Saturday, 5 November 2011

What to do about Italy?

Right now the Italian economy is doing worse than the Italian rugby team. And that’s not a good thing. As there is an over-400 basis point spread between Italian bonds and German bunds, a 1,900 billion euro public debt, a public debt to GDP ratio of 120% and zero growth prospects for 2012, Italy could be the next Greece.

So, what should the government do now, in the context of the current crisis?

At the IEA blog Dr Alberto Mingardi, the Director General of Istituto Bruno Leoni (,  outlines some policy options the Italian government could take.
The quickest answer lies in one word: privatisation. The Italian state owns assets worth €1,800bn. Not all of them can be privatised quickly. Nonetheless, Istituto Bruno Leoni, among others, has estimated that the Treasury still holds €100bn in listed or private companies that could be released to the market.

This includes shares in the energy giants ENIand ENEL, 100% of the post and railways monopolies (Poste Italiane and Ferrovie dell Stato), a fully state-owned insurer against accidents at work (INAIL), an insurance company that guarantees to domestic entrepreneurs against political and commercial risks linked with the export of goods and services (SACE) and many others.

On the top of that, the Italian national and local governments own €400bn in real estate. The Berlusconi government is planning to sell some - for a value of €5bn euros a year for three years, which means €15bn all together, i.e. less than 5% of those assets and less than 1% of the total public debt.

It is amazing that, for purely ideological reasons, the Italian government is not undertaking privatisations that would both contribute to the objective of reducing public debt and release still monopolised business sectors to entrepreneurial creativity.

It has often been lamented that Italy's problem is one of credibility. This is true. Italyis not a country without strengths: impressive private savings and strong entrepreneurs are the two most relevant ones. Still, incentives matter. In a world where capital is far more mobile than in the past, Italy's intricate and unpredictable regulations, plus its heavy taxation, make it an unlikely candidate for more investment.

Italians have long waited for a simplification of their legal codes and deep tax cuts. Yet the ingrained resistance of interest groups to a strong restructuring of public finances and, thus, of the scope of government, has made such policies impossible.

Mr Berlusconi and the Italian government should now be what they have never been: bold. This is the right moment to start long awaited liberalisation, aiming at boosting growth. But since the effects of liberalisation take time to materialise, the markets must be reassured of the Italian government's seriousness in getting public debt under control. Privatisation is the right instrument to achieve this.

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