ISSN 2330-717X

Italy’s Economic Crisis And The OECD Warnings – Analysis

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By Giancarlo Elia Valori*

At the Columbia University in New York I have recently met many young, skilful and well-trained Italians, who are very worried about the future of their country.

 Currently the Italian Statistics Institute (ISTAT) tells us that the cost of training multiplied by the number of Italian researchers abroad amounts to over one billion euros a year.

 Every year approximately 3,000 researchers leave Italy for other countries – the well-known “brain drain”. We lose 16.2% of researchers trained in Italy, but we succeed in attracting only 3% of scientists from other countries.

 The reasons which underlie this situation are the following: old-fashioned universities, exam-rigging, corruption and nepotism, never-ending public competitions and ridiculous salaries.

 The “brain drain reversal scheme” started by the  government back in 2001, has convinced only 488 researchers to come back to Italy, of whom less than a quarter decided to prolong their stay in Italy for the following four years.

 A student at the Columbia University told me “we need to start a revolution”. It is true, but we need to agree on the meaning of this remark.

 No other country in the West is undergoing a structural crisis like Italy – and recession is looming large. The current Purchasing Managers Index, which measures the manufacturing activity, is at its lowest level over the last four years, in Italy as in the rest of the world.

 Hence a very severe crisis of the whole Euro area is  expected, while Italy will distribute an ever decreasing  GDP that will be reduced to nothing in the near future.

 Hence obviously the redundancy Fund shall be increased significantly and the public debt, which is already under pressure, will immediately sky-rocket.

  The VAT cannot but increase by 12.5 billion euros – a “safeguard clause” that cannot be met otherwise.

 According to the estimates made by some research centres, the VAT increases – 23.1 billion euros for 2020 and 28.7 billion euros for 2021 – will naturally entail a 1,200 euro annual extra-cost per each household.

 Young people will be the most penalized, considering the low wages and salaries they normally earn – if any.

 It is self-evident that if the VAT increases, the propensity to buy decreases – and this would happen precisely in a recessionary phase.

  Economic masochism, but probably inevitable when you are wrong in defining the public budget composition, as is currently the case.

 Furthermore, within a framework of fully negative forecasts for Italy’s economy, the OECD report of April 2019 has been made public.

 The topics are well-known, given the wide media coverage,  but it is good to examine them analytically.

 In particular, the OECD recommends to work on institutional, economic and social reforms, which have been debated in recent years.

This means and immediate and strict simplification of the government system – probably including a one-chamber parliamentary system, but not in the regional devolution sense envisaged by former Prime Minister Renzi’s proposal –  tax reform and regional simplification with only two or three macro-regions.

 Nevertheless reducing the Regions’ spending powers is an essential issue, currently still capable of redressing public budgets.

 The OECD also recommends a medium-term budget plan within the framework of the EU Growth Pact.

  This means that a program is proposed to correct the annual imbalances with respect to the Maastricht rules and to the other European financial treaties.

 Said program, however, envisages budget cuts that no one knows whether they are possible.

 It is equally true, however, that – according to the current government’s rhetoric and storytelling – these are Draconian rules and measures for Italy.

 Nevertheless we need to refinance a huge public debt and  at the best rates – hence we can only follow the rule of the great football coach, Nereo Rocco: “kick and run”.

 Control of debt securities sale, reduction of public spending and analysis of its effectiveness.

 The sooner we enter the Euro comfort zone and safety area – without ridiculous pseudo-economic theories – the better.

 Furthermore, the OECD asks Italy to implement measures designed to foster productivity. It is an excellent proposal but, from 2010 to 2016, productivity in Italy increased only by 0.14% a year – which means virtually nothing.

  Here we go back to the issue of science and innovation, which Italy is unable to retain in the country, thus forcing the young researchers who produce them to leave.

 The main reason for it is the excessive fragmentation of companies which, due to their small size, cannot invest in innovation, but rather focus on the gradual specialization of low-tech traditional productions, which will soon be swept away by international competition.

 It should be recalled that in Germany the graduates’ unemployment rate is 2-4%, as against the Italian one which ranges between 8% and 13%.

 Moreover, in Italy the number of humanities graduates is twice as much as in Germany.

 Once again, quantity does not favour quality. Quite the reverse.

 Another OECD request is to fully implement the reform of cooperative banks (BCC), also known as banche popolari.

 It is really a thorny issue. Certainly cooperative banks (BCC) must be placed in a position to face and withstand the other types of banks.

 There is the widespread feeling, however, that much of the cooperative banks’ capital (currently the number of members in Italy is equal to as many as 1.3 million) is strongly desired by larger and currently less capitalized banks.

 Italian banks had the Supervisory Authority of the Bank of Italy when their  European competitors resorted to the  usual consulting firms.

  Hence there should be a good reason why the network of cooperative banks is successful, while the network of ordinary banks has a smaller capital allocation ability.

 Hence obviously the OECD basically wants the recapitalization of Italian banks “by other means”, i.e. with the cooperative banks’ liquidity, which is on average higher.

It is by no mere coincidence that 63% of Italian high-risk banks are in favour of the cooperative banks’ reform.

 Another key aspect of the OECD recommendations is the abolition of the so-called “quota 100″early-retirement scheme intended for employees aged at least 62 and having accrued at least 38 years of social security contributions..

Certainly, from Mario Monti’s government onwards, the Fornero pension reform has been the State’s way to “swell its coffers”.

