For much of the world, Italy is synonymous with “la dolce vita,” the sweet life, full of pleasure and indulgence. But that life comes at a price, and the bill has come due.
After 60 years of ever-increasing cradle-to-grave benefits and lifetime job security, Italy’s economy — the eighth largest in the world — is breaking down amidst declining birthrates, protectionism and crushing debt.
Stunted by policies that discourage competition and thwart growth, Italy’s economy has been stagnant for 15 years, forcing that nation to borrow heavily in order to sustain its social welfare compact. Italy owes nearly $2.6 trillion, about 120 percent of its GDP. The country will default this year unless it can refinance $428 billion in loans it cannot repay.
Analyst Neil Macdonald of CBC News says, “Italy is staggering toward a financial abyss and threatening to drag the rest of the developed world along with it.”
If Italy collapses, the resulting economic crisis will reverberate through Europe and the global economy, dwarfing the high-profile problems of nearby Greece. To put the issue in perspective, the entire population of Greece can fit within the boundaries of a single Italian province.
How did Italy get into this mess?
Italy vigorously rejects the notion that competition brings growth and excellence. Instead, officials and special interests have crafted a byzantine labyrinth of bureaucratic protections designed to insulate the society from the demands and stresses of a free-market economy.
The system is called “la casta,” a coalition of 28 guilds — taxi drivers, notaries, pharmacies, lawyers, truckers and professional organizations — dedicated to keeping the protections they’ve enjoyed for years.
“We are afraid of competition,” says Italian economist Giuseppe Ragusa. “It’s difficult to say but that is the tendency of the Italian people. We fear competition.”
Journalist Sergio Rizzo describes how la casta works in real life.
“When they decided to build a train station in Rome, they had to include 38 different players in the decision making. Each of the 38 people had veto power. Each one wanted three copies of the project. Each project was made up of 1,000 sheets of paper, so they had to make 38,000 times three photocopies.
At the end of the two-year process, 114,000 photocopies were left behind.
“We took two years to decide how to build a station,” notes Rizzo, “with 38 people wasting their time and spent [$585,000] on photocopies and spent [$28,600] to burn them. This is a snapshot of Italy today.”
Want to start a business in Italy? Think again. On average, it costs $6,565 for permits and takes 62 days to navigate the Italian bureaucracy. In the U.S., the same process takes four days and costs $218.
If you do start a business, the government controls virtually everything you do, with protectionist policies so severe it’s nearly impossible to fire anyone.
Prime Minister Mario Monti’s government is attempting to institute economic reforms, cracking down on tax cheats, curbing Italy’s generous public pensions that allow workers to retire after as little as 15 years, weakening the monopolies and guilds and taking on organized labor.
In response, pensioners, truckers, lawyers and unionized laborers have taken to the streets. The hospital pharmacist guild is threatening to cut off the nation’s supply of Viagra if Monti goes ahead with his plans to open 5,000 new pharmacies.
Unless Monti succeeds in reining in Italy’s debt, that nation will be forced to seek a bailout from the International Monetary Fund. But with neighboring Spain also teetering on the brink of ruin, the IMF does not have enough money to bail out both nations.
The story of Italy’s economic crisis is a cautionary tale for those in our nation who seek to replace our free-market system with government controls and protectionism.
We don’t need to speculate where that road leads. We know.
