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Not long ago Italy was Europe's highly touted emerging economy, a society that blended dynamism and super-fast growth with a lifestyle that was the envy of all. Now it is viewed as a major threat to the future of the Euro, indeed to the European Union as a whole. Italy's political system is shorn of credibility as it struggles to deal with huge public debts and anemic levels of economic growth. Young people are emigrating in droves, frustrated at the lack of opportunity, while older people stubbornly cling to their rights and privileges, fearful of an uncertain future.
In this lively, up-to-the-minute book, Bill Emmott explains how Italy sank to this low point, how Italians feel about it, and what can be done to return the country to more prosperous and more democratic times. With the aid of numerous personal interviews, Emmott analyzes "Bad Italy"—the land of disgraced Prime Minister Silvio Berlusconi, an inadequate justice system, an economy dominated by special interests and continuing corruption—against its contrasting foil "Good Italy," the home of enthusiastic entrepreneurs, truth-seeking journalists, and countless citizens determined to end mafia domination for good.
Italy's Wake-up Call
It was a stunning result, but should not really have been surprising. When voters went to the ballot boxes on February 24th–25th, in an election held more than a month early because of a decision by one of the established political parties to withdraw support from the 'technical' government led by the respected non-politician Professor Mario Monti, they rejected two of the pillars of the Italian political system: the old political parties and adherence to a fiscal austerity programme ordained by the country's European partners. Instead, 25 per cent of them voted for not a party but a movement, led by a former stand-up comedian, Beppe Grillo, that stands, essentially, for 'a plague on all your houses'. That meant that his Five Star Movement had gone from zero in 2009 to become the country's single most popular political group, with 163 members of Parliament. Moreover Silvio Berlusconi, of whom much more will be said in this book, came within a sliver of winning the election with his coalition, despite having been slung ignominiously out of office barely a year earlier, to make way for Professor Monti.
Pundits, politicians, pollsters and above all the leaders of other European countries were stunned. But they should not have been surprised. For what voters were saying was that, in the midst of a long recession and the second political and economic crisis their country had faced during the past twenty years, they wanted change. And it is only a modest exaggeration to say that the only man offering them change was the hairy, bearded, internet-savvy Mr Grillo.
There is a lesson in Italy's poll, as in its whole experience since its political and economic crisis began – and the former can be dated to 2011 though the economic crisis really began with the wider western economic crisis in 2008. The lesson is simple: that in a crisis, reality needs to be grasped, sooner rather than later. And a failure to grasp that reality, when allied to a deteriorating economic situation in which voters can see no hope of improvement, is going to produce a political backlash, even an explosion. Yet this lesson is not just a lesson for Italy. It is a lesson for the rest of Europe, and even for the whole of the West.
After all, for most of the big, rich countries of the West, the financial crisis of 2008–10 and its worrying aftermath came as a genuine shock, the worst such economic shock since the Second World War. It was made even more humbling by the sense that their control over world affairs is ebbing away, thanks to the rise of China, India and other previously poor countries, and thanks to the ageing of their populations. It was far from being the first big post-war crisis – the oil-price hike and runaway inflation of the 1970s had long ago jolted Europe and North America out of any post-1945 complacency – but it was the first time that the West really felt as if it might be teetering on the edge of an abyss of long-term decline and even of a serious crisis in its democracies, over inequality, over the need for austerity, over immigration, over the apparently excessive power of some big corporate groups, especially banks.
For Italy, however, that sense of crisis was and is not really new. The crisis it found itself in during 2011–13, both in its economy and its democracy, was the second such crisis it had faced in the past twenty years. In one sense, at least, it can therefore count itself lucky: having failed on the first occasion, in the early 1990s, to truly rebuild and reform either its politics or its economy after a nasty shock, it now has a second chance to do so.
The comparison between the 1992–94 Italian crisis and today's is quite spooky. Twenty years ago, a discredited, paralysed government collapsed, and alongside that collapse there occurred a financial crisis, brought about by the fact that Italy's government debts had risen to the then-colossal level of 120 per cent of the country's annual economic output, its gross domestic product (GDP), and the fact that international investors had lost faith in the Italian government's ability both to maintain its currency and to service its debts. The response was to throw out, albeit temporarily, the politicians from government and instead to install a technocrat, a non-politician, as prime minister. Twenty years ago the chosen man was Carlo Azeglio Ciampi, former governor of the Bank of Italy, the country's central bank.
In 2011, as the government of Silvio Berlusconi became more and more paralysed and discredited at home and abroad, and as faith in Italy's ability to service its debts started to wobble alongside faith in the still-young European single currency, the euro, with which Italy had replaced its lira, the central bank governor was not available: Mario Draghi had just been appointed president of the European Central Bank. But another 'super-Mario' was available: Mario Monti, a distinguished economist who had served as European Commissioner for the single market and for competition between 1995 and 2004. Once again, normal politics was suspended, and, with the support of the main political parties, a 'technical government' was installed in November 2011 in the hope of launching a reform programme, mainly for the economy but also again for political institutions, including the electoral system, the various layers of local government and the justice system. It was that government whose fall in December 2012 provoked the February 2013 elections. But also it was the failure of all that government's reform ambitions bar one – fiscal austerity – that shaped 2013's stunning result.
