Why is Greece better than Italy

Debt, critical of the EU, unpredictableIs Italy the new Greece?

A supermarket at the gates of Milan. It's Saturday and many families do their weekly shopping here. A mother pushes the half-full shopping cart to the cash register, skips over what she will probably pay for - and sighs.

"Pasta, bread, milk, water, fruit and vegetables - all of these are more expensive than in the past. You can't get far with 150 euros these days."

Before - that means: before the introduction of the euro in 2002. For many Italian consumers, the adoption of the common currency was, in retrospect, the beginning of a story of suffering that still continues. Although the Italians are not as emotionally attached to their lira as the Germans are to their D-Mark. Although people were proud to be there at the time - after all, Italy is one of the founding states of the European Union. But the prices, especially for food, have risen sharply with the euro and have doubled in some cases. The wages and salaries, on the other hand, do not.

Dwindling enthusiasm for Europe

And so Italy's enthusiasm for Europe has evaporated over the years. Parties critical of the EU benefit from this, because part of the population is now very critical of the euro and the EU. Roberto Trefiletti from Italy's largest consumer association understands this.

"In 2000 and 2001, citizens were positive and confident. There was anticipation for the euro, it was like a dream come true.

Today things are different. Italy's national debt has risen exorbitantly and our sons have no jobs because unemployment among young Italians has doubled compared to then, from 20 to 40 percent. "

The dream has burst - and the EU and the euro are to blame for it. This simple formula is not only used by the people who grudgingly pay in euros at the supermarket checkout, but also by those who rule the country today. The coalition of the five-star movement and the right-wing Lega has been in office for a good two months. A populist government that is considered anti-European and, for Brussels, unpredictable because it thinks little of state spending discipline.

The EU as a scapegoat

Interior minister from the Lega has railed against the euro for years and, in short, made it the scapegoat for all of Italy's economic problems. This week, he even blamed the EU for the tragic collapse of the Genoa bridge: Brussels' austerity targets - as Salvini explained - are jointly responsible for the ailing infrastructure of his country.

Italian hardliner: Interior Minister Matteo Salvini (imago / Xinhua)

"What I think about as a minister and an Italian citizen is why many schools, hospitals and highways need to be repaired. But it is often said that we cannot spend this money because there are European obstacles, the deficit, the gross domestic product."

Homemade Problems

What he hides is the fact that before the introduction of the euro, Italy's economy could only remain competitive on the world market because the lira was devalued. At the time, that helped to avoid fundamental structural problems such as low productivity, high non-wage labor costs and too much bureaucracy. The fact that these problems are homemade and have little to do with the euro - even today, most Italian politicians have turned a blind eye to this. Because they failed to introduce the necessary reforms in good time. Instead, the blame is shifted on to others - preferably on the EU and the euro. The entrepreneur Maria Xenia D'oria thinks this is short-sighted.

"Life was easier with the lira, but that is not because of the euro, but because of the changed conditions that we are dealing with today. The world was less globalized, that is, the markets were more isolated than they are today, and that is what the Italian has Economy protected.

We were able to sell our products more easily back then, but that has nothing to do with the currency, but with the increased competition due to globalization. "

Memories of the Greek crisis

The changeover to the euro initially brought advantages, but then things went downhill. Memories of the Greek crisis are imposing. Three aid packages had been put together for the Greeks in the past eight years to avert national bankruptcy. The last one expires on August 20th. European politicians and the financial markets are now looking worriedly at Italy - but is the situation there comparable to Greece?

Customers in Italy blame the EU for the high food prices (picture alliance / dpa / Lars Halbauer)

Michael Heise, chief economist of the insurance group Allianz, waves it away: After the introduction of the euro, there was a real boom in the Aegean, with gross domestic product and debt growing very quickly, including in the private sector:

"Wages rose rapidly in Greece, so that you ran into a huge bubble, into a macroeconomic imbalance. That never developed in Italy in the first years of the euro era. And so Italy did not have these ups and downs. Participated in movements that Greece made. Which then caused severe damage in Greece. "

Unlike Greece, Italy is a founding member of the European Economic Community and - unlike Greece - it was also part of the monetary union from the start. Most Italians were very interested in recording, although Germany was very skeptical over 16 years ago. Recalls Michael Hüther, Director of the IW, the corporate institute of the German economy:

"You can still remember how, on the sidelines, I said to the budget committee meeting of the German Bundestag Theo Waigel, at that time Federal Minister of Finance, that he could not imagine that Italy would be there when the financial indicators started. That caused an uproar The public and the media were triggered especially in Italy, and with that the subject was virtually gone, the only attempt to suggest that it could work without Italy. "

At the time, the Bundesbank warned against Italy joining the monetary union

At that time, Theo Waigel was also able to invoke the warning from the Deutsche Bundesbank. The central bank had prepared a report for the German government on the convergence situation in the European Union and examined how far the member states fulfilled the stability criteria set out in the Maastricht Treaty. The report said:

Italy's economy lacks the performance concept, criticize financial experts (picture alliance / Karl-Josef Hildenbrand)
"In the case of Belgium and Italy, however, there are serious concerns regarding the requirement of a sustainable public sector financial position. These can only be dispelled if additional substantial commitments are made."

