Prime Minister Monti Upbeat About Italy – Yet His Economic Reform Agenda Will Clash With Lack of Labor Mobility – Worse Yet, Italy Has Third World Scores On Corruption and Bad Governance

By Paolo von Schirach

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January 1, 2011

WASHINGTON – Italian Prime Minister Mario Monti sounded optimistic during an end of year press conference. Italy has turned a corner and is now poised to rejoin the European mainstream, he more or less said. He also indicated that the next target for his technocratic government will be to tackle labor mobility issues and to look at other measures aimed at promoting growth.

Reforms unlikely

All this sounds wonderful, except that it will not happen. Monti can be credited with tightening the austerity screws that in practice mean lower spending and higher taxes as a way to reassure the bond markets that Italy is solvent and therefore fully capable to meet its obligations. But even on this score, a lot more convincing needs to be done. Indeed, why is it that the spread between Italian bonds and German bonds remains so high? If the insolvency risk has been erased by the new fiscal policies, then why these abnormally high borrowing costs?

Structural impediments to economic growth

Well, I believe that the “spread issue” related to the high interest that Italy has to pay is tied not just to fiscal policies, but also to the economic reform agenda that Monti announced but that he will be unable to deliver. Italy is a unproductive economy bound by labor market norms that discourage hiring in as much firing a full time employee is almost impossible. And this will not change. Monti already got a taste of the resistance to any attempt to introduce genuine labor mobility. Any talk about modifying Article 18 of the Workers Statute will be met by fierce labor unions battles.

And this is a key component of the vicious cycle that condemns Italy to stagnation. Lack of labor mobility discourages hiring. A frozen labor market discourages entrepreneurship. No entrepreneurs, no innovation. No innovation translates into stagnation.

Italy needs a moral revolution

And this is not all. As Monti was delivering his upbeat forecast, Luigi Giampaolino, President of the Corte dei Conti, (a position akin to a National Inspector General), in an interview with the daily La Repubblica sounded very pessimistic about Italy’s corruption levels. (See link above to a related story). He sees no change. And he argues that Italy would need a veritable moral revolution. In other words it is not about prosecuting known offenders more aggressively. The issue is that there is a culture of corruption in Italy. Public administration jobs are not assigned on the basis of merit and there is an inherent disrespect for tax payers’ money. So, bad governance is prevalent.

Corruption and bad governance

And corruption, argues Giampaolino, rewards the worst private sector corporations. Those that get the public sector procurement contracts because they paid off someone. And this way the economy suffers, as dishonest, inefficient companies are financially rewarded. And what Giampaolino stated in the interview is supported by the bad grade Italy gets on corruption perceptions compiled by Transparency International. Indeed, if we combine the worst EU scores on corruption with a very low ranking for Italy in the World Bank “Doing Business” index, plus labor market rigidities and an impending recession, we see the magnitude of the challenge confronting Mario Monti and his team.

Monti needs to convince the Italians that vigorous economic growth is necessary and that one needs honesty and integrity on the part of all players to have a fair chance to achieve it. And yet, without the moral revolution Corte dei Conti President Giampaolino referred to as the means to establish decent national ethical standards, this is “Mission Impossible”.

Good Luck, Mr. Prime Minister.

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