 The impact of “quota 100”, however, is significant on public accounts, if we consider the expected deficit of 17 billion euros. Furthermore, with this schemethere is the risk of an early retirement of civil servants that the Public Administration can partly replace, but the Municipalities cannot replace at all.

 Without changing the Fornero pension reform, over the next two years 500, 000 civil servants would retire from the Public Administration. Currently, however, the “quota 100″early-retirement scheme costs one billion euros for SMEs alone, in terms of severance pay. Nevertheless, with  “quota 100”, the State shall pay 335,000 pensions more than expected.

 Hence spending will rise to 4.7 billion euros and we do  not know yet where this money can be found.

 Moreover, the OECD considers “quota 100” a generational injustice, given the different economic treatment granted to the various pensioners.

 Nor does it seem credible that any job vacated by a pensioner is ipso facto filled by a young person.

 This is tantamount to applying to pensions the “voodoo economics” with which George Bush senior referred to  Ronald Reagan’s economic and tax policies.

 Certainly the “quota 100” early-retirement scheme will reduce staff in hospitals, schools, courts and municipalities significantly.

 And there are no real and cheap alternative options to solve the issue.

 Moreover, as natural, the OECD recommends to reduce tax amnesties, but also asks for a very interesting measure, i.e.  to improve the coordination of the bodies dealing with taxation.

 This is a dual problem certainly requiring to organize the bodies, but also to simplify and streamline rules and regulations.

 For example, a standard tax system for each activity can be defined and the taxpayers’ data in relation to this tax benchmark can be later checked.

 Without tax simplification, there will never be tax fairness and equity. Currently the tax rate on limited liability companies increases by 14%, while the flat-rate regime decreases and the minimum tax bases increase. Everything is fine but, if we do not deal with taxation on natural persons, there will always be a big problem of tax injustice.

 With specific reference to the public investment that the OECD requires, reference must be made to my old friend Paolo Savona and his plan to set aside 50 billion of savings from treasury bonds (BTP) and other securities to be invested in infrastructure.

 That plan on which he had been working, was immediately shelved because the Five Star Movement members cringe whenever they hear people talking about infrastructure to be built.

 Savona was also thinking of introducing the so-called  mini-BOT, named after Italy’s short-term treasury bills -the quasi-parallel currency also permitted by the EU regulations, which leads to investment and growth.

 It was not possible to implement that plan and this already bears witness to the conceptual and practical narrowness of the current government.

 Once again, no imagination and above all no technical knowledge of problems.

 What about the so-called “reddito di cittadinanza” – a citizen basic income which is conditional upon undertaking “unpaid work” in community-based services? It can be implemented, although it is an expensive and probably useless measure.

I share the OECD view according to which it is an artificial increase in the minimum labour income which, however, many small companies will not accept.

 They will prefer not to hire rather than paying wages and salaries competing with the “reddito di cittadinanza”.

 Hence we will easily reach a situation of massive support for long-term unemployment, which will discourage many individuals from undertaking productive work since they would earn less than the “reddito di cittadinanza”.

 Mass poverty, however, does exist, and it mainly results from the fact that, since 1999, 25% of Italy’s production system has moved abroad.

 The OECD also wants to reduce the “tax wedge”.

 It is an excellent idea that is partly already envisaged by the current tax legislation.

 However, what about workers having a good share of their wages and salaries without tax wedge, in exchange for a normal tax return?

 Certainly there are obvious dangers, but entrepreneurs would gain a good share of tax-insurance costs and  employees would pay their taxes independently.

 Another problem to be discussed is the OECD proposal to gradually lower the “reddito di cittadinanza” and, at the same time, introduce a subsidy for low-income workers.

 It is a good, albeit abstract idea: in principle, those having low labour incomes cannot invest in their training.

  Furthermore the subsidy to workers favours the employers’ tendency to lower wages and hence produces  adverse and costly effects.

 It is better to make investment in the education and training sector open to workers or even to provide tax support to have access to the refresher courses organized by the trade unions.

 Finally, the OECD confronts Italy with its long-standing  problems: the per capita GDP is at the same level of 2000,  when we introduced the Euro, but it is anyway clearly below the pre-crisis level.

 Therefore each negative cycle leaves us poorer and less industrialized.

 And hence less able to face our social needs: poverty; the aging of population and the increase in the number of elderly people; the young researchers who leave the country.

 The OECD recommends to provide subsidies to workers.

 Nevertheless, we need to be careful: if entrepreneurs get used to paying a “political” price for wages and salaries, the whole system will collapse.

 The OECD envisages a living wage that is worth 70% of the average wage.

 Will it be enough? However, it shall be linked to a salary already active in companies or also in the Public Administration which – as university researchers know all too well – currently lives on unpaid work.

 But certainly the State must tackle the wage crisis and supplement wages and salaries with the reduction of the tax wedge – with the aforementioned mechanisms and also with ad hoc funds for the most crisis-stricken sectors.

 Certainly an aggressive operation – like the one designed and planned by Hitler’s banker, Hjalmar Schacht, with the “MEFA” securities, which were “private” bills payable by banks – would not be a bad idea.

 A great deal of imagination will be needed here, because currently all the old theories of economic “balance” do no longer apply.

 The OECD also thinks that the regional development funds must be added to those inside ordinary expenses. Currently, however, they are both lacking. Where are the funds to make them effective?

 In short, if we abandon the current policy based on “all power to the imagination” and study problems more carefully, we will probably make a few steps forward.

*About the author: Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France.”

Source: This article was published by Modern Diplomacy

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