Economics Marc ColemanIt is 12 minutes past midnight. A man in Rome makes a phone call to a man in Milan. "Did I wake you up," says the man in Rome. "No, absolutely not, I'm still here talking to my associates," says the man in Milan. "Good, I want you to know that I've just signed," says the Roman. The man from Milan gushes: "Tonino, I'm overwhelmed with emotion, I've got goosebumps. Thank you, thank you! Tonino, look, I would kiss you on the forehead if I could, but I can't. I know what you've suffered, believe me - I too have suffered."
These words were spoken in a taped conversation between two top Italian bankers: Gianpiero Fiorani - chief executive of Banca Popolare Italiana (BPI) - and Italian central bank governor Antonio (Tonino) Fazio. The exchange concerned a takeover battle for control for Italian bank Banca Antonveneta. The more emotional speaker was thanking the BPI governor for authorising the takeover. The release of the tape has sparked controversy about the bias implicit to a process over which the Italian central bank is supposed to stand as an independent arbitrator.
How history repeats itself. In 1522 a Dutch pope, Adrian of Utrecht, was elected. Adrian did not observe the dictum: "when in Rome do as the Romans", but faced the challenge of reformation by trying to modernise the curia. He was opposed by powerful factions in Rome and died a year later from exhaustion.
The prospect of ABN Amro taking over Banca Antonveneta presented the prospect of a reformation in Italian banking. From such historical events modern parallels can be drawn. A first issue is whether Italy's financial system fairly allocates capital to firms on the basis of profitability, or whether those in the know get the best deals. A second issue is the degree to which - in an increasingly globalised economy - investors in Italy can have confidence in the existence of a level business playing field. A third relates to Italy's position in the euro zone.
These recent events come in the wake of the Parmalat scandal, and at a time when Italy's economy is already in serious trouble. Last May, the OECD forecast Italian gross domestic product (GDP) will decline this year. Latest statistics reveal that industrial output declined by 3 per cent year- on-year and that GDP growth is flat. The macroeconomic malaise is long-term and relates to globalisation. China now competes aggressively on world markets for manufacturing goods that have underpinned Italian industrial performance. For Italy to compete, its financial system must become transparent and competitive.
Like Italy, China has its own issues relating to transparency. For example, in 1992, McDonald's failed to uphold the validity of a 20-year lease on a franchise on a site in central Beijing. In spite of what appeared to be clear and enforceable legal rights to the site, the government ordered McDonald's to vacate in favour of a company that had more clout with city officials.
China is improving its business environment. More to the point, its low labour cost advantage is so strong that rewards of engagement outweigh the risks to investors. In Italy unit labour costs are much higher, thus increasing pressure on manufacturers in its northern industrial region.
In the 1970s, the Italian government could respond to such pressure by devaluing the lira. That prop disappeared when Italy joined EMU in 1999. But instead of adapting to the new need for flexibility, many sectors of Italy's economy remain sheltered from real competition. This is helping to drag down Italy's export sector.
The contrast with Germany is interesting. During the 1970s, a combination of a competitive non-traded sector and strong productivity growth in its traded sector allowed Germany to shrug off the effects of an appreciating currency. Germany's exports are still growing in spite of a host of other problems besetting the country.
In Italy, many appear to miss the good old days of devaluation. Several politicians - including prime minister Silvio Berlusconi - blame the euro for their present troubles. Indeed, both the euro and the ECB have become the whipping boys of politicians trying to avoid their economy's real problems.
Italy's problems run deep and include not just a competitiveness problem, but severe demographic and fiscal problems. Italians are getting older and the resultant pension burden is adding to a debt mountain that - at over 100 per cent of GDP - is already high by EU standards. And Italy's fiscal deficit continues to breach the stability pact guideline of 3 per cent of GDP. This week two international bond rating agencies - Fitch's and Standard & Poor's - have downgraded their ratings for Italian debt, citing these factors as a reason for doing so. The Italian economy is the weak man of Europe.
But we should not be smug - some of its problems could become our own. Like Italy, Ireland too needs to address a high cost of living caused by sheltered sectors of its economy. This problem is dragging down the traded sectors of our economy; those sectors which must fight in increasingly competitive world markets.
And as Italian politicians debate their countries euro membership, we might consider the dangers of a similar debate arising here. Between November 1999 and October 2000, the European Central Bank raised its key interest rate by 2¼ per cent. The housing market was buoyant and barely flinched. A future repetition of such speed - in a softer housing market - might lead to a debate about who should set our interest rates.
The lessons from Italy are that we should not blame the euro for self-imposed problems. We have benefited from its discipline and should get on with implementing the policy regime it requires: labour market flexibility, increased competition in our domestic economy and financial and fiscal stability.
Finally, economists increasingly stress the role of ethics and institutions in shaping economic success. As a small open economy, Ireland is far more reliant on international investors than Italy.
There has been much debate about whether the issue of safety was adequately addressed by the procedures for approving the Corrib gas field project. By all means let us debate this issue - but once we have concluded that debate, we must clearly communicate the rules of engagement we set for foreign investors. And once we communicate those rules, we must stick to them.
