Eight Reasons Why Italy Is Such a Mess

We’re now in the throes of one of the most dangerous moments of Europe’s two-year-old debt crisis. Thus far, Italian Prime Minister Silvio Berlusconi’s pledge to resign has failed to convince markets that Italy can pass unpopular austerity measures and repay its whopping $2.6 trillion in government debt. And while this lack of confidence has sent Italy’s borrowing rate soaring above a threshold — 7 percent — that compelled Greece, Ireland, and Portugal to seek international help, many analysts argue that the world’s eighth-largest economy is simply too big for Europe to bail out in the event of a default.

In fact, Italy’s problems run much deeper than a collapsed government and high borrowing costs, and range from heaping piles of trash in Naples to unsustainable birth rates. What follows is a tour of eight key issues that are plaguing the country behind the scenes.

Above, university students demonstrate in Palermo in Nov. 2010 aganst proposed budget cuts to the education system. The sign in the middle reads, “If you block your future, we’ll paralyze the city.”

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MORE DEATHS THAN BIRTHS

Italy has experienced more deaths than births for four years in a row, and the trend is gaining momentum. The country, which has the second oldest populace in the European Union according to the Italian news agency ANSA, relies on immigration for population growth and infusions of youth as the average number of children per woman declines to a super-low 1.4. (In the United States, where the birth rate is less of a problem, women have an average of 2.1 children.) But Italy’s Northern League, an influential member of Berlusconi’s center-right coalition, is aggressively anti-immigrant. In their more extreme moments, party leaders have called for police to turn their guns on boats carrying illegal immigrants and unleashed a pig on land set aside for the construction of a mosque.

These dynamics have economic costs. As Steven Malanga explained in Forbes last year, Italy’s fertility rate, which has been falling since the 1970s, has produced labor shortages and a social security crisis. “Retirement not only robs the workforce of needed laborers but also depresses household consumption because retirees almost invariably spend less than workers do,” he noted. Italy, according to the Irish Times, has tried to address the flagging birth rate through a 2006 “Bonus Bebè” program in which parents of newborn children received a letter from Berlusconi informing them that they were entitled to a one-off €1,000 payment. The program has since been replaced by a “Fund For the Newly Born” that makes loans available at lower rates to parents. Italy’s youth minister Giorgia Meloni said earlier this year that efforts to reverse Italy’s birth rate require “millions in investment” that the country just doesn’t have.

Above, senior citizens in San Vincenzo in Feb. 2011. 

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WACKY WELFARE SYSTEM

The root of Italy’s problems, the Wall Street Journal argues today, is that the country “financed generous entitlements with high taxes and towering piles of debt,” and now finds the money running out as the economy sputters. Indeed, Italy has more pensioners than workers and currently spends about 14 percent of GDP on pensions — more than any other country in the Organization for Economic Cooperation and Development (OECD).

Silvio Berlusconi pledged to raise the retirement age in Italy to 67 as part of his raft of austerity measures, but it’s a controversial move. In late October, two Italian lawmakers exchanged blows in parliament during a debate about whether to revamp the country’s pension system. House Speaker Gianfranco Fini had noted on television that the wife of the Northern League’s Umberto Bossi had taken early retirement at 39 and cashed in on Italy’s generous benefits.

Above, Italians in Naples vote on pension reform in Oct. 2007.

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A BLACK MARKET YOU CAN BOAST ABOUT

The Associated Press recently observed that “easygoing Italians, expecting little from the state, rarely think twice about paying under the table for home improvements, dental work, or even a frothy cappuccino.” The numbers back this claim up. In 2007, the Austrian economist Friedrich Schneider estimated that Italy’s shadow economy accounted for over 22 percent of GDP. The only country with a larger underground economy as a fraction of GDP? Greece.

Lawrence Copeland, a professor at Cardiff University in Wales, explains today that the “economia sommersa” is “exempt from taxation, unmonitored and unregulated.” In fact, he adds, “the Italian authorities have sometimes seemed to take a pride in its size, notably in 1987, when by a sleight of the statistician’s hand, Italy’s GDP was deemed to have overtaken that of Britain, thanks to an overnight reassessment of the scale of the country’s black market.”

Above, a street vendor cleans artichokes in Rome in March 2010.

