holds in many enterprises. It is, however, very difficult to implement the necessary reforms in practice.
A very large part of the electorate benefits in some way from the role played by the State and believes that such benefits outweigh the disadvantages.
The majority of Italians live in the illusion that they can exist at the expense of all others, which makes the political cost of reforms very high and goes to the advantages of those politicians who want to maintain the status quo.
Mr. Berlusconi and the centre-left parties managed to maintain the status quo over the past 20 years and Mr. Berlusconi’s judicial problems as well as his scandals served to distract the citizens from the real pressing issues.
Italy’s woes are very serious; Italy is at the ground, it is dying, but no one seems really interested in curing it.
It is much easier to focus on Mr. Berlusconi and his threat to continue to fight outside Parliament. Yet, his expulsion from the Senate does not mean the end of Italy’s problems: we are all going together towards the end.
forbes.com
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