Italy and the Renzi Factor

The leader of the Democratic Party can claim to have been the youngest PM in Italy’s recent history but he definitely failed to confirm his nickname ‘Il Rottamatore’. His infight was weak, not very sensitive and tying his PM-ship to the outcome of a referendum was a huge political miscalculation. The reform of Italy’s bicameral system that resembles more a political ping-pong structure than a working federalist regime continues to be a political necessity. However, reforming the electoral regime to one that would have given the strongest political party the automatic privilege to govern alone, was a political mistake as it added to the public discontent. Referenda are quite challenging undertakings as the electorate usually uses this opportunities to punish the government for all kind of policies or non-policies. The No-Vote thus is not solely a victory of populist forces but also the result of deep democratic concerns on the side of the public as well as a reflex of the dire economic and social state of Italian capitalism. Data show that the Italian economy continues to be characterized by a North-South divide, and at least as problematic by a enormous share of unemployment for young people.

The crux of the problem is that Italy’s economic regime is no longer generating sufficient gains that that are required for positive social integration. According to the Five Star Movement, this is caused by the common currency and its German-inspired rules. And indeed, the Euro – like any common currency across a range of politically independent jurisdictions – comes with a one-size-fits-all monetary policy and a set of basic fiscal rules that may not always work to the benefit of each member economy. Moreover, the Euro ended the long-standing practice of competitive depreciations of the Italian Lira. When the fixed exchange rate system of Bretton Woods came to an end, the Italian Lira had a rather high number of depreciation episodes, and the need of downward flexibility’s taken into account when it came to the launch of the Exchange Rate Mechanism in 1979 where the Lira got a special fluctuation band of +- 6%, in contrast to more stable currencies whose band was set to +-2.25%. In absence of this time-buying policy, Italy would had only the alternative to introduce smart economic policies that eventually would improve productivity and set Italy on a path of globally successful economic activities. As we know, the Italian political regime was not prepared to act in a world without competitive depreciation. The idea that it only needs setting rod off the Euro in order to return to the deprecation-game of the past is in the best manner naive and in the worst manner a invitation to continue procrastination – no good idea in a world that moves along the lines of competitiveness.

If we look at the rather simple productivity indicator, calculated as per capita GDP in constant prices over time, then it his obvious that Italy has a productivity problem since the 1980s, that started quite a time before the Euro was introduced. Over the the last twenty years or so, only Haiti and Zimbabwe, as Mazzucato informed us, had an even lower productivity rate than Italy. The IMF calculates that real per capita income today is about 12% below the level pre-financial crisis in 2007. What would be embarrassing in many countries became a widely accepted fact in Italy that is not planned to be tackled by any political party. Renzi had reforms in mind when he came to power but those were mainly directed towards the political system. When it came to the economy, then it were rigidities of the labor market that became the critical reform field during his tenure. This traditional supply side-policy and may actually not be strong in there case of Italy – however, labor market reforms are not sufficient to generate growth and improve productivity. This verdict even holds more for the general SGP-approch that aims to reduce the debt and deficit rations by means of supply-side policies. As a matter of fact, the EU- focus on public debt over the years was wasting important time that potentially could have been used to seriously change track of the Italian economy. I say potentially because I can’t see a relevant political actor in Italy that who actually would tackle the underlying problems.

The Italian financial system with its dominance of banks is a lazy system that fed since the end of WWII from the state and its widespread forms of economic and political clientelismo. Italy may be not the only country in Europe where access to politics on all levels is critical for success in the world of domestic finance. It is fair to say, though, that clientelismo has been perfected in Italy, and that the banking industry implicitly relied on active support on the side of the state in case of an emergency. Moreover, in particular the large number of smaller banks cultivated close contacts to local political parties, and this went both ways. The failure of in-built control ands supervision mechanisms is best illustrated by the Euro 360 bn of bad debts in the books of Italian banks. Political favorism in combination with strong incentives for capital misallocation by financial institutions created a messy situation for Italy that needs to be dealt with. Postponement is no longer a viable alternative, but then again the banking sector problems can be sorted out in smart ways. Latter will require some state assistance, and thus the willingness join the side of the EU to compromise in terms of bailing-in rules, and it will require the acceptance of potential losses on the side of debt holders when the conversion to equity will come under way. In case of Monte dei Paschi di Siena institutional investors as well as retail investors may have to convert up to Euro 4.5 bn into equity, a bail-in that seems to be doable. Still, at this point, investors seem not to be very optimistic about the economic and political perspectives of Italy: Its Target 2 balance run end of October, before the referendum, up to a deficit of 355.5 billion Euro – a sign for ongoing flight to safe havens in the Eurozone. And yet, it is not the amount of bad debt that makes Italy to a low growth economy. The problem is the lack of sufficient economic growth which then again is the result of lacking competitiveness in terms of productivity and also the result of a long-term misallocation of resources which reflects the entrenched regime of clientelismo.

If I understand the vague economic policy program items of the Five Star Movement correctly, than chances are low that any of the underlying structural problems will get tackled. Leaving the Euro is no recipe for Italy’s problems nor it is the introduction of a basic income. One of the insights of approaches like varieties of capitalism and institutional theories is that the quality of political, social and economic institutions is key for economic development. In this regard, the4 Euro should be seen as a monetary institution that delivered for quite a while good results for Italy, in particular by insulation its economy from adverse domestic events. The deteriorating quality of this institution over the last years diminished this contribution. However, rather then giving up membership in the common currency it would be smart to overcome the current flaws of the Euro by developing smart ways to block the economically counterproductive policies of Germany. Germany is not the cause for Italy’s economic malaise but a critical blockade to make the euro to a truly European institution that would support forward-looking changes in economic regime of members states. At the very start of his tenure, Renzi was close to move into this direction. Over time, however, he lost the Renzi Factor- appeal and degenerated into an other version of ‘Italy’s normal’.