Why Europe is both a curse and a blessing for Italy
The blessing of having a stable democracy is the curse of regressing economically
It seems to be a common theme on FinTwit to blame Italy’s woes on the EUR and the impossibility for Italy to devalue its currency. I wanted to have more insights into this and how what used to be the 6th biggest economy could now be a laggard.
The goal is not to criticize but to dig into facts. I am taking Italy & The Netherlands as comparison points, as most of our friends here in Amsterdam are Italians that emigrated. I was always curious to understand why so many Italians are leaving their country. I am also adding Ireland, to have one of the “PIGS” in the comparison. The 3 countries started more or less at the same spot, per capita, in the ‘90s.
Chapter 1. The leadership crisis.
To put things a bit more in perspective, you need to remember that the Spain & Portugal were still dictatorships in the ‘70s. Democracy is recent in the South of Europe…
In Italy, the Prime Minister is the most important figure of state & we can see that in terms of stability … there’s none.
“In the whirlwind of Italian politics, prime ministers come and go with dizzying frequency – on average about once every 14 months over the last 75 years.”
There were 15 different prime ministers in Italy since the ‘90s, and almost one third of this was under the rule of the nebulous businessman Berlusconi.
The current Prime Minister is unelected, wasn’t chosen by people and is not even a politician. If Italy was in Africa, we would call that a coup d'état, except that Draghi comes from finance and not the military.
Given that leadership crisis, it’s easy to understand how corruption can proliferate and the economy recede so much. Unfortunately, a strong and stable political system is a prerequisite to any prosper country.
Chapter 2. The disaster of education led to the economic woes
Strong countries not only need strong leaders, but also educated people. Education is not only teaching of knowledge, but also of values, work ethic, civility, and character.
In 1990, Italian learning outcome was above the Netherlands & Ireland’s, it’s now well below and stagnating.
Which makes sense as education expenditure per capita in 🇳🇱 is ~ double.
What happens next is that under-par education leads to lower innovation…
Which turns into lower productivity, leading to weak economic growth, as we can see in the GDP per capita…
Chapter 3. Europe, the saviour
One of the biggest factors (read “this time is different”) affecting the chances of a country to default, is its history of default… not the debt/GDP ratio.
Italy has been quite lucky in that sector, but my opinion is that this could have been different after 2000 without the help of the ECB.
Italian yields have always been higher than their peers, correctly reflecting a higher chance of default. We can see that the introduction of the EUR helped normalize yields in 🇮🇹 . After GFC, the @ecb policies prevented a further explosion of Italian (&PIGS) yields and an inevitable default.
It’s not hard to imagine that without the Euro & the @ecb, Italy would have likely defaulted (several times) in the 21st century. This would have added to Italy’s economic problems as the risk to become a serial defaulter and become incapable of finance themselves would have been real.
Chapter 4. The great Italian diaspora of the 21st century
In 2000, ~2M Italians 🇮🇹 nationals were living abroad, it’s now almost 6M.
Most of them are young, graduates and educated, and emigrated within the EU 🇪🇺 to find a job, thanks to labour mobility ease within the EU. This is what we usually call a brain drain.
You could argue that Europe is therefore bad for Italy, but we will see why this is what is actually keeping the country together.
Chapter 5. The curse and the blessing
To summarize:
A corrupted & disorganized political system led to a lack of productive investments, especially in education
The lack of efficient education drove the lack of innovation, thus the lack of productivity
In terms of GDP per capita, Italy became a laggard. This drove a low fertility rate, which itself is reinforcing the low economic growth
The EUR & @ecb prevented a necessary collapse of the Italian financial system, this enables them to continue running unproductive deficits. Because of this, there was a relative social stability, no internal conflicts (no dictator, little social unrest)
Bad economy combined with the free movements of people within EU led to a brain drain
Young educated people are the most prone to start revolutions
This and the relative social stability due to Europe, prevented a reset of the system (revolution), which in turns prevents them of making the necessary changes to their system
The blessing of having a stable democracy is the curse of regressing economically
Bonus:
My scenario without EUR and EU would be 2 separate countries: one in the North and one in the South. It’s already starting now, with the “Lega” party. We can see a very big discrepancy in productivity & wealth, which would have eventually led to a break-up. Again, Europe prevented this.
Subscribe now with this link