This second crisis brought to mind the old Irish joke about a farmer being asked for directions and responding: 'If I were you, I wouldn't start from here.' For after a humdinger of a political crisis in the early 1990s, when most of the political establishment went on trial for corruption and the main parties all collapsed, Italy then sleepwalked into a new dark political alley, even if one with thoroughly modern characteristics, one from which it is far from clear that it is yet emerging. The new alley was epitomised by the former property developer turned media mogul Silvio Berlusconi. It consisted of the merging of vast wealth and media power, arising from a quasi-monopoly in commercial television and a dominant position in advertising sales, with the very institutions of government that would normally be expected to regulate such power.
The modern character of Italy's new democratic crisis is its mediatic nature, the fact that Mr Berlusconi became, when he entered politics in 1994, the first Italian post-war political leader to harness television to his cause. But it has had a very traditional character, too, in the way he turned government towards his own interests, issuing (and passing) a whole series of ad personam laws that benefited him and his companies, and in the way in which, beneath him, he built a whole superstructure, a spider's web of favours and patronage to his supporters and those who collaborated with him, partly using his own money, partly the country's money.
The Italian story of the past twenty wasted years is thus a story of what happens when a billionaire businessman and his associates turn government to their own interests – and thus of how an economic and political crisis in a western democracy can be exploited by distinctly nonreformist forces. It is also a story of what happens when media power is concentrated in too few hands, and when the rest of the media and the cultural elite fail to take a stand or tell the truth in response. It is a story of what happens when the moral arbiters in a society – in this case, the Catholic Church – fall silent and become collaborators, and when other political parties become complicit.
That complicity was also linked to a widespread failure, during both the 1990s and in the first decade of the twenty-first century, to tell, or face up to, the truth about Italy's economic situation and prospects. Perhaps, after the initial recovery from the financial crisis of 1992–94, and especially after Italy's successful effort to join the euro in the first wave of members when the European single currency was launched in 1999, some complacency was understandable – or at least a desire to hope for the best. After all, one of the benefits of joining the euro was that the country's borrowing costs fell towards those of the continent's best credit-risk, Germany, thus making the burden of a large debt more bearable. But when the global financial crisis erupted in 2008, after a year during which contracting interbank credit markets caused increasing pain and difficulties for European and North American banks, a process that culminated in the bankruptcy of the Lehman Brothers investment bank in September, the Italian response was one not just of complacency but of self-congratulation. That response was led by the Berlusconi government that had taken office in May 2008, but it was echoed and reinforced by wide swathes of Italian business and the media.
The self-congratulation arose from the idea that the 2008 financial crisis had exposed the fragility and even recklessness of economic models which Italians considered anathema, and which thus made Italy's economy look better by comparison: ones that had given a big role to service industries, especially financial services, ones in which household debts had risen rapidly, driving up consumption artificially, and ones that had substantially liberalized their economies and removed regulatory barriers to risk-taking. Principally, of course, that meant the United States and the United Kingdom, but also a neighbouring Mediterranean rival, Spain, whose property boom turned into a painful bust. To have a stable, nonreckless banking system like Italy's suddenly looked like a virtue, as did having low household debts and a still relatively large manufacturing sector, even though this latter virtue was, in truth, at least temporarily a vice, since, after Lehman's demise, the biggest immediate impact was on worldwide demand for manufactures.
Some Schadenfreude, or pleasure at the misfortune of others, can perhaps be forgiven. But the real trouble with this line of thinking was that it distracted attention from Italy's own weaknesses and vulnerabilities. It mistook for a benefit the fact that others were now joining Italy in a debt-ridden economic mess. Italy was no longer unusual in having an unsustainably large government debt burden: the public debt burdens of Britain, France, America and even Germany were, after 2008, rising rapidly towards Italian levels. But other people's sicknesses do not make you any healthier. Italy's long-term sickness remained: its economy had barely grown from the mid-1990s until 2008, thanks to slow or non-existent growth in productivity and to declining household incomes; and so its government debts were still dangerously high in relation to its annual output and thus to its ability to raise tax revenues. The post-2008 recession increased the ratio between the country's public debt and GDP to the same level it had attained in 1994, namely 120 per cent.
In his annual year-end press conference in 2010, Silvio Berlusconi boasted that Italy's economy was strong, its households rich, its exports recovering, its savings abundant, and said that there would be no need for any new budgetary stringency from the government during 2011. By the time he resigned from office on 12 November of that year, his government had introduced five different budgetary measures (though not all were implemented). Days before resigning, he still proclaimed that there was no crisis in Italy, for 'the restaurants are all full'. The bond markets, source of the Italian government's borrowing, thought differently, driving up Italy's borrowing costs as investors grew more worried about the country's future ability to service or repay its debts. The eruption in the summer and autumn of 2011 of a financial crisis that had, in reality, been developing for years seemed to come as a genuine surprise.
