June 25, 2012 / 3:23 PM / 6 years ago

Italy and the missed opportunity of euro "purgatory"

ROME (Reuters) - Antonio Fazio, the disgraced former governor of the Bank of Italy, warned half-jokingly in 1998 that the euro would not be paradise but a “purgatory” that would demand years of pain and sacrifice.

Currently appealing a conviction for improperly trying to influence a bank takeover in 2005, Fazio is not much listened to these days, but his words have turned out to be frighteningly prophetic for Italy.

The country has gained much from its membership of the single currency over the past decade, notably generously low borrowing costs and freedom from the wild gyrations that plagued its old lira currency on foreign exchange markets.

But it has not used the time to purge itself of faults which have made it the most stagnant economy in Europe for a decade. Its towering public debt is stifling growth and it is buckling under the pressure of competing on equal terms with Germany’s forbiddingly efficient export machine.

“Italy hasn’t grown in the last 15 years,” said Lorenzo Bini Smaghi, a former member of the European Central Bank Executive Council, now teaching at Harvard University.

“The markets are currently asking ‘what is Italy doing to tackle the fundamental problems that have prevented it from growing?’” he said.

The question is expressed in borrowing costs that are hovering around six percent on 10 year debt, dangerously close to the levels that pitched Silvio Berlusconi from power last year and brought in the technocratic government of former European Commissioner Mario Monti.

The answer appeared clear when Monti took office promising to control public finances, open up the economy to more competition and reform Italy’s sclerotic labor market to get more young people into permanent jobs.

It is less so now that the tangled realities of Italian politics have got in the way, eroding support for reform and fostering an increasingly bitter public mood best expressed in the angry diatribes of comedian-turned-campaigner Beppe Grillo and his rebel Five Star Movement, which wants out of the euro.

All that many ordinary Italians have seen of Monti’s promised reforms are higher taxes, rising unemployment, declining incomes and yet another year of recession that has hardened resistance to more sacrifice.

Isolated by politicians gearing up for elections due early next year, Monti is seeking a Europe-wide solution to the crisis, with more emphasis on growth and new tools like jointly issued eurobonds backed by the whole bloc, including Germany.

But Italians, who once trusted Europe far more than their own scandal-ridden political class, have begun to turn away from the euro as the single currency has come to be associated with terms like austerity, tax hikes and pension cuts rather than stability and low interest rates.

“For years Europe represented ‘something more’ but now it represents ‘something less’,” said former Prime Minister Giuliano Amato, who piloted a series of reforms at a time of severe crisis in the early 1990s.


Opinion polls have shown steep falls in support for the euro in Italy but the clearest illustration of the new mood in has been the runaway success of the maverick Grillo, who wants Italy to default on its debt and drop the single currency altogether.

“If we had the lira in one night we could write two lines on a piece of paper and devalue by 30 percent, and then we could start over. As things are now, we can’t make it,” Grillo said ahead of spectacular successes at local elections last month.

He has bellowed his defiance in town squares across Italy, blasting Monti, the euro, bankers and corrupt politicians in a campaign that has turned his Five Star Movement from a fringe group to the second biggest political force in the country.

Traditional parties denounce him as a demagogue but they have been terrified by the explosion of popular anger against politicians and are scrambling to come up with a response.

Berlusconi, who still controls Italy’s largest centre-right party, the People of Freedom, is also trying to ride the anti-European wave, saying leaving the euro was “not blasphemy” and he did not see why it should make Italians poorer.

In his long political career Berlusconi has frequently blamed the single currency for Italy’s difficulties, famously declaring in 2005 that “Prodi’s euro has screwed us all,” in reference to former centre-left leader Romano Prodi.

This time, out of office and desperate to regain lost popularity, it may turn out to more than just words.

Monti has acknowledged that the changing mood is now reflected in Italy’s parliament, which he said “has traditionally been pro-European, and no longer is”.

The Northern League, which seven years ago tried to promote a referendum to take Italy out of the euro, is also returning to its euro-sceptic roots, meaning that at least three large parties may fight the next election on an anti-euro ticket.

The rising tide of anti European sentiment has come at a dangerous time with Greece teetering on the brink, Spain dependent on international support to keep its banking system afloat and Italy, the euro zone’s third biggest economy, now once again the next front line in the crisis.

“Nothing irreparable has happened yet but a serious accident is possible,” said Giampiero Auletta Armenise, chairman of Rothschild in Italy and former chief executive of UBI Banca.


Italy avoided the frenzied real estate speculation that ruined Spain and Ireland and has a far stronger economy than sickly Greece. But it has slid further into stagnation, choked by one of the world’s heaviest public debts.

“We threw away the euro dividend in those years, particularly at the start of the 2000s,” said Emma Marcegaglia, former head of Italy’s main employers federation Confindustria, who returned to her family-owned steel group this year.

“We went from paying interest rates of 10-12 percent to rates of 2-3 percent and instead of taking advantage of this by cutting taxes, investing in research, reducing spending and building up surpluses, we did the opposite. We threw it away.”

Official data shows gross domestic product has risen by an average of 0.4 percent a year since 2000, hourly productivity levels have been stagnant, and in the last five years average family incomes have fallen 7 percent in real terms.

In 2000, Italy’s unit labor costs, one of the main gauges of productivity in the economy, were 12.75 percent lower than Germany’s. Today, they are 6.6 percent higher.

In the same period, Italy’s public debt burden, the heaviest in Europe after Greece, has climbed from 108 percent of GDP in 2000 to 120 percent in 2011, leaving it perilously exposed to the changing moods of the bond markets.

Looking forward, the picture gets no better. Growth between 2012 and 2017 will average just 0.5 percent, the Paris-based Organisation for Economic Co-operation and Development forecast last month, the lowest rate of 41 countries it assessed.

Italy has not been helped by a political system dominated by special interests and tainted by corruption and cronyism that has proved singularly inept at pushing though reform.

“It’s a system which has always been very fragmented and which has always given small groups a disproportionate power of veto,” said Amato.


A swiftly approved mix of tax hikes and pension cuts at the end of last year helped calm the immediate financial crisis, but since then the government has been bogged down in wrangling over wider structural reforms to the economy.

It is only now getting around to planning serious spending cuts and has been slow to tackle a bloated public administration and deregulate markets shackled by special interest groups ranging from lawyers to pharmacists and taxi drivers.

The labor market reform degenerated into a fight about the rights of sacked workers to win reinstatement in court and has still not been approved by parliament after three months.

The growing ambivalence towards the euro among the political classes underscores doubts about Italy’s willingness or ability to accept the rigid fiscal discipline that would be demanded as part of a truly European solution to the crisis.

“For now, discussion of euro bonds in Italy is only about the benefits but not the duties,” said Bini Smaghi.

He noted the Italian parliament has dragged its feet over approving the so-called “fiscal compact”, a German-driven budgetary pact which would be a first step towards euro bonds and which European Union leaders signed up to last December.

The intensifying euro crisis may ironically help Monti, according to Amato, who took office in 1992 after Italy had been expelled from the European Monetary System and as the political class was reeling from the “Bribesville” corruption scandals.

“These moments of risk are always good moments because if there’s no risk it’s difficult to move, you can’t convince anyone,” he said.

More immediately, many Italians are hoping for a clearer signpost out of the crisis from a European Union summit at the end of the month. If not, said Marcegaglia, the consequences for Italy and the euro zone as a whole could be dramatic.

“I think either something substantial comes out in June or else we are really at a very serious crossroads,” she said.

Additional reporting by Lisa Jucca, Valentina Consiglio and Steve Scherer; editing by Philippa Fletcher

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