January 29, 2014

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TSG IntelBrief: Italy’s Economy & Consequences of an “Adolescent Approach"

President of Italian Republic Giorgio Napolitano

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Despite the hope that normally accompanies a New Year, Italy seems destined to continue its struggle with economic stagnation throughout 2014. With 41 percent unemployment among young adults, its currency overvalued by 20 percent, and public debt continuing to exceed 130 percent of its gross domestic product, Italy runs the near-term risk of again being placed on the European Union's blacklist of countries with excessive deficits. It has been off the blacklist for less than a year, following four years of EU-mandated corrective actions to get its deficit under control. In May 2013, the European Commission finally removed the restrictions after presenting Rome with several policy recommendations including balancing the budget, cutting public debt and making structural reforms. The Commission also required the Italian government to strengthen anti-corruption legislation and improve national legal proceedings.

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A Worried Government and People

In recent weeks, President Napolitano has had much to say, and little of it cheerful, about Italy’s current predicament. In a mid-December speech, the President lashed out against the institutional and political constraints and inefficiencies plaguing his country, and he offered neither hope nor potential solutions. The president bemoaned the current crisis as virtually insurmountable due to poor monetary policies and antiquated central bank practices that resulted in contracting credit and “looming deflation.” The climax of the president’s analysis and speech was Italy’s inevitable devolving into “widespread social tension and unrest” in 2014.

Demonstrations have been occurring in Italy since 2011, when farmers and truck drivers founded the Pitchfork Movement and peacefully demonstrated to seek government assistance as a way out of their economic troubles. Since then the number and types of protests have rapidly grown and now include students, unions, pensioners, feminist groups, business owners and far-right elements. Protestors are demanding Italy leave the EU, abandon the Euro as currency, and dissolve the parliament.

In some cases, it appears the protests have begun to escalate in aggression and danger and perhaps some level of coordination as well.  According to regional reporting, in late December, while Italian students were demonstrating and throwing paint at government buildings in Turin, the nation’s strongest unions were rallying outside parliament and grassroots protesters were marching in both Venice and Ancona while security forces used tear gas and smoke grenades in response. Meanwhile and seemingly emboldened by the chaos, a group of about 100 neo-fascists from the Casapound group stormed the offices of the European Commission in Rome. The deputy leader of the Casapound, Simone Di Stefano, managed to scale the headquarters building and rip down the EU flag before his followers were forcibly dispersed. After Di Stefano was arrested he claimed his goal was to replace the EU‘s pennant with the Italian flag.

Pitchfork Movement leaders, who deny any political party affiliation and proclaim the goal of re-establishing Italy‘s national sovereignty outside the European Union were quick to distance themselves from the neo-fascists and any others calling for violence while admitting that, in some ways, their own movement was sometimes being hijacked by outside forces. Despite its claims of pure motives relative to other opposition groups, the Pitchfork Movement has its own public relations problems.  In mid-December, its spokesman was widely condemned throughout Italy and Europe for anti-Semitic comments made in an interview to La Repubblica newspaper in which he claimed Italy was a "slave to bankers like the Rothschild’s."

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Searching for Hope

President Napolitano’s doom and gloom aside, Italy’s center-left prime minister, Enrico Letta, and 39-year-old reformist mayor of Florence and newly elected leader of the Democratic Party, Matteo Renzi, appear ready to confront the issues of unemployment and economic despair, but not as a team as Renzi has pledged to replace the prime minister.   Meanwhile, Prime Minister Letta said Italy’s 12.7 per unemployment rate, the highest in more than 30 years, is his personal “nightmare” and he pledged “a radical change” to shake up Italy’s labor market. Renzi’s plans reportedly include hiring, contract and labor code reforms alongside changes to the welfare and tax systems.

President Napolitano has pledged not to complete his term. Referred to as “King George” by many, he said, "I'll stay president until the situation of the country and its institutions make it necessary and possible, and until my strength holds up. Until then and not a day longer…” The president is 88 years old and is serving an unprecedented second term.  He recently opened his year-end address saying, "The year that is about to end was one of the heaviest and most troubled Italy has endured since the republic was created.”

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 • In the near-term, Italy is likely to remain stuck in depression with minimal to zero growth through 2016

• Italy’s relationship with the European Commission will continue to be strained by the nation’s deficit. Meaningful economic change is inextricably tied to Italy’s staying off the blacklist and free of the associated and burdensome austerity measures.
 
• Economic, institutional and procedural change, though crucial for recovery, will continue to be politically obstructed. Excessive regulations, a bureaucracy that discourages free enterprise and encourages favoritism will continue to challenge the market

• Negotiation with protesters will remain difficult due in part to the large number of opposition groups and no clear leaders. Violence is trending as a present concern.

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