The Bundesbank could hardly have expressed its concerns more clearly. In Italy, of course, you didn't like to hear that. In the end, it was Helmut Kohl who insisted, against fierce opposition in his own country, that Italy should join the monetary union. Stefan Kooths, Head of the Forecasting Center at the IfW, at the Institute for World Economy at the University of Kiel:

The then Federal Chancellor Helmut Kohl insisted on Italy as a founding member of the European monetary union (dpa / Uwe Anspach)
"Then the so-called political point of view prevailed and ignored the economic criteria, so that Italy could be there at the start of the euro at its own request."

Monetary union based on the German model

Viewed soberly, the numbers spoke volumes even then: In its annual report for 1998, the European Central Bank listed the gross debt of the founding members of the monetary union: Italy was already at the top with a rate of 118.7 percent of gross domestic product. The debts could be piled up because the Italian central bank repeatedly printed lira. Italy has a "different monetary tradition", as Kooths calls it - different from, for example, Germany. The monetary union was then designed based on the German model: printing money to cover up structural problems - that was exactly what should no longer be possible in the European currency area, an agreement had been reached at the time.

"There were, of course, rightly concerns in Italy as well as to whether you could simply flip the switch in practice to switch from a monetary policy tradition to a completely new regime almost overnight, and these fears now seem to have come true after all."

Italy's starting elite was quickly lost

The Italians had already tried in the 1990s to get a grip on the worst excesses of the Italian economy, recalls Michael Hüther from the Institute for the German Economy. Up until this point in time, the fixed link between wage and price developments was fatal. This bond was lifted:

"A concerted campaign has been set up as a new framework for collective bargaining. And as a result, the trade balance also turned. It had been chronically in deficit since 1970 and in 1993 Italy suddenly had a considerable surplus."

This vigor was soon lost in Rome, although interest rates and inflation had fallen sharply with the start of monetary union. Italy was actually on the right track at the time. And then I lost my trust again. This analysis of German economists like Michael Heise from Allianz is quite sober.

"Unfortunately, Italy then did not take advantage of the opportunities that the euro gave it, especially with regard to the consolidation of the national budget. Italy was in the yellow, if not in the red, for many, many years in terms of fiscal developments A fall in interest rates would have enabled a much more brash approach and stronger consolidation. But that was not noticed in Italy for political reasons. "

Unpopular reforms

After all, there have been some effective reforms. But these are considered unpopular in large parts of Italy: the pension reform, for example, because it increases the retirement age. Or the labor market reform, which loosens the previously rigid protection against dismissal and provides for fixed-term employment contracts. The incumbent government has already announced that it intends to overturn these reforms.

Italy's Prime Minister Conte. Politics is the biggest risk factor for the country, analysts believe (AFP / Andreas Solaro)
"That would be very harmful. It should not be overlooked that the employment level in Italy has risen dramatically in recent years since the so-called Jobs Act in 2014. The employment level is now higher than in 2007 before the crisis in Italy. And it is possible back to the liberalization or reforms, as you want to call it, on the labor market. Please don't turn that back. "

2.2 trillion euros in debt

Because meanwhile - the figures are from 2017 - Italy is in debt with more than 2.2 trillion euros. That corresponds to more than 130 percent of the gross domestic product. Actually, according to the Maastricht Treaty, only 60 percent are allowed in the EU. However, Italy is keeping well with the deficit limit, i.e. the budget's new borrowing. According to EU guidelines, three percent of the gross domestic product is allowed. Italy was last at only 2.3 percent.

Nevertheless, the populist government made up of the Lega and the Five Star Movement is looking for every opportunity to insist on exceptions in Brussels. Interior Minister Salvini repeatedly attacked the EU about the deficit limit of three percent of the gross domestic product.

