Wednesday, November 30, 2011

Feldstein on Italy

Martin Feldstein weighs in on the Euro crisis (Italy can save itself and the euro), and makes some interesting points.

First, as Feldstein notes, Italy has a huge stock of debt, but it's flow situation is not that bad - it has been running a large primary surplus for years, unlike Greece. It could reduce its deficit and enhance market confidence with realistic adjustments to taxation and spending. This is an important point, since the measures asked of Greece are truly impossible to successfully implement.

Feldstein also makes another good point - that with public spending running at half of GDP, there must be savings that Italy can make somewhere. This is clearly true: Italy has a public sector that wastes resources on a truly awesome scale. However, it is also true that any major cuts will be contractionary in the current climate, and could reduce what little growth Italy has in store.

And that brings us to another point. As Feldstein shows, that required fiscal adjustment, with measures taken to increase growth, could quickly rebalance the situation. But if the reforms needed were so easy to achieve, maybe they would have been implemented already, given Italy's poor economic performance over the past two decades. Clearly, the time for such reforms was in the more buoyant climate of the late 1990s and early 2000s - now they will probably have contractionary effects.

That all said, there is a lot of low-hanging fruit when it comes to possible reforms. More women could be encouraged in the labour force very easily (see the weird but interesting proposal by Alesina and Inchino to reduce employment taxes for women), competition could be usefully introduced into some closed markets (the 'professions', local transport, retail). A bonfire of pointless regulations could save a lot of time and energy for businesses and citizens and allow resources to be deployed more productively.

The trouble is, there is at present no political constituency for these measures. The majority position in Italy is economic and cultural conservatism, with occasional bursts of intolerance towards groups such as immigrants that are key to the country's future. Berlusconismo has to be defeated before anything good can happen.