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A NATION OF TAX DODGERS

Hand in hand with the shadow economy and widespread corruption comes tax evasion. Back in 2004, Italian Prime Minister Silvio Berlusconi wondered aloud whether the country’s high taxes made tax dodging a “natural right” (the premier himself has been accused of tax fraud). It’s a sentiment that many Italians seem to have taken to heart. The wealthy often send their money to tax havens in Switzerland or Luxembourg, and even Italians planning their weddings often dodge consumption taxes by paying for catering, photographers, and flowers in cash. Italy’s Economy Ministry noted in 2009 that half of Italy’s taxpayers weren’t declaring much more than $20,000 in income, and tax returns were showing lawyers earning on average a little over $60,000. Last year, according to the BBC, tax evasion cost the government $142 billion.

As Italy tries to trim its debt, it’s promising to crack down on tax evasion through measures such as threatening the most egregious dodgers with prison sentences and requiring more detailed tax returns. An advertising campaign in August called tax dodgers “parasites on society.” With €100 billion euros, one ad explained, Italy could “build 600 new hospitals or a million new homes — or triple spending on security.” As for those wedding tax dodgers? Last month, the government informed more than 2,000 couples who were married in the past five years that they must present detailed receipts for their celebrations or face a steep fine.

Above, members of the Italian Radical party hold placards that say “Vatican, you also pay” during a protest in Rome in Sept. 2011 against tax exemption of ecclesiastical institutions.

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AN INABILITY TO GET ITS SH*T TOGETHER

Since the mid-1990s, the southern Italian city of Naples has been plagued by waste management issues stemming from overflowing landfills, broken incinerators, illegal dumping by the local mafia, and municipal worker strikes. Silvio Berlusconi promised to clean up Naples’ streets while campaigning for reelection in 2008 (a year when the Italian army entered the city after residents set fire to piles of rubbish). But the Italian prime minister made little progress. The military returned to the city last May to dispose of refuse, and residents once again lit garbage on fire in June. In August, the Guardian looked at how Neapolitans were taking matters into their own hands and cleaning up trash using grassroots tactics like flash mobs and guerilla gardening.

Naples isn’t the only place where garbage is an issue. A government plan to build an emergency trash dump near Hadrian’s villa in Tivoli as Rome runs out of space to bury its rubbish has met with resistance.

Above: People protest the garbage crisis in Naples in May 2011 ahead of a visit from Berlusconi.

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NORTH-SOUTH TENSIONS

The plight of trash-filled Naples underscores a broader phenomenon in Italy: tensions between, as the CIA’s World Factbook puts it, a “developed industrial north, dominated by private companies, and a less-developed, welfare-dependent, agricultural south, with high unemployment.” This divide and the resentment it breeds have prompted Italy’s Northern League party to at times call for the north to secede from Italy and form a new country called Padania. This week the Northern League’s leader, Umberto Bossi, emerged from the apparent collapse of Berlusconi’s government looking pretty powerful.

So, is Italy poised to return to its city-state system of old? Unlikely. But the Northern League has slightly less ambitious goals. It has already made progress in promoting more financial autonomy for Italy’s regions — so-called “fiscal federalism.”

The picture above shows a mock-up of a national ID card for Padania that was put on sale during a Northern League meeting outside Milan in June 2008.

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SMALL BUSINESS OVERLOAD?

The Italian economy, according to the CIA, is largely driven by the “manufacture of high-quality consumer goods produced by small and medium-sized enterprises, many of them family owned.” In fact, OECD data analyzed by American economist John Schmitt indicates that Italy and Greece have the highest shares of employees in small enterprises among OECD members.

But as U.S. presidential candidates extol the virtues of small business during this campaign season, some U.S. analysts have begun wondering whether that dependence on family-owned businesses is good for Italy. “With the advent of modern communications and information technologies, arguably the return to ‘small family firms’ has fallen,” the economist Tyler Cowen writes. Matthew Yglesias at ThinkProgress observes that Italy has “lots of barriers to competition so that poorly managed firms stay in business.” If “small firms were so fantastic,” he argues, “Italy and Greece would be the economic superstars of the western world.” The Guardian adds that Italy’s industrial centers have been battered by China’s manufacturing of cheap consumer goods. Oh, and many of these small businesses also avoid taxes. 

Above, residents of the southern Italian region of Calabria chat with a grocer in June 2011.

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A NEPOTISTIC JOBS MARKET

The youth unemployment rate in Italy is currently hovering around 30 percent, and the Telegraph‘s Nick Squires says a jobs market predicated on patronage, connections, and an “institutionalised gerontocracy” may be partly to blame. “While millions of older Italians have jobs for life,” he notes, “their children scrabble from one short-term contract to another and often work for free.” He adds that young people are “locked out of work by a closed shop system which affects dozens of trades and professions,” and afflicting Italy with brain drain by emigrating abroad.

Above, students in the city of Perugia in Oct. 2011.

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