Tuesday, September 2, 2014
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Europe’s Japan?

MILAN – Since the global economic crisis began in 2008, Italy’s GDP has declined by about 8%, nearly a million workers have lost their jobs, and real wages have come under increasing pressure. In southern Italy today, a young person – especially a woman – on a permanent work contract, being paid on time and in full, is a statistical oddity. And yet, an uneasy coalition government seems unlikely to address the concerns that drove voters to reject the entrenched ruling elite in the last election. The most striking aspect of Italy’s recent turmoil is what has not happened: citizens have not poured into the streets demanding reform.

Indeed, throughout the crisis, Italian society has remained uncharacteristically stable. The subdued nature of the few public protests that have occurred contrasts sharply with uprisings in Europe’s other struggling economies – such as Greece, Spain, Portugal, and Ireland – not to mention those that have roiled the Arab world in recent years. Even Sweden faced riots this year, as did the United Kingdom in 2011.

The absence of such outbursts of popular anger in Italy can be explained partly by the savings cushion built by previous generations. But there are also deeper social and political forces at play – forces that threaten to push Italy, like Japan after its asset-price bubble burst in 1990, toward silent decline.

Japan’s experience – characterized by more than 20 years of economic stagnation – offers important lessons for crisis-stricken democratic countries with aging populations. During Japan’s “lost decades,” successive Japanese governments allowed public debt to skyrocket and refused to confront the economy’s deep-rooted problems, allowing sclerosis to take hold.

In fact, Japan’s leaders had little incentive to pursue bold reform, because voters consistently failed to demand it. This quiescence was at least partly rooted in demographics. Japanese society is one of the world’s oldest, with roughly 40% of the population older than 54 and a median age of 45.8.

Older citizens’ substantial savings make them amenable to economic torpor. When banks cut lending, the velocity of money declines and consumer prices fall, increasing the purchasing power of pensioners and fixed-rate investors. And those who are nearing retirement know that they are unlikely to lose their jobs in an uncompetitive economy. So, while older people do not prefer to live in a crisis-stricken country, they do not find it intolerable, as opportunity-starved young people do; they are simply more focused on purchasing power than on the economy’s animal spirits.

Italy currently has the world’s third oldest population – 33% are at least 55 years old, and the median age is 44.2. As in Japan, these older citizens have ample savings. In the Piedmont region, for example, those with savings of at least €350,000 ($461,000) are 66 years old, on average. Moreover, 18.6 million of Italy’s 60 million citizens receive monthly pension benefits (though 11 million receive less than €1,000 per month), while only 12 million people are on a full-time permanent work contract.

Italy’s malaise, like Japan’s, has deepened as its generational disparity has grown. Simply put, whereas citizens receiving rents benefit from falling prices for goods and services, producers (and potential producers) do not.

Given this, the two groups advocate very different policies. For example, payroll-tax cuts – which would enable small business-owners and entrepreneurs to expand, innovate, and become more competitive, thereby bolstering job creation and economic growth – might require reducing rents.

In fact, Italy’s tax system is skewed in favor of savers. A 12.5% tax is levied on capital gains from government bonds, while entrepreneurs risking their own capital to launch new businesses must pay roughly 50% of their start-up costs in taxes. Similarly, Italy’s real-estate tax amounts to about 2% of total government revenue, compared to the OECD average of 4% – and the government intends to slash it further. And landlords pay a 15% tax on rents, while unskilled workers pay a 23% tax on their meager incomes.

But, while rentiers and producers are increasingly at odds, the former prevail at the ballot box – and not only because of demographics. According to the pollster EMG, 60% of Italians aged 18-34 are likely to vote, compared to 72% of those over 55. Pensioners have the highest propensity to vote (73%); students and the unemployed are among the least likely to turn out for elections.

It is not surprising that those whose interests have been best served by politicians are more likely to vote. But this creates a vicious cycle: as young people and workers become increasingly alienated from the democratic process, political leaders continue to implement policies that favor the old, demoralizing producers further.

Recent developments in Japan offer reason for hope. Growing concerns about China’s rise encouraged Japanese voters to support Prime Minister Shinzo Abe and his bold reform program. While the results of “Abenomics” remain to be seen, the mandate to reinvigorate Japan’s long-stagnant economy was clear.

The question now is what kind of shock would be required to motivate Italians to demand similar action. Adopting the euro in 1999 clearly was not sufficient, nor has rising competition from emerging economies spurred Italians to halt their country’s decline. But, unless they begin demanding that their leaders address the country’s many economic challenges instead of attempting to wait them out, Italy may well be doomed to a Japanese-style lost decade – or two.

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  1. CommentedWayne Davidson

    Italy and Japan are not the only governments guilty of the politically corrupted economics of wealth transfer. The so called champions of democracy have institutionalized the economics of illegal wealth transfer. The masses, confined within the ideology of universal representative democracy will continue to be disenfranchise by the elite for generations.

  2. CommentedJose araujo

    Japan was facing a liquidity crisis, risk aversion lead to low investment and zero interest rates. Japan's debt is mostly internal and in the 90s japan wasn't facing a competitive problem.

    Italian problem is a competitive issue from its economy, a development profile that doesn't fit on modern times, lack of reestructuring, policies drawn to protect establishment, the growing cost of making business introduced by european regulation and an increasing Euro, who not only created problems to Italian exports but also led the aggravation of the competitive position of Italy.

  3. CommentedWalter Gingery

    Fubini ignores an essential point: in Japan, the vote of the urban population basically doesn't count -- one vote in rural districts equals 2 votes in urban districts. The conservative, backward-looking constituency of the Liberal-Democrats almost always preponderates. The similarity to Italy is obvious: the Italian political system is notorious for its unresponsiveness and lack of accountability. Therefore, Italian political reform must precede economic reform.

  4. CommentedStamatis Kavvadias

    Interesting point on biased taxation and demographics. The latter, is probably the reason eurozone is holding at this point. Although the approach is constructive, the problems addressed are only a small part of Italy's problems. The mountain of debt cannot be handled without large scale privatizations and clearance sale of public and private property. The big problems are much deeper....

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