Without a Growing Italy, the Euro Is Over
Pier Luigi Bersani, leader of the center-left Democratic Party, is widely expected to win the Italian election scheduled for February 24-25 by fending off a spirited challenge from Silvio Berlusconi. However, should he indeed win the premiership, a very much greater challenge will await him. Can he succeed where Mario Monti, his immediate predecessor, failed? Can he return the Italian economy back to economic growth that will allow Italy to grow itself out of its chronic public debt problem? Whether he succeeds in that challenge will have important consequences not simply for Italy but for the entire Euro project. For if Italy fails to return to a more rapid pace of economic growth, there is little prospect that the Euro can survive over the longer run.
Unlike the rest of the European periphery, Italy's basic economic problem is not one of an excessive budget deficit. At around 3 percent of GDP, Italy's budget deficit is presently below the European average, while excluding interest payments Italy's budget is in surplus. Rather, Italy's fundamental problem is that of having a persistently sclerotic economy and an excessively high level of public debt, which now exceeds 125 percent of GDP. And it is that combination of poor economic growth and high public debt that keeps investors nervous as to whether Italy will in the end honor its public debt commitments.
One measure of Mr. Bersani's economic growth challenge is the fact that, over the past decade, Italy's economic growth has barely averaged 0.3 percent a year, making Italy the Euro area's slowest growing economy. Another measure is that Italy is presently in the grips of its worst economic recession in the post-war period. During 2012, the Italian economy contracted by 2 ½ percent with the result that Italy's GDP is presently as much as 6 percent below its pre-2008 peak. Meanwhile, Italy's unemployment rate has risen to over 11 percent and its youth unemployment now exceeds 37 percent.
In September 2011, in the midst of an economic crisis, Angela Merkel, the German Chancellor, and Mario Draghi, the president of the European Central Bank, insisted that Mario Monti replace Silvio Berlusconi as Italy's prime minister in return for Europe's promise of support to the Italian economy. This makes the deepening of the Italian economic recession over the past year all the more troubling. For it has occurred under the watch of Mario Monti's highly competent technocratic government rather than under that of the hapless Silvio Berlusconi.
Particularly disturbing is the fact that the Italian economic recession has deepened despite Mario Monti's government having done very much the bidding of Angela Merkel and Mario Draghi. In compliance with the European fiscal pact, the Monti government adopted a series of budget austerity measures aimed at generating a large primary budget surplus that would allow Italy to place its public debt on a declining path. And in conformity with European orthodoxy, the Monti government had success in steering through some structural reforms particularly in the area of labor market relations.
Sadly, it is very doubtful whether Mr. Bersani will be any more successful in revitalizing the Italian economy than was Mr. Monti. For very much like Mr. Monti, he will be beholden to the policy dictates of the European Central Bank whose proposed support of the Italian bond market through its Outright Monetary Transaction program is vital for maintaining Italian government borrowing rates at reasonable levels. In terms of the European fiscal pact, the ECB must be expected to require Mr. Bersani to implement a similar degree of budget austerity within the Euro straitjacket as it demanded of the Monti government. And the ECB will now be doing so at a time that the Italian banking system is still experiencing a credit crunch and that there has been a worsening in Italy's external prospects.
Further clouding the prospects for any Bersani-led Italian economic recovery is the patent lack of appetite among many in his party and in the trade unions for the sort of structural reform measures that might offer a clear break from Italy's sclerotic economic growth past. This would certainly seem to be true of the sort of labor market reforms that are being championed by the IMF and the European Union as a vital element in a strategy aimed at boosting productivity growth and competitiveness.
The very real prospect of a continued floundering in the Italian economy should be concentrating minds in Berlin and Frankfurt. For Italy is the Euro area's third largest economy and is of great systemic importance to the entire Euro project. At a minimum, one must hope that Angela Merkel adopts more expansionary policies to boost the German economy and that the ECB takes measures to reduce interest rates and to weaken the Euro. Since, absent a marked improvement in Italy's external environment, it is difficult to see how Mr. Bersani will succeed in extricating Italy from its ever deepening economic recession.