EU Officials Urge Italy to Address Low Productivity

Among the 30 leading industrial democracies, Italy has the lowest percentage of graduates. Moreover, one in ten of them emigrate, also because the cost of starting a business here is among the highest in the world. If it is to avoid a decline in the 21st century, the country clearly has little time to lose: radical change will be required, and it will take years. For 15 years, Italy has been losing touch with the production standards of the West, and needs to start changing course urgently, precisely because this will be a slow process.

This is not the first time that severe criticisms have arrived from abroad on what once was the sixth largest economy in the world (it is now the ninth, after Brazil and India). Sometimes, however, it is not only the contents of the analysis that matter, but who carried it out and when. A few days ago, Dino Pinelli, István P. Székely and Janos Varga presented their opinions on www.vox.eu. None of them is well known in Italy, but their ideas matter, since they are closely involved in the European Commission’s work on the budget and reform programme of Matteo Renzi’s government. The first in particular, Dino Pinelli, holds a key role, since he is the head of the “Italy Desk” at the Directorate General for Economic Affairs in Brussels, which has the task of assessing the government’s measures. Székely and Varga also hold sensitive posts, with the former a research director and the latter an economist at the Directorate General in Brussels examining Italy’s budget.

On 22 December, the group offered a preview of the work it is about to publish on behalf of the EU Commission. This does not formally present the authority’s official position, but it is unlikely to deviate much from it, and the draconian nature of its arguments is certainly unusual. Pinelli, Székely and Varga observed that since the mid-90s per capita income in Italy has been losing ground to other European economies. There is a specific reason for this delay: in Italy, “total factor productivity” has been decreasing (on average by 0.3% per year) since the end of the last century. This is almost unique, as it has been growing almost everywhere in the rest of Europe and above all in the US. This indicator measures the wealth created in an hour of productive activity, once all contributing factors have been taken into account: working organization and regulations, skills, investment and technology, bureaucracy, market openness, infrastructures and energy supplies. It is “total factor productivity”, more debt or growth, that gives an idea of a system’s health, and in Italy, almost uniquely, it has been on the way down for 15 years.

Pinelli, Székely and Varga highlight some of the causes of this anomaly: not only the very low proportion of graduates and basic skills, but also the educational shortfall of young people compared to, for example, Poland, South Korea or Spain. Difficulties posed by bureaucracy or justice, embodied in the prohibitive costs of starting a business, or by Italy’s position at the bottom of the table for investments from the more dynamic foreign funds, also weigh heavily on the situation.

Labour reform has reduced by only a quarter the difference in labour costs in Italy compared to the rest of the euro area. Pinelli, Székely and Varga acknowledged Renzi’s reforms in education and with the Jobs Act, but added that “fundamental structural weaknesses” remained, and that “a return to healthy growth will require an extraordinary effort”, while also stressing “the urgent need to take decisive action”. It is not clear whether the analysts are providing a preliminary reply to the government’s request for more accounting flexibility in exchange for reforms, but it does give an idea of what Italy looks like today, as seen from Brussels.