lunedì 1 settembre 2014

Intervista Morsanica: un Economista Innominato ci parla di Italia

Abbiamo chiesto a un economista che dall'estero si occupa di Italia un'opinione sul Bel Paese. Buona lettura!

What's your evaluation of the Italian reforms from Mario Monti, via Letta to Renzi? Only superficial or are you seeing any positive results?
My evaluation of the reforms witnessed from Mario Monti, via Letta to Renzi is lukewarm, with Italy making insufficient progress after the adoption of the euro to shift from its competitive devaluation model to a model based on productivity gains and on higher value added production and services.

Although we acknowledge that recent reforms are encouraging first step, Italy remains a work in progress. The previous technocratic government under Monti passed legislation to inject greater competition into several professional and service sectors. The reform bill abolished the use of minimum professional tariffs for all sectors, with the notable exception of the legal profession. The bill also increases the number of pharmacy licenses nationwide. This was a first step to dismantling the excessive regulation in sheltered service sectors, and will bring about some incremental benefits. This was accompanied by a moderate labour market reform bill, which removed some of the dismissal restrictions currently specified in Article 18, which require firms with more than 15 employees to reinstate workers who have been wrongly dismissed, with full payment of lost salary. The reform proposals do not plan to scrap Article 18 but amend its scope by allowing firms to dismiss workers for business reasons on payment of compensation. In cases of wrongful dismissal for misconduct, it will be left up to a judge to decide if the worker should be reinstated or just receive compensation.

Nevertheless, the government still needs to dismantle ongoing and long-standing structural impediments to ensure a better productivity and growth performance, namely a segmented and rigid labour market, a still excessively regulated business climate, high levels of inefficient public spending funded by one of the largest tax wedges in the Eurozone, and a pronounced north-south divide. The biggest challenge remains to reverse Italy's woeful growth and productivity performance since the adoption of the euro. The economy has been unable to rely on competitive devaluations to elevate growth, as was the norm prior to joining the single currency. Italy recorded average growth of just 0.5% per annum from 1999 to 2012, compared with 1.4% from 1990 to 1998 and 2.7% from 1982 to 1989. The main drags on growth have been the country's dismal productivity performance and declining competitiveness during the last decade, with domestic producers struggling to protect market share both domestically and abroad.

The dysfunctional labour market continues to prevail

Apart from Monti’s bill, Letta’s government pushed through a decree to provide financial incentives for businesses to hire young workers up to a maximum payment of EUR650 per employee. However access to the scheme is highly restrictive. Only workers aged 18 to 29 years old are eligible to participate. The "Youth Guarantee" initiative applies for 18 months for new hires provided that employees have been without regular employment for six months previously. In addition, the funding provision is only available for a 12-month period where fixed-term contracts are transformed into permanent contracts.

The Italian (and even the Spanish) government has to tread very carefully when formulating future labour reforms. The conflicting challenges facing the government is to balance the need to create jobs very quickly alongside securing a more stable and better functioning labour market in the medium term. The key issue remains the usefulness of temporary contracts in an economic downturn and its implications for the dual labour market. The previous government adopted a labour market reform in 2012, which made short-term contracts more costly for employers by raising the tax and welfare contributions they have to pay by 1.4 percentage points. Firms will be reimbursed the extra tax if the temporary contract is made permanent. However, temporary contracts can be an important tool to encourage firms to create jobs during the final stages of a downturn or in the beginning of a recovery when there remains uncertainty about whether the upturn will be sustainable and significant. This is particularly true in countries like Italy and Spain where employment protection legislation is lopsided, favouring workers on permanent contracts, making it difficult and costly firms to shed unproductive workers on indefinite contracts when they are faced with difficult trading conditions. Interestingly, the OECD is urging Italy to repeal parts of the labour market reform adopted in 2012, arguing that the government should consider "easing entry regulations by making it more convenient to hire on a temporary basis and with greater flexibility." They accept this encourages the dual labour market, but the grim situation is crying out for initiates to protect and then boost the demand for labour.

The dual labour market is not a sustainable model, given that it can trigger sharp swings in the demand for labour (and the unemployment rate) that we have witnessed during the various stages of the economic cycle, particularly the downturns. Firms are better able to jettison workers on short-term contracts when times are tough, rather than attempt to engineer a downward adjustment in wages which could impossible if the firm is locked into a collective wage bargaining agreement.