"Economy takes place in real life. And when I am told that the lira was an insignificant, weak, inflationary currency, I ask back whether it was easier to pay off a house then or now? Whether there were more jobs then or was it Today? Whether you still had something to save at the end of the month or today. The economy is the question: What can I buy with my money - and that's where Europe failed. "

Italy's exit from the euro is not planned

Italian government politicians no longer speak of leaving the euro - at least not in public. The discussion about this during the coalition negotiations in May had led to a clear reaction on the financial markets: government bond yields skyrocketed. Which is always a sign that the financial markets are assessing a higher risk. In this case, the risk that the Italian state will not be able to repay the debts to the creditors. So is Italy a problem for the euro area? Marija Kolak, President of the Federal Association of German People's and Raiffeisen Banks:

"Due to the size of the country, the high national debt and the risks in the banking sector, economic development and financial stability in the euro area could be adversely affected.

One warning here is government bond yields since the formation of the Italian government in early June. "

Problem child banking sector

Italy, the third largest economy in the euro area, could at least seriously jeopardize this. In the event of a crisis, the banks would first have to be stabilized, because they have 630 billion euros in Italian government bonds in their custody. The banking sector is still a cause for concern, says Stefan Kooths from the Kiel Institute for the World Economy:

"We should be very worried about what will happen when the current economic upswing comes to an end. Then the question marks behind Italy will be very, very big again."

In September the new government intends to bring its budget for the coming year to parliament. In the election campaign, the populists had promised lower taxes, higher social benefits, and earlier pensions - only savings were not planned. The alarm bells rang in the EU.

Now it is said from Rome that they want to introduce comprehensive reforms and at the same time reduce the national debt. Michael Heise from Allianz remains skeptical:

"In this respect, there is also a great risk for the autumn, when the budget plans are presented, that Italy will continue to be punished by the financial markets. I think that the government knows this and it is precisely this pressure from the capital markets that will keep it from being all too drastic Also implement plans that would set Italy back in terms of debt policy. In this respect, the scenario is still an optimistic one. But there is certainly a risk. "

Visit to a medium-sized company. The Bonaudo tannery in Lombardy is one of the most modern in Italy. Brightly cleaned floor, rollers and barrels that slowly turn on their own axis like concrete mixers. Water consumption has been reduced by 30 percent over the past five years, and the wastewater has already been treated. Nevertheless, the industry has an image problem, says tannery owner Alessandro Illiprandi

"Today we still suffer from the prejudice that the leather industry pollutes the environment and that a tannery is dirty and stinks. But that no longer corresponds to reality at all. Those who produce leather today have to adhere to strict environmental requirements and that is correct so."

This is the only way he can assert himself on the world market, explains Alessandro Iliprandi, who only produces leather for luxury products.

Italy's leather industry is an important branch of the economy with 17,000 employees, the goods are of high quality, 70 percent are exported.

"In Italy, achievement is almost a sin"

Actually a success story. But there are many obstacles. For example, the bureaucracy. They cause Italian entrepreneurs to lose more time and money than in countries with an efficient public administration. All the governments of the past few years have promised improvement, albeit with little success. For the economist Giorgio Barba Navaretti from the University of Milan, the merit principle is missing.

"That is Italy's great weakness, especially in public administration. Also in the private sector, but in the public sector the effect is particularly devastating. In Italy performance is almost a sin. Everyone has to be paid equally. Nobody can be better or better paid What does that lead to? On the one hand, everything costs a lot, regardless of the quality. And, on the other hand, there is no promotion of the elite, which would be important for the future. "

"Everything used to be better" is a common lament. Italy used to be less under pressure to reform and, for example, was more likely to afford comprehensive dismissal protection than it is today. The "posto fisso", the secure job for life, is still the goal of many young professionals. Italy's economy is characterized by low productivity, below-average growth and high susceptibility to crises - but the will to reform is limited.

"Italy does not have the courage to initiate radical reforms. Other European countries are further along. In Italy, the interests of certain groups are put above the interests of the general public.This is a huge problem because such a minority with strong political representation prevents reforms that are necessary for the economic growth of the whole country. "

Biggest risk factor in Italy: politics

Politicians in Italy pose the greatest risk - and that's not just how analysts see it. What will the populists from Lega and the Five Star Movement come up with if they don't succeed? Italy is considered to be the greatest factor of uncertainty in the euro zone. If the third-largest economy gets out of hand financially, it will - unlike in the case of Greece - be impossible to rescue the country with a European bailout. Why Marija Kolak, President of the Federal Association of German People's and Raiffeisen Banks, says:

"It is very important that Italy pursues a policy that is responsible for the country and for Europe. For Italy is more or less systemic for the euro zone."