Surprise or not, this time the stakes were much higher than before. While in 1992–94 Italy's financial crisis was a problem chiefly for the country itself, in the new crisis twenty years later Italy's problems are intimately connected to those of the whole seventeen-country eurozone, the nations that all share Europe's single currency. Some Italians who are surprised to find themselves in a tight financial corner may blame the euro for their problems, believing this to be an imported crisis, and indeed the February 2013 votes for Grillo and Berlusconi both reflected those leaders' anti-euro rhetoric. Yet, while there is a small amount of truth to this, in terms of the timing, the larger risk is that Italy's crisis could be exported to the rest of the eurozone, which, given the importance of Europe and given the close integration of the global financial system, really means that it could be exported to the rest of the world, too.
The eurozone is weighed down by debts and by doubts, and certainly they are not just Italian ones. At their core, the problems of the European single currency arise from the fact that the countries that joined it in 1999 and thereafter disagree about whether inside the currency there should be collective responsibility for public debts, with corresponding rules and duties attached to them, as in the United States of America, or whether each country should simply stand on its own, dealing with its own debts according to agreed guidelines about how large those debts are supposed to be.
That latter form is the way in which the currency was set up by the 1992 Maastricht Treaty and then launched in 1999, with no collective responsibility, a formal ban on the bail-out of any member country, and with rules for acceptable levels of budget deficits and public debt as a ratio to GDP. Unfortunately, in order to get the euro launched on time and with a pleasing fanfare it was decided to waive the rules, 'temporarily', for several countries that did not then meet them. The biggest of those non-conformists was Italy. Then, shortly thereafter, even Germany and France decided to flout the rules about budget deficits. So the euro entered the storm of the global financial crisis with no collective responsibility for government debts but also no credible rules.
By 2011, Italy was not the eurozone's largest debtor, measured by the ratio of public debts to GDP: that honour was held by Greece, whose debts were rising well past 150 per cent of GDP. That country was forced into drastic austerity measures, slashing public sector wages and pensions, and yet still could not afford the borrowing costs being imposed on it by a worried international financial market. Hence talk spread of a potential Greek default on its debt, or of its more euphemistic equivalent, a 'debt restructuring', under which lenders would agree to cut the country's borrowing costs and give it longer to repay.
Once that talk became accepted and repeated even by the leading eurozone governments, France and Germany, markets inevitably began to wonder whether, if Greece were to be given such a benefit, other eurozone debtors might eventually want, or need, the same. So the markets started to price in the possibility of such future default-cum-restructurings, and even, more tentatively, the chances of the euro being abandoned altogether by a few countries or of it collapsing altogether. All countries' borrowing costs thus rose, except those of Germany, but borrowing costs for the biggest debtors rose the most. Greece accounts for about 2 per cent of eurozone GDP, and so neither its economy nor its debts are crucial. Italy, however, accounts for more than 13 per cent of eurozone GDP, and its public debts are, in absolute terms, the third largest in the world, after those of the United States and Japan.
So Greek doubts, and the timing of Greece's bail-out negotiations, did help determine Italy's financial fate in 2011. But as long as the Italian government showed no interest in either cutting government debt materially over the long term nor in bringing in reforms to promote faster economic growth, a debt crisis was inevitable at some stage or other. The euro crisis nevertheless makes Italy's financial troubles far more important and worrying for the rest of the world than they would otherwise have been. And both the original 2008–10 financial crisis and now the euro crisis mean that, unlike twenty years ago, Italy's efforts to solve its financial troubles will take place in distinctly difficult and unfavourable global circumstances. But that does not alter the underlying fact: that it is twenty years of neglect and complacency that have put Italy in the situation in which it now finds itself, twenty wasted years that could have been used to make the country stronger, more dynamic and less vulnerable.
With hindsight, it is clear that during those two decades, during which Mr Berlusconi was in power for nine years but governments of other stripes ruled for the other eleven years, steady, gradual measures to cut government spending, raise more tax revenue and liberalize the economy to achieve more growth could have enabled the country to avoid the current crisis. As Italy is the world's eighth largest economy and the eurozone's third largest economy (after Germany and France), this failure matters to the whole world. But also, the failure matters because it shows what happens when a country fails to acknowledge and face up to reality: it is like the band on the supposedly unsinkable Titanic, which played on even after the ship had hit an iceberg and started to sink. The iceberg should have been avoidable and the passengers saveable, if only the ship's designers had acknowledged the dangers and equipped the vessel with a sufficient number of lifeboats.
Excerpted from GOOD ITALY BAD ITALY by BILL EMMOTT. Copyright © 2012 by Bill Emmott. Excerpted by permission of Yale UNIVERSITY PRESS.
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1 Italy's wake-up call.................... 1
2 L'inferno politico.................... 29
3 Il purgatorio economico.................... 72
4 Inspirations from Turin.................... 108
5 Hope in the South.................... 139
6 Enterprise obstructed.................... 184
7 Potential displayed.................... 211
8 Good Italy, Bad Italy.................... 254
Further reading.................... 289