Italy’s economy: Slowly to market

Suffering an acute loss of competitiveness

NOT before time, Silvio Berlusconi's government last weekend proposed measures to enhance Italy's competitiveness, worth some €4 billion ($5 billion) in all. Economists have for years wondered how Italy's economy would fare inside the euro, since it could no longer devalue when the going got tough. More recently the worry has been how it will cope when faced with competition from emerging low-cost exporters like China. The answer to both questions is: badly.

In 2004 the economy grew by less than the euro-area average for the eighth time in nine years. A key factor holding it back was low exports, hit by a loss of competitiveness against not just America and Asia, but even Germany. Many Italian firms are still in traditional manufacturing areas that they should have abandoned the moment people began to talk of Asian tigers. That they did not has much to do with low spending on research and development, which also has much to do with Italy's high proportion of small businesses. In 2003, Italian spending on R&D as a share of GDP was barely half the EU average. In the same year the average number of workers per enterprise was just over four, the second-lowest figure in the EU.

Italy's competitiveness problems are deep-rooted, not just in the economy but in a culture that venerates the family and favours the proliferation of small, often inefficient, family firms. The government's new measures include inducements to get small companies to merge. They seek also to soften the impact of the bankruptcy laws, boost the use of information technology, and cut red tape.

Yet Italy's government is schizophrenic on these matters. The coalition has a more nationalistic, interventionist wing, led by the former neo-fascist National Alliance, alongside a supposedly more liberal element consisting of the prime minister's Forza Italia party and the populist-regionalist Northern League. But Mr Berlusconi's own rhetoric is shot through with praise for family enterprise (as befits the founder of a family-run business empire).

As for the Northern League, it fast ditches its liberal principles if its voters' interests seem threatened. Many own or work for textile firms that are reeling from cheap Chinese exports after the ending of global quotas. The Northern League almost derailed the government's competitiveness package last week by demanding duties on Asian products that Italy is not allowed to impose, since trade policy is a matter for the EU. Mr Berlusconi mollified them by promising to raise their concerns in Brussels, and a minister was duly sent to see Peter Mandelson, the trade commissioner. This is depressing for anyone who wants Italy to thrive: the last thing it needs is another bout of protectionism.

The Italian economy is suffering an acute loss of competitiveness.