17 January 2013

Lorenzo Bini Smaghi: Italians need more than the old politics

The election debate continues to focus on fiscal measures: property taxation and ways to boost aggregate demand. State intervention is seen as the only way to increase employment, and to protect ailing companies.

The missing word is competitiveness. Italy’s economy has lost competitiveness over the past decade or so. Internal labour costs have grown at a faster pace than productivity, and faster than in most of the rest of the world. Since the creation of the euro, Italy’s unit labour costs have risen by about 30 per cent more than the currency area average.

Other indicators of international competitiveness, such as tax rates, costs of starting a business, market flexibility, layers of bureaucracy, research and development investment, and transparency, show Italy as a laggard. The result? Stagnant productivity.

This explains why Italy’s current account has moved from surplus at the start of monetary union to a deficit of about 4 per cent of GDP in 2010. Italy’s external competitiveness has not even improved since the start of the crisis, unlike in Spain, Ireland and even Greece, where “internal devaluation” has occurred. The current account adjustment has taken place largely through a reduction of imports of goods and services (by 7 per cent in 2012), while exports have recovered (increasing by 1 per cent), but at a slower pace than the eurozone average.

Weak competitiveness has depressed growth, which in turn has worsened the public finances. The measures to tackle the latter have further reduced competitiveness and growth, creating a vicious circle. The only way to escape is to adopt measures to improve competitiveness and increase Italy’s growth potential. However, these measures require the determination to fight the opposition of multiple interest groups, which protect privileges and so-called “acquired rights”.

Full article (FT subscription required)

© Financial Times