Italy at the crossroads: desperately seeking government in a time of crisis

Regardless of who wins the 2013 election, citizens and commentators alike are pessimistic about Italy’s economic outlook. AAP

Italy has had several crucial elections in the past. In 1946, right after the end of World War II, citizens were called to decide between Republic and Monarchy. Two years later, the 1948 general election was a choice between the two blocs of the Cold War. In 1994, the so-called first Republic came to an end, swept away by corruption scandals, and voters had to give the Parliament new life.

But this 2013 election (24-25 February) is likely to stand out because there is something very gloomy about it. Italy is in a crisis, and not a “simple” debt crisis, as one might be tempted to believe. Most Italians today feel economically and financially insecure, their jobs are at risk, the prospects for their children are dim, and the widespread opinion is that no matter who wins the elections, things are not going to improve.

Realistic pessimism

This gloomy feeling has some justification in the data. Unemployment is now above 11%, two percentage points higher than a year ago. Youth unemployment is about 35%, with peaks of more than 50% in certain areas of the South. About ¼ of the population is estimated to be at risk of poverty or social exclusion.

But perhaps more than these numbers, what really worries Italians is that the country appears to be trapped in a vicious circle of fiscal austerity — which many perceive as the consequence of undue European interferences — and worsening recession.

The last 12 months of Mario Monti’s government might have reinforced this impression. Acclaimed as a saviour by most media and European partners in November 2011, when the interest rate spread hit its maximum and the incumbent Berlusconi’s government seemed paralysed an incapable of action, Monti implemented a tough fiscal austerity plan mainly based on tax hikes.

The plan was successful in reassuring international markets and reducing the spread. But in the absence of significant expenditure cuts and ambitious reforms to re-start growth, it deepened the recession. As a result, household welfare is today lower than a year ago.

Campaigning on economic issues

The problem is that the debate on fiscal austerity in Italy has overshadowed the debate on economic growth. If a country achieves a steady rate of economic growth, then no draconian tax hikes and expenditure cuts are required to ensure the long-run sustainability of debt. In Italy, this simple lesson seems to have been forgotten.

Of course, the Italian situation 15 months ago was one of acute emergency. Without much time to boost growth, Monti’s only initial option was to adopt severe measures of fiscal austerity. Now the time has come to move away from this obsessive focus on austerity, but this is not what the main political parties seem to be doing.

Certainly, the policy platforms of all parties include some significant tax cuts. But the discussion on measures to relaunch growth has been marginalised. The problem of how to finance the tax cuts has attracted much more attention than the question of how to design new pro-growth reforms.

Berlusconi’s centre-right People of Freedom Party (PDL) proposes a large fiscal stimulus package consisting of tax cuts across the board and an increase in public investment. Extra revenues would be generated through an aggressive public assets sales plan, fiscal agreements with Switzerland for the taxation of Italians financial capitals abroad, and a reorganisation of tax expenditures.

Monti’s centrist movement Civic Choice (SC) offers a significantly more conservative platform than the PDL: smaller-scale tax cuts, a larger reduction in the consumption component of government expenditure, and a more moderate increase in public investment. Similarly to the PDL, SC also proposes to generate extra-revenues via public assets sales, but again this plan is less ambitious (and probably more realistic) than that proposed by the PDL.

The policy platform of the centre-left Democratic Party (PD) of Pier Luigi Bersani seems to be more orientated towards redistribution. PD proposes a reduction in the lowest income tax rate and a reformulation of the property tax to reduce cost on poorer households and increase the burden on richer households. The main action in support of growth would probably be an increase in deductions on taxes on reinvested earnings.

None of the parties are proposing measures that are capable of sustaining high growth in the long term. A study recently released by Oxford Economics confirms that whichever of these three platforms were to be implemented, the annual average growth rate of Italy over the period 2013-2018 would be less than 1%.

Considering that the fourth major contestant is the anti-politics Five Star movement of Beppe Grillo, whose economic platform is limited to generic statements on the need to curb public administration costs, the chances that this election can mark the beginning of new growth era for Italy are feeble.

And exit polls contribute to the darkening outlook: no party is likely to have a solid majority in both the House of Representatives and the Senate. Hence, the need to form a coalition (most likely between PD and SC, with PDL and the Five Stars movement at the opposition) will further complicate economic policy-making and reduce the space for long-term reforms.

Is then Italy doomed? Maybe not. Its problems are home-grown, which means that solutions are also to be found at home. As a political and economic system, Italy has the potential to find a way out of the crisis. However, to do so, the country (its political class, its private sector, its citizens) will have to recover the entrepreneurial spirit, the vision, and the courage that made the “economic miracle” of the ‘50s and ‘60s possible. The question is: is Italy prepared to “go back to the future”?