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Exhausted Italy

Italy is facing perhaps its most important elections since 1948, when voters confirmed the emergence of Italy’s new republic from the wreckage of Mussolini’s fascist regime. On April 9-10, Italians must choose between Prime Minister Silvio Berlusconi’s center-right government and the center-left bloc headed by Romano Prodi. But neither man seems the sort of decisive figure that overcoming Italy’s bleak economic predicament demands.

Italy’s economic malaise is obvious. Cumulative economic growth over the past five years was the slowest in the euro zone – 3.2%, compared to an average of 7.8% – with two years of stagnation. Per capita GDP, too, has fallen below the euro-zone average. Employment has increased, but labor productivity has remained flat and total factor productivity has declined. Combined with strong real exchange-rate appreciation, this has led to a dramatic loss of competitiveness and weakening exports. Indeed, the only growth sector seems to be books about Italy’s decline.

Berlusconi claims that statistics are unreliable, for they conceal a much rosier reality for today’s well-off Italians. Other members of the government admit more soberly that Italy faces serious problems, but they lay the blame on factors beyond their control: a series of global economic shocks, a slow-down in continental Europe, the admission of China to the World Trade Organization, and the role of the euro.

But such explanations are unconvincing. The global shocks affected all European countries alike, as did the entry of China (and other Asian countries) into the WTO, but French exports, for example, suffered much less, while German exports actually increased. True, European growth was dragged down by meager growth in Germany, but Italy grew marginally less than Germany. Finally, while the euro has put a stop to competitive devaluations, it also provided Italy with a sizeable benefit: a reduction by 6% of GDP in interest payments on the huge public debt accumulated in the 1990’s.