The Italian prime minister's economic strategies may have prevented dramatic falls in his popularity in the short-term but will eventually backfire, writes Tito Boeri, professor of economics at Bocconi University in Milan.
Tito Boeri is professor of economics at Bocconi University in Milan and director of Fondazione Debenedetti.
"Silvio Berlusconi has survived a confidence vote, but his government is virtually dead. One cannot rule a country with so scant a majority. Not for long.
The one important decision that this, Berlusconi's fourth government, ever bothered to take was a decision not to decide. Two years ago, when financial crisis shook the world, Berlusconi's choice was to avoid any policy intervention to counteract the Great Recession. This contributed to the deepest fall in output in Italy's postwar history, with a cumulative 6.5% decline in GDP. Within the G20, only Japan did worse.
Remarkably, Italy had twice the fall in output seen in France, another large OECD country that, like Italy, had avoided the root causes of the crisis: a housing boom-bust sequence and a serious bank crisis. The paradox is that inaction on the behalf of Berlusconi's government did in fact prevent a major deterioration in the public deficit.
In light of the current debt crisis roiling the euro zone, the advantages of a policy of inertia are easy to appreciate. Italy's position today could have been much worse than it is.
The Italian economy's problems, and the major issues concerning the sustainability of the country's huge public debt, are rooted in low growth of potential output. As is also revealed by the term structure of credit default swaps for Italian debt, investors are not worried about, say, the 2011 budget law. Instead, they are worried about Italy's economic conditions in 5-10 years.
It is these medium-run problems that Berlusconi's government has overlooked. None of the structural reforms essential to improving Italy's growth potential – for example, labour-market and unemployment benefit reforms, product market liberalisations, improvements of the education system, reforms of the public administration in the South – have been carried out, even though Berlusconi could count on solid majorities in both chambers of Parliament.
Why did Berlusconi's government choose such a passive economic policy? One reason is that the level of Italian debt did not leave much room for countercyclical fiscal policy. But some effort to stimulate the economy at the outset of the crisis could have been attempted. For instance, it would have been possible to provide income support to job losers– which would have been useful after the crisis as well– by reforming the system of unemployment benefits.
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(Published in partnership with Project Syndicate.)