Why Renzi and Juncker are about to fail
Matteo Renzi, the Prime Minister of Italy, is trying hard to pull his country out of the economic doldrums. He started ten months ago with an ambitious reform program. At first, the Italians were baffled. No-one really understood what reforms mean. If he thinks he can cure us with reforms, let him go ahead!
As soon as Renzi's program became more tangible, many Italians discovered that reforms mean sacrifice, loss of income or higher expenses and taxes, loss of influence, losing customary ways of cheating and gaining from graft. Reforms threatened many aspects of the comfortable Italian way of life.
In a replay of the Greek economic drama, the empire hit back at Renzi. A vast and deeply entrenched bureaucracy rendered every step difficult and time consuming. Laws promulgated by the earlier government of Mario Monti still wait to be enacted by directives. A zillion opponents arose and tried to block or water down his reform initiatives, forcing firebrand Renzi to accept compromises, delays or even defeat. The leftist hardliners of his own party revolted, proving that the "Democratic Party" is really a misnomer for a loose alliance of widely different currents, each one with a history and tradition of its own. What could Renzi do?
To please his leftwingers and the trade unions he fell back on the old assumption that investments were needed to trigger growth and buttress his reform program. The call for investments is a time-honored battle horse of the political left. Ignoring economics they assume that private investments can be obtained by calling for them and perhaps by removing some of the worst obstacles. If private investors are not queuing behind the corner, public investments are required, they think, or a mix of public and private ventures.
Small wonder that Renzi's call for investments was cordially supported by the French socialist government. Together, they convinced the new EU President of the European Commission, Jean-Claude Juncker, to launch a huge fund raising effort to finance a European investment program. Renzi commented: "The Juncker scheme of 300 billion euro goes in the right direction because it emphasizes the need for investments without which there is no future, although in our opinion it (the scheme) needs to be expanded."
A timely Christmas gift for Italy? Can Renzi's opponents relax, hoping that a Juncker-triggered economic miracle will obviate the need for reforms or at least postpone them or make them more supportable?
Instead, all that Italy has gained is more time to maintain the old system, the status quo of immobility. Time and again, Italy has refused to face economic reality by relying on an expected miracle cure. First it was Silvio Berlusconi who promised to cure Italy's old ailments by applying his supposedly superb managerial skills. When he drove the economy almost over the cliff, the honest Mario Monti was expected to rescue the country. When he was shot down by the displeased electorate and the usual alliance of nay-sayers, Enrico Letta attempted to forge a broad alliance for reform, to be followed by Matteo Renzi with a more forceful reform package.
What happened during the many years of dodging reforms was a continuous decline of the Italian economy. Many times, economists and politicians hoped that the bottom of the trough had been reached. But the situation continued to deteriorate. While Juncker is working on his mammoth scheme, Italy's public debts continue to rise. New records of unemployment are attained, especially among the young. Industrial output, private and public investments, and private consumption are decreasing. Only the balance of payments is positive mostly because imports are shrinking faster than exports.
In Italy's case, Juncker's scheme -- as well as any other plan of publicly funded or subsidized investments -- is likely to fail. As has been said before in this magazine, Italy's economy seems to have reached the maximum possible size conditioned by the current set of institutions and practices. In fact, instead of growing it is shrinking. Any amount of public investments is not going to alter institutions and practices. All it can achieve is a temporary boost to employment and private consumption. Once the investment ceases, the economy will return to its previous no-growth equilibrium. What will remain is a higher level of public debt, hopefully offset by an improved infrastructure.
No doubt, Italy needs enormous investments in infrastructure illustrated, for instance, by endless miles of country roads perforated by potholes. Leaden water and gas pipes still exist in many old houses, reminiscent of imperial Roman technology. Decades of disinvestment in favor of consumption left a legacy which hampers the economy and discourages private investment. But a crash public investment program based on deficit and debt spending is the probably most wasteful way of tackling this problem.
In some ways, a public investment program means putting the cart before the horse. Italy needs reforms more than anything else. Once reforms are successfully implemented, private investment will return even without the lure of public-private ownerships. The global economy is awash in funds seeking gainful investment, and Italy as a member of the EU and the Eurozone remains a prime candidate. If it continues not getting its act together, the trickle of foreign investment it receives will come from less welcome sources.
Like in Greece, the most active investor will be China which purchased the Port of Piraeus and maintains scores of maquiladoras in Prato near Florence. At the retail level chinese shops are already ubiquitous all over Italy, selling household goods from plastic flowers to handyman's tools and perfumes, everything cheap and imported from the People's Republic. Bangladeshi and other Asians are dominating the flying markets which increasingly serve as the main source of consumer goods for an impoverished population. All of these Asian ventures are characterized by their low inclination to pay taxes. Remittances to their countries of origin amounted to 2.5 billion euro in 2013. Six among ten Bangladeshi in Europe are living in Italy. Only the United Kingdom counts more Indians and Pakistani than Italy.
In conclusion, Matteo Renzi is advised to tell his hardline left and the general public in Italy to forget about miraculous investments and focus instead on the arduous road to reforms. His opponents should look beyond the fence and learn from the example of Japan which has over a decade repeatedly tried to fight stagnation and deflation by stimulus spending. As a result, Japan is mired in the world's largest public debt while the economy continues to stagnate. Bart Van Ark, an economist at the U. of Groningen, urged for Europe "a reform agenda, and that is a very difficult strategy." Especially for Italy which shows Japan's woes in many respects.