We have argued that the dual labour market has been encouraged by past reforms. Italy has adopted asymmetric reforms to increase labour-market flexibility, which entailed adopting less restrictive regulations on temporary contracts alongside strong employment protection for permanent workers. Consequently, firms have shown a very strong bias towards recruiting workers on temporary contracts, especially with first-time contracts, which tend to be less productive. With recent labour-market reforms failing to address more effectively the high cost and the legal obstacles of dismissing workers on permanent contracts, firms remain reluctant to hire workers permanently because they struggle to dismiss non-productive workers. Clearly, encouraging firms to offer more short-term contracts has to be accompanied by a more a flexible and decentralised wage bargaining structure, allowing firms to target wages rather workers on temporary contracts during difficult times. This remains the roadblock, with the wage-bargaining framework in Italy still too centralised, which prevents wages adapting to specific productivity and demand conditions at the firm level. About 60% of Italian workers are covered by collective wage bargaining agreements (IMF, 2009), which is high when compared to the rest of the EU. Furthermore, the current wage formation system is even more punishing for small enterprises, with the nationally negotiated wages having greater weight than those negotiated at the firm level.

Are the labour market pressures still intact?
Italy continues to endure substantially lower employment ratio when compared to most of the countries in the European Union (EU), particularly among women, older workers, and the young. . This is accompanied by painfully high youth unemployment, with 30% of 18- to 24-year olds currently unemployed.
     Italy's unemployment insurance system is too wide-ranging and also has "dual characteristics". Unemployment benefits are initially high, with a net replacement ratio of 60% before dropping to zero after eight months (12 months for workers aged over 50). In addition, tough eligibility rules restrict the number of individuals who qualify for unemployment benefits. On the other hand, the wage supplementation fund scheme (cassa inegrazione) is substantially more generous, both in terms of level and duration. The scheme makes up the pay of permanent employees affected by temporary layoffs (who are not considered unemployed) or under shorter working hours for a maximum of two years. However, it is limited to workers on certain contracts, with the participating firms mostly large and located in the north.
● Despite some part liberalization, the wage-bargaining framework in Italy is too centralised, which prevents wages adapting to specific productivity and demand conditions at the firm level. About 60% of Italian workers are covered by collective wage bargaining agreements (IMF, 2009), which is high when compared to the rest of the EU. Furthermore, the current wage formation system is even more punishing for small enterprises, with the nationally negotiated wages having greater weight than those negotiated at the firm level. Indeed, despite awkward labour market conditions, earnings growth has remained stable above 1.0%, with the nominal hourly wages in the industry sector increasing by more 2.0% y/y (reflecting the higher incidence of centralized wage agreements). This contrasts starkly with the Spanish experience, which is undergoing significant nominal wage growth compression after several deep-rooted labour market reform bills to untangle its wage bargaining system.
● Italy has a relatively high tax and social security wedge on labour income
Do you see a lack of structural fiscal reform
Italy has also failed to put into place structural fiscal reform to drag back its mounting public debt, which stood at just below 133.0% of GDP in 2013. Italy is home to one of the largest black labor market and highest tax evasion – areas from where it is possible to gather vast resources to fund the public finances. In addition, there are various chapters of public expenditures which can be cut, including the transfers to local administrations, the health system, the public sector employment. On top of that, a quicker reduction of public debt is feasible also through sales of assets, both state owned and local governments owned. In the long-term, several opportunities may be exploited, ranging from an increase in the women labor participation rates to wider legalization of immigrants, both items sustaining tax and pension receipts. On the other side, in order to boost growth, consumption may be financed by both a reduction in currently high saving rates and by broader use of credit. Additional measures are well known and politically agreed upon, such as further liberalization of protected service sectors, a further reduction in tax burden on labor, increased labor market flexibility, increased R&D and innovation spending.

The implementation of such policies requires strong leadership and also acceptance by the Italian population – both appear to be weak under the current political system. Clearly, impending electoral reform needs to deliver more stable governance to trigger a more aggressive structural reform agenda.

Do you see other roadblocks to higher potential growth?
The high fragmentation of the Italian enterprise system, excess of regulation in several markets and the lack of competition in several key services sectors. This includes the banking sector as well as others, which are able to transfer their low productivity on their selling prices, that way representing a burden for the whole economy. One other crucial aspect of the Italian economy which weighs heavily on its competitiveness is the regional disparities between the Center-North on one side and the South on the other side. In more general terms, it can be argued that following the adoption of the Euro, Italy has not made insufficient

So what's to be expected as far as the future path of reform?
Again, the focus will have to return to a still too segregated and inflexible labour market, where progress has been limited, especially when compared to the Spanish experience. This is not surprising given the lack of a stable political platform in Italy compared to Spain where recent governments have enjoyed secure majorities (or relatively water-tight coalitions). Indeed, wage-setting behaviour and employment volumes have been fair sticker in Italy when compared to Spain, with Italian unit labour costs climbing steadily from 2010.

