To elucidate some of the major issues about the European Union, I sometimes find it useful to look at the performance of individual states. Two weeks ago, I discussed the French economy, whose woes have cast a pall over the Euro 2016 football championships. For reasons which should soon become clear, today I turn my attention to Italy.
Although the relevant numbers aren’t as large, in many ways the economic failure of Italy is more striking than Greece’s economic implosion – and definitely more dangerous. Italy is the eighth largest economy in the world and has a major presence in important industrial sectors. When a country like this gets into trouble, the consequences are pretty big.
Since the formation of the euro in 1999, the Italian economy has hardly grown at all. The total increase in GDP has been about 3pc. Yes, I do mean the total increase and not the annual average. To put this into perspective, over this period, Spain has managed to grow by 30pc, and the US and the UK by 35pc.
As you might expect, this appallingly weak performance manifests itself in several ugly ways. Unemployment is running at more than 11pc nationwide. But in the south, it is very nearly 20pc. And youth unemployment for the country as a whole is more than 35pc.
Whereas Greece’s government debt is at about 180pc of GDP, Italy’s is just over 130pc of GDP. This is still a horrific number and, because Italy’s economy is much bigger, the absolute amount of Italian government debt is much larger.
The consequences of the weak economy are also evident in the poor quality of bank assets. Something like 17pc of bank loans are “non-performing”, compared to about 2pc in Germany and 4pc in France. Several possible sources of crisis exist in the eurozone but the Italian banking system is a leading candidate. A major blow-up would have dire consequences for all.
Why is Italy in such a mess? Most of its problems are home-grown. In particular, the labour market, the housing market and the legal system all function badly. Moreover, the Italian political system seems incapable of delivering radical reform. In these various malfunctionings the EU has played next to no role.
The one area where the EU is to blame, of course, is the euro, which has been a complete disaster for the Italian economy. In Italy’s heyday, it always had a tendency to inflate faster than the Germanic countries to its north. This periodically landed it with a problem of uncompetitiveness, which damaged its international trade and hence its overall GDP. But the escape route was always close at hand – namely a weaker exchange rate for the lira. This mixture of exchange rate weakness and relatively high inflation was far from ideal. But if costs and prices are going to increase rapidly, the ability to depreciate the currency is absolutely critical.
Although inflation in Italy has slowed to next to nothing, it is still saddled with the effects of earlier inflation and so is uncompetitive. What the advent of the euro has done to Italy – and also to several other countries – is to impose Germanic values in one sphere while having very little effect on performance in most others. It is the combination of Germanic money and Italian practices that is so devastating.
One clear lesson from this is that the EU is far from being the only factor affecting economic performance in Europe. Within the EU, it is possible to do things relatively well, and it is also possible to do things relatively badly. (The same is true for countries outside the EU.)
But the Italian experience also makes it clear that the various things the EU supposedly does to improve economic performance aren’t worth very much. Yes, Italy is in the single market and enjoys all the much-vaunted advantages of that arrangement: it has a seat at the table when regulations and standards are framed; these rules apply both in Italy and across the single market; no customs forms are needed when Italian goods head northward; no tariffs are encountered.
Similarly, when Italian goods and services are sold to other eurozone countries there are no problems about exchange rate uncertainty or the cost of changing money.
Yet Italy has not been carried forward on a wave of prosperity brought about by the absence of form-filling at borders and the convenience of operating in a common currency. Funny that.
It may have had some very successful companies, but Italy has rarely been blessed with stable and effective government. This is why Italy has traditionally been an extremely europhile country. Most Italians felt quite relaxed about Rome ceding power to Brussels.
But now, in reaction to recent appalling economic performance, coupled with the EU’s imposition of an unelected “technocratic” prime minister in 2011, more and more Italians are thinking radically about the future. In a recent opinion poll, 58pc of Italians said they wanted a referendum on EU membership and 48pc said that they would vote to leave the EU.
Leaving the euro would be a good start. If the new lira dropped by 20pc-30pc, as it probably would, within a couple of years Italy would be enjoying an export boom as it retook market share from other countries, mostly in Europe. The result would be a resumption of decent economic growth and a fall in unemployment.
Come to think of it, is that a key reason why many business leaders in the countries to the north are pretty keen to keep Italy in?
Roger Bootle is executive chairman of Capital Economics. The new, referendum, edition of his book, The Trouble with Europe, has just been published by Nicholas Brealey.
roger.bootle@capitaleconomics.com
