Feb. 22 (Bloomberg) -- Italian voters have the unenviable task next week of choosing among two populist clowns, a politically challenged academic and the leader of an unpredictable coalition of the left.
We aren’t Italians, so we don’t get a vote. We have a stake, nonetheless: If Italy gets this wrong, it may put back into question the future of its economy and the survival of the euro, sapping what life remains in the global economy.
None of the choices are good, but some are terrible:
We hope that Italians don’t turn out in big numbers for the two entertainers -- former stand-up comedian Beppe Grillo and three-time Prime Minister Silvio Berlusconi -- both of whom were surging in opinion polls two weeks ago.
The attraction of Grillo and his Five Star movement is evident. Grillo is the anti-establishment, anti-euro and anti-politics candidate at a time when Italians have plenty to be angry about. He is a great campaigner, eschewing TV (Berlusconi owns most of the private channels) and relying on the Internet and a road show.
In his way, Grillo is a visionary, but he says Five Star won’t join any coalition government and he won’t serve in parliament. Instead, he promises to oppose and obstruct, and says his goal is to have enough legislators in parliament to topple the next government. If Grillo can suck enough votes away from other parties on Feb. 24-25, then he could make the formation of a stable government impossible from the outset, forcing new elections.
This would be a replay of the damage wrought by the upstart Syriza party in the first of Greece’s repeat elections last year. Think of the lost time and the instability that resulted, and then multiply that mayhem by eight to reflect the size of Italy’s economy.
The revival of Berlusconi’s political fortunes at 76 is the most depressing aspect of all this. Il Cavaliere is a brilliant political tactician and a strangely magnetic campaigner, yet if insanity is doing the same thing over and over expecting different results, then voting for Berlusconi would be an act of collective madness.
Italy’s average growth rate in the six years before the 2009 global recession was half that of its euro-area partners, because it had become uncompetitive. Gross domestic product has fallen almost 8 percent since 2008 and is still contracting. A business tycoon, Berlusconi promised repeatedly to bring that acumen to bear in delivering free market reforms and clean courts. Over three terms in office and a decade in power, he not only failed to deliver, he did harm.
Berlusconi became poison to Italy’s brand in Europe and in bond markets, which control the country’s economic fate because it has to service a debt that amounts to 127 percent of GDP. He resigned in 2011, after the country’s bond yields hit an unsustainable level, above 7 percent (they’re now about 4.4 percent). Some of this yield premium would return if Berlusconi came back to power.
That’s improbable, but like Grillo, Berlusconi can still be a spoiler in opposition. In 2006, Berlusconi’s last-minute promise of a tax windfall to voters gave him a surge in the polls that left Romano Prodi’s leftist coalition with such a narrow majority that its government eventually collapsed. This year, Berlusconi’s party is enjoying a boost from his recent promise of an amnesty for tax evaders and a letter he sent to every household in the country’s swing regions, promising to refund $5 billion worth of a property tax that his successor Mario Monti introduced to balance the budget.
This is vote buying and dumb economics. Of course it makes sense to cut taxes in Italy -- they are too high, and the country doesn’t need more austerity. In fact, Roubini Global Economics compiled a fascinating table that calculates the cumulative fiscal stimulus major economies have applied since 2008. It suggests that Italy has been more austere than Germany.
Yet the question is, which taxes to cut? Italy’s economy is distorted by high taxes on productive assets such as labor. The country’s tax wedge -- the net tax that employees and employers pay on a salary -- is about 13 percentage points above the Organization for Economic Cooperation and Development average. Monti’s decision to raise taxes on an unproductive asset, property, was a step toward rebalancing. Income and social security taxes need to be cut, as well as spending.
What Italy needs is credible government and more reform. A recent International Monetary Fund study argues that if Italy were to bring its labor and product market regulations more in line with euro-area best practices, it could raise real GDP by 5.75 percent in five years and eventually by 10 percent. More reform and competition would add more growth still. Don’t look for that from Grillo and Berlusconi.
That leaves us, and Italians, with some combination of the least-bad choices. Most Italians don’t much like Monti. And many don’t trust the left coalition led by Pier Luigi Bersani, with its large communist rump and close ties to labor unions that are determined to keep the protections and rigidities that serve their members, but keep the young unemployed. We aren’t convinced either. Still, Bersani and Monti both seek to actually govern and have indicated they understand what needs to be done.
Grillo and Berlusconi, by contrast, offer only instability. If their support grows through the polling days, the result won’t be funny.
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