It’s going to take a lot more than just a bailout to fix what ails the Italian economy.
Italy is the latest Eurozone country to be considered for a bailout in the deepening Euro debt crisis. However, debt is only one of several deeper issues that are eroding the core of Italy’s economy, society and politics. The Italian system– from its tax, labor, and corporate laws to its pensions and benefit plans– needs to be reformed. In fact, short of a Neronian fire, Italy might need to hit economic rock bottom before it can rebuild itself into a functioning state.
Though the Italian economy is in danger, it’s not yet terminal. What Italy suffers from is threefold and self-perpetuating. Political reform and progress has been all but halted by entrenched interest groups, widespread corruption continues to weigh down an already sluggish bureaucracy, and organized crime has still not been pushed out of the political process. All of this takes place against the backdrop of a complacent society which has been coddled with benefits, government aid, and exaggerated employee protection rights that in turn cheat the system and their employers.
Prime Minister Monti has made progress with long-overdue labor reforms that overhaul the law governing the hiring and firing of employees. But this victory is bittersweet, as the final product was heavily diluted as a result of pressure from his ruling coalition, so much so that it barely addresses the core issues at hand. The result has been a political victory on paper, but without the substance to make real change. Nevertheless, it is a first step.
Addressing Italy’s labor regulations is just one aspect of a wider problem. The Italian economy is held back by old, archaic laws that make business difficult and hiring expensive. The government tries to compensate for this poor productivity by coddling inefficient companies to satisfy unions, workers and consumer demand. Institutionalized mistrust of competition has further hurt the economy with grossly high prices and chronic undersupply.
Italy’s overall growth prospects suffer when industry is discouraged from growing past the stage of small cottage production. Imposing higher taxation and draconian hiring rules make business growth a burdensome endeavour that is often not worth the cost. These small businesses constitute over 50 percent of the Italian economy. Economies of scales are rare in Italy, driving up prices and making Italian products less competitive in global markets.
Italy is further encumbered by a sluggish and backlogged legal system. The inefficiency of Italian regulations creates dependence on the judicial system for solution; and it’s not uncommon for simple legal procedures in Italy to take years to settle. Today, landlords cannot evict tenants or businesses without legal recourse, even armed with the justification of missed lease and rent payments.
The Italian income tax system is also archaic. Annual taxes are paid on what was contractually agreed rather than what was actually earned. It allows for people to pocket differences, or conversely, pay out more than they made that year. It has driven honest people to skullduggery, cash deals– especially tax evasion– to avoid this burdensome tax system altogether.
Dealing with the country’s bureaucracy is a challenging task: applications for licenses, visas, and citizenship documents are all processed at a glacial pace. In addition, government offices often have ambiguous authority, making for a process that is tediously circuitous. These bureaucratic requirements bog down the pace of business and increase costs over the course of unpredictable wait times.
From these overarching problems stem the small, innumerable issues that drive the country into a state of paralysis, notably the wait times for permits and licenses, the confusing bureaucratic process, widespread corruption, and the large underground economy. Together, they form the environment in which Italy finds itself today: indebted, on the verge of crisis and a hostage to itself. The result is low foreign direct investment, climbing rates of unemployment and uncompetitive industries.
Fixing the Italian state is a monumental endeavour. To begin with, corruption has to be stomped out at all levels. This would put an end to black market deals, tax evasion, political graft, and wasted public money. Moreover, it would help to reduce the influence of organized crime on the political process.
Taxes need to be reduced to encourage businesses to grow and expand while simultaneously discouraging cheating and tax evasion.
Italy’s government bureaucracy must be reduced and streamlined. Reducing red tape will speed up reaction time, cut redundancies and allow individuals and businesses to operate freely. This kind of effort would go hand in hand with the reform of labor and other corporate laws, primarily with an eye on freeing up the judicial system.
Local governments and other departments must be held to a high standard of transparency and accountability in order to eliminate corruption.
Lastly, Italy must regain confidence in itself. Consistent business practices, flexible labor and business laws, and steady economic growth can transcend political ideology. This kind of comprehensive reform would reinvigorate the economy, create jobs– especially for young people– and bring faith back in the (new) system.
Prime Minister Monti has 10 months before his term comes to an end. Until then, he must rally the support of parliament and fix as much as he can before the general elections.