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Italy’s future growth hinges on new ways of doing business

Regardless of one’s position on the recent Italian referendum on constitutional reform, it is clear that Matteo Renzi made a mistake when he identified the Yes vote with his position as prime minister. It meant that some people voted No simply to oust him, while others voted Yes to avoid the instability that would follow […]

Regardless of one’s position on the recent Italian referendum on constitutional reform, it is clear that Matteo Renzi made a mistake when he identified the Yes vote with his position as prime minister. It meant that some people voted No simply to oust him, while others voted Yes to avoid the instability that would follow a No vote.

Mr Renzi’s reforms were rejected, and he duly resigned. What happens now? What can be learned from his mistakes, and those of the politicians who preceded him?

Italy’s economy has suffered low productivity and low growth for more than 20 years. Crucially, the problems began before the introduction of the euro, and became worse in the late 1990s once there was a need to run fiscal surpluses in order to fulfil deficit criteria set out in the Maastricht treaty.

Only Haiti and Zimbabwe have had lower productivity growth than Italy in that period. As productivity is a key driver of gross domestic product, this stagnation has been a significant factor in Italy’s inertia. It has been easy to blame the usual suspects: corruption, slow bureaucracy and labour market rigidities. Too little attention has been paid to low investment by public and private sectors in the key drivers of productivity: education, research, human capital formation and innovation.

As prime minister, Mr Renzi put most of his energy into tackling what he saw as the problem of labour market rigidities. He focused on reforming Article 18 of the labour market constitution, which had allowed workers to be reinstated in cases of unjustified lay-offs. Italy is desperate for reforms but this was not one of them. It applied to companies with more than 15 workers, yet the average size of an Italian company is 3.9 workers, versus a European average of 6.8 workers.

To understand why companies in Italy are so small and not growing, it is crucial to look at Germany. While the latter has a strong public bank, KfW, providing long-term capital for corporate innovation, Italy’s public bank, Cassa Depositi e Prestiti, is still too much oriented towards small infrastructure investments for local government, and too little on financing innovative enterprises.

Second, Germany has links between science and industry, through the Fraunhofer institutes, which Italy completely lacks. Italy’s average research and development expenditure during the past 20 years has been 1.1 per cent of GDP, whereas Germany has invested 2.49 per cent of GDP in the same period.

The subsidy mentality, rather than a proactive investment one, has created a parasitic public-private ecosystem that breeds inertia on both sides. The current banking problem in Italy is partly an outcome of this clientelism. Changing this calls for a specific type of reform that cannot be summarised in terms of simple cuts to the public sector.

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