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Visitors to a recent conference in northern Italy became painfully aware of what ails the Italian economy. It was fascinating to watch how a ferry employee methodically slowed down the sales of tickets to a long line of tourists who watched aghast as the mostly empty ferries left without them. At train stations and on high-speed trains redundant employees were obvious. The public sector problems in Italy are similar to China's with the state-owned enterprises in the 1990s, only several times bigger.
Italy's private sector works better than the public sector but not by much. Numerous activities seem to be subject to government and union restrictions. Supply response is virtually not existent. The retail sector seems most market driven. It is relatively efficient compared to other sectors. Still it is less efficient than the retail sector in the United States or East Asia.
Even without government or union restrictions, the Italian economy would opt for more leisure than most others, as the retail sector demonstrates. But, the market choice would still be significantly lower than what the government and union rules dictate. The Italian economy has stagnated for the last decade. The anti-market rules must be a big factor.
If the Italian economy is deregulated to permit quick supply response, it could grow briskly for many years, until the inefficiency is squeezed out. The economy could be 20 to 30 percent bigger than now. Italy's national debt is 120 percent of GDP. The improved efficiency could pay for it all in six years. While there are many other factors causing Italy's economic crisis, self-inflicted inefficiency must be the most important one.
Other European economies that are in trouble like Italy's have similar problems in over-choosing leisure through collective actions like government regulations and union rules. The debt levels and fiscal deficits in the euro zone are not significantly higher than in the United Kingdom or the United States. The market, however, worries more about its problems because it doesn't have confidence in its future. This is why outside help isn't the solution. It merely gives the troubled economies the means not to address their problems.
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