Global Agenda: Too little, too late

It is possible to salvage the Italian economy. Extremely difficult and painful – but definitely possible.

By PINCHAS LANDAU
November 17, 2011 22:56
4 minute read.
Italian PM Berlusconi [File]

Berlusconi311. (photo credit: REUTERS/Tony Gentile)

The focus is still on the Old Continent. The US is in terrible trouble, and its political system remains paralyzed, as the self-imposed deadline of November 23 nears for the bipartisan “super-committee” to agree on serious and significant budget cuts. China is trapped between the need to offset the damage caused by its own policies and the need to respond to the damage caused by others (the Americans and Europeans); unfortunately for China, the two needs are mutually offsetting. But all that palls compared to the ongoing meltdown in Europe.

This week began with the resignation of Silvio Berlusconi and saw the installation of his replacement, Mario Monti, and the latter’s efforts to establish a government of technocrats, that will do – what? That question and how it is answered, if it can be answered at all, contains the crux of the whole crisis – not just in Italy, but throughout Europe and, for that matter, in the US as well.

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It is possible to salvage the Italian economy. Extremely difficult and painful – but definitely possible. There are two ways of looking at this, both of which are essential components of the overall solution. One is the “technocratic” way, which encompasses the “what” of the solution – by analyzing the budget accounting and the economic dynamics of various potential policy decisions, such as raising taxes, firing civil servants, etc. Since Italy, unlike Greece, is a large economy that produces many goods and services that people actually want to buy, and since it has plenty of waste to cut, this part of the exercise is relatively straightforward.

The second component is the sociopolitical aspect. What makes sense and is eminently desirable in a spreadsheet analysis of the Italian budget and the economy as a whole, may not be desirable, or even possible, in political terms. If the parliament won’t vote for the measure, it won’t be legislated. Even if the parliament does vote for it, with or without a foreign gun to its head, there is no guarantee whatsoever that the law will be implemented by the civil servants or observed by the citizenry. Many, perhaps most, laws in Italy are routinely disregarded.

That is why the only chance a country has of climbing out of a deep hole, especially one of its own making, is by achieving a large measure of consensus among the key political forces, representing the main socioeconomic groups, within that country. When this is achieved, amazing things can happen. Israel in 1985 is an outstanding example of a recovery from an economic near-death situation. But, smart as we doubtless are, we are by no means the only successful example of this kind of recovery.

Sweden, Finland and Canada, all in the 1990s, are also fine examples of countries that had to undergo very difficult periods of financial losses, economic pain and social adjustments to get back on track – but they did. So did Ireland, with phenomenal results, until they went and threw it all away. South Korea after the East Asian crash of 1997-98 is another, non-Western example.

Achieving social consensus is very difficult because all the groups have to make sacrifices and share the pain, whereas in normal politics the game is to pass the pain along to others while avoiding it yourself. In other words, in the negotiations that lead to the achievement of an agreed-upon rescue program – as opposed to an excel spreadsheet drawn up by clever bureaucrats – each group has to put on the table what it is willing to forgo or sacrifice, not just what it demands from the others.

The realization that if this is not done everyone will lose everything, is a powerful incentive and justification. But it does not, on its own, ensure that the various groups will come together. Often there is too much personal and group antagonism and a legacy of past wrongs, real or imagined, that stretches back decades or even centuries (in Europe, the latter is the norm – something Americans have great difficulty in understanding).

That explains why Italy is likely doomed. The numbers can be made to generate the desired result – but the society cannot be. Monti and his men, precisely by dint of being technocrats, cannot deliver the goods needed, which are fundamentally political. Spain may well be in a similar situation. It may even happen that the US, despite not having such deep historical roots, will fail to generate the sociopolitical will to solve its eminently solvable problems – although that hopefully will not be the case. America still has some time to play with, but for Italy and other European countries, time has run out.

What is now being done is the right kind of thing that, had it been done a year ago, could have prevented things from spinning out of control and, even now, if it was pursued determinedly, would move the country in the right direction. Tragically, it seems that the new government is a classic example of “too little, too late” – at least as far as preventing a breakup of the euro zone and, perhaps, for preventing the ultimate breakup of Italy itself.

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