The labor market remains the main battleground, with the economy needing far-reaching labor reforms to reverse Italy's poor productivity performance. First, the wage-bargaining framework in Italy is still too centralized, which prevents wages adapting to specific productivity and demand conditions at the firm level. A decentralized wage formation system in Italy would provide wider scope to alter working conditions, break the link with projected inflation, and allow the greater use of performance-related pay. Second, the labor laws are wide-ranging and inflexible, with the process of dismissing workers a laborious and costly one for employers. Despite recent reforms, the high cost of dismissing workers and the legal obstacles prevail, and stem the offer of new permanent employees. More importantly, it makes it difficult to lay off non-productive workers on permanent contracts, resulting in a bias towards less-productive employment.

Our baseline assumes that electoral reform has to be in place before Italian governments can make more significant strides to reverse the woeful productivity and competitiveness performance witnessed since Italy adopted the euro. This is a challenge in itself, with the Italian political system weighed down by fragmented political alliances shaping up governments.

Assuming the introduction of far-reaching structural reforms in Italy and short-term adjustment pains, real GDP growth could stabilize in the 1.2–1.5% range in the outer years of the forecast period. Currently, we estimate long-term growth at around 1.0%, which assumes a less aggressive reform agenda, while the economy is weighed down by poor demographics. Clearly, an underlying improvement in competiveness in the upbeat scenario would help Italy to better exploit any growth in the trade-weighted index of world demand for Italian products beyond the short term, and provide more ammunition to protect its under pressure export market shares in the face of the anticipated steady appreciation of the euro and intense competition from low-cost producers. In addition, further labor market reforms would be required to encourage higher labor-force participation in order to offset the projected decline in working population, and help to lift the employment ratio.

However, we continue to have doubts, and our lack of confidence in Italy's economic prospects stems from continued rigidities in the country's labour and product markets. Indeed, the credit rating agency S&P argues that that wage formation in Italy continues to be decoupled from underlying productivity trends, weighing down on the country's competitiveness, with Eurostat estimating that nominal unit labour costs have risen more in Italy than any other country in the Eurozone. Apart from unhelpful unit labour cost developments, Italy's poor competitiveness is also being stoked by higher than average non-wage domestic costs, including energy prices standing above the Eurozone averages, as well as excessive administrative costs. Consequently, S&P estimates that Italy's share of the global goods and services market has fallen by one-third since the adoption of the euro. Conversely, a major obstacle to advancing the reform process in Italy is the lack of urgency to act with Italian 10-year bond yields falling back notably in the wake of ECB launching its conditional bond-buying program in September 2012. We doubt that Italy lacks the disciple to deepen its structural reform agenda unless it faces another period of sustained pressure from the bond markets (with 10-year bond yields rising above 7.0% alongside rising short-term borrowing costs).

Interestingly, the European Commission advocated several specific growth-boosting measures in a recent appraisal of Italy , and we agree
· The government needs to tackle labour market efficiencies by implementation of measures to reduce job protection and streamline the rules for collective dismissals.
· The EC argues that Italy needs to transform the educational and teaching architecture of Italian schools and universities, while adopting greater innovation and digitalisation. 
· The Commission proposes the full implementation of the "Brunetta reform" which seeks to modernise the public administration sector by targeting improved labour productivity and efficiency while injecting greater transparency within the sector to fight corruption.
· A key focus of the reform drive is to lower business costs by slashing bureaucracy and speeding up the judicial system when dealing with contract enforcement disputes.
· Italy has to inject greater competition in the network industries, such as electricity and natural gas supply, by removing entry barriers. The Commission notes that Italian electricity costs are above the European average, and "remain a drain on industry and telecoms, post, water and transport also remain sheltered from competition."
· Italy has to overhaul its regulated professions in the service sector, particularly dismantling the right of professional associations to act as a barrier to entry.

We hear talks of "internal devaluation" but with such an unfavourable (for the worker) fiscal wedge, is there any hope for Italian workers to become competitive again?
Some of the analysis is in the section above. However, I think Italian workers will resist robustly any attempt by the government to implement a more flexible wage bargaining system that would allow firms to set their wage levels to reflect their local demand conditions. Not surprisingly, this would trigger considerable nominal wage growth compression (like the Spanish experience), with firms opting out of centralized wage bargaining agreements to ratchet down labour costs to regain loss competiveness. One approach to lessen workers’ opposition to future wage formation reform is shrink the tax wedge. Not surprisingly, the government has implemented broad-based income tax cuts from May 2014, with Prime Minister Matteo Renzi fulfilling a past promise to cut the tax wedge. This is a major issue in Italy, with the OECD estimating that the average worker in Italy endures a relatively high tax burden on labour income (tax wedge) of 47.6% in 2012 compared with the OECD average of 35.6%.

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