Mr Almunia, Italy needs you to change refrain

The European Commissioner Joaquin Almunia is a constant fixture in Italian newspapers and newscasts. Most times, he is quoted as admonishing the Italian Government to reduce its budget deficit and its debt. There is nothing special about Almunia. European Commissioners, as long as other officials, have constantly harassed all the Italian Governments of the last 25 years or so. Depending on the contingent economic and political situation the country has found itself in, Government leaders have either welcome European suggestions or rebutted them as unwarranted intrusions in the country’s affairs. The fact is that in the last couple of decades Italy has reached important economic milestones exactly because of this external pressure: the drop in inflation from the double digits of the early 80s, the adoption of the Euro, the deregulation of the airline and cell phone communications markets.

Italy needs more of this pressure, and a better one. Almunia likes to hammer on numerators, i.e. budget and deficit and debt, rather than the denominator, i.e. GDP. Italy, instead, desperately needs to get the denominator going. Almunia and the European Union can help. Big time.

We all know why Italy has been stagnating for the last fifteen years: public policy. Italian Governments have a rather uncanny ability at messing it up. Sometimes for ineptitude, but a lot more often because they have such weak support in Parliament, that they fall victims of all sort of constituencies. The waste of taxpayers’ money is so evident, that it causes daily disgust among disgruntled citizens. Taxes are among the highest in all of Europe. Important services such as public transportation and health care are often sub-par. I argue that the country could put up with all of this, and still prosper, at least in relative terms, if only the private sector was left alone. This is hardly the case.

Government regulation is paramount. In most markets, regulatory policy introduces and/or enhances barriers to entry and prevents or reduces competition. As a result, prices are high, and quantities are low. Examples abound. Here is one. All Italians, since early age, become acquainted with legendary figures known as notary public. There are only 5,000 of them in the whole country, and the law requires their intervention to seal a large array of transactions. For example, the sale of any piece of real estate. The number of notary publics is regulated by their own professional association, which also sets lower bounds to prices. The outcome is that these gentlemen (they for the most part males) charge incredible amounts just to rubber stamp simple contracts. Their fees act as sale taxes, reducing the number of transactions. Their legal consulting services, that could be of some use to many, are too expensive for most. These phenomena have clear effects on the allocation of resources, effects that modern economic science emphasizes as powerful obstacles to economic growth. Consider a young agronomist just out of school that wants to purchase a piece of land from an old farmer to grow a new breed of oranges. The land would be more productive under the care of the young agronomist, but given the notary tax, the latter will find it worth buying only if productivity is considerably higher. A lot of transactions that could increase productivity will not be executed exactly because of that tax. Less income will be produced. Less jobs will be created. Economic growth will be reduced.

Italian Governments have proven to be either unable or unwilling to liberalize the notaries’ as well as many other professions: attorneys, taxi drivers, you name it. Almunia and the European Union would render Italy a big service if they started putting pressure on Italy to get market liberalization going, rather than keeping on emphasizing fiscal restraint. A more prosperous Italy is a much better partner. Apart from lowering its relative debt burden, it would become a much more enticing destination for trade, FDI, and workers from the other EU countries. Almunia, go for it!

4 Responses to "Mr Almunia, Italy needs you to change refrain"

  1. Anonymous   October 18, 2007 at 1:16 am

    Superficial, poorly written.

  2. Anonymous   October 18, 2007 at 8:39 am

    but very true, Italy has failed miserably in the liberalization of several professions and this certainly has an impact on the efficient allocation of resources. Almunia and Kroes go for it!

  3. eparisi   October 18, 2007 at 10:00 am

    Italy has lost a lot of competitiveness to China and other EM as shown by the rapid deterioration of the world export market share (-40% from 1005-2006). As EEAG in their excellent report note [http://www.cesifo-group.de/pls/guestci/download/EEAG%20Report%202007/eeag_report_chap2_2007.pdf] nothing prevents Italy from specializing in higher-quality segments of its traditional export industries except a long delay in structural product market liberalization as detailed in Luca Clementi’s analysis. The higher internal cost base also prevents the real devaluation needed to restore external competitiveness.

  4. Guest   October 18, 2007 at 11:54 am

    Excellent article. It shows that italy badly needs more reforms and liberalization of its economy to grow faster. Italy is stuck in a time warp reform-wise!