Italy’s countdown to default has begun

It is true, as some economists have suggested, that Italy, in contrast to Spain, Greece and Ireland, has a low private debt – which means that the average Italian is much richer than the average Spanish, Greek or Irish citizen. Still, it is difficult to see how a low private debt can counterbalance Italy’s monstrous public debt of €1800 bn: the fourth highest public debt in the world after USA, Japan and Germany. Consider also a GDP growth of less than 3% over the last decade, compared to France’s 12%, a youth unemployment rate of 29% and retirement pensions of less than €500 for 50% of the retired. All these data suggest just the opposite.

To make the prospect even dimmer are the governmental policies of the last decade. As Mario Draghi has pointed, governments of the last decade have failed to implement reforms, which would be the only way to stop this countdown. In his final speech to Bank of Italy’s annual shareholders’ meeting on Tuesday, Mr Draghi explicitly attacked Italy’s incumbent finance minister Giulio Tremonti.

In fact, in order to mend the annual Italian budget deficit, Mr Tremonti has made linear cuts in all fields, from Research & Development to military spending. Linear cuts means uniform cuts on ALL balance-sheet entries, regardless of their economical relevance. As Mr Draghi noted in his speech on Tuesday, such linear cuts have choked the Italian economy by driving money away from Research, which is fundamental for an economy striving to get out of stagnation. What Mr Tremonti should have done instead, was cutting more on some money-eating entries such as the judiciary while leaving Research spending untouched. Political reforms are also necessary.

Italy’s Auditor General estimated that tax evasion costed Italy €120 bn in 2011. Instead of fighting tax evasion, Silvio Berlusconi’s government decriminalized accounting frauds by a law introduced in the same decade. An accounting fraud occurs when a trader earns €1000 and declares only €800, and pays taxes only for €800. How can a government cut €9 bn to research in three years, while decriminalizing accounting frauds in a society where tax evasion amounts to €120 bn/year?!

Another important entry in the Italian balance-sheet are legal expenditures. Italy spends approximately as much as UK in the judiciary. But, while British Courts are to settle 300 thousands cases/year, Italian courts must settle 3 million. According to Auditor General the enormous backlog costs the Italian government almost 1% of the GDP. The causes of this mess is a deregulation of the activity of attorney lawyers. In fact, unlike countries like Germany – where only a small fraction of attorneys is allowed to bring their cases to the Supreme Court – in Italy any attorney is granted such right and there are more lawyers per citizen in Italy than in any other country in the world. Even in this case the Italian government has shown no willingness to end this squandering of billions of euros in bureaucratic procedures.

A Greek default, with Greece having a public debt of ‘only’ €330 bn, has already caused, and is causing, a lot of unrest in the international markets. An Italian default – with Italy having a public debt almost six times that of Greece – would be impossible to mend by any bailout plan and would have catastrophic consequences in the world economy. This is the reason why no politician dares to admit such possibility, afraid of destabilizing the markets. Nevertheless, such a taboo has had tremendous consequences for Italians internally. Lack of international pressure on internal fiscal policies has permited to the governments of the last decade, especially the ones led by Berlusconi’s right, to take several steps in the wrong direction. What Italy needs are severe reforms, both financial and political. Otherwise, the nightmare of all european politicians will come true.