Italy struggles to survive in the grip of the coronavirus

The big, unanswered question about Italy as it lurches from crisis to crisis is the one that is no longer asked, for to answer it would be to reap the whirlwind: how did it come to this?

In the 1960s and 1970s, Italy was one of Continental Europe’s Big Three, alongside Germany and France. Europe was in the middle of what the French recall fondly as les trentes glorieuses – the three decades in which economic growth was not just a blessing, but seemingly a given.

The politics of Italy was venal and volatile (though when had it not been?). The Mafia was everywhere, especially in the South; and the Cold War was at its height. But the money kept rolling in, funding a growth in living standards and a sense of optimism that had not been seen since the false dawn of Il Duce and his fascist dictatorship.

The Marshall Plan had delivered a total of $13 billion (a king’s ransom at the time) between 1948 and 1952, and Italy had made good use of it. Industry was flourishing and jobs were abundant. There was also a newfound spirit of cooperation that, with Italy’s Alcide De Gasperi to the fore, led to the creation of the Common Market and, ultimately, the European Union.

Italians worked hard. Huge corporations, like the oil and gas giant ENI; carmakers Fiat, Alfa Romeo, Lamborghini, Lancia and Maserati; the tyre manufacturer Pirelli; the consumer and electronics group Olivetti and the utilities group Enel, had blossomed and were rapidly extending their international reach. The insurance company Assicurazioni Generali was on its way to becoming the third-largest in the world; while in the banking sector mergers and takeovers would create some of Europe’s strongest financial institutions, including, today, Unicredit and Intesa Sanpaolo.

Italian designers led the world. Italian cinema was king. In fashion, only the French could vie with the likes of Prada, Versace, Gucci and Giorgio Armani.

There was, of course, a downside. Crime and corruption were a commonplace, poisoning politics, business, the police and everyday life. Prime ministers came and went, caught in the gunfire (sometimes literally) between the Christian far-right and the Communist left. The currency was a joke, making everyone a millionaire. There was grinding poverty in the cities south of Rome and in the remote countryside. The Church still had much of the population in its grip. And yet and yet … remarkably, largely by dint of its own efforts, Italy was on the up. When the original six members of the European Economic Community decided to formalise their association, it was the Treaty of Rome, in 1957, that sealed the deal.

But that, as they say, was then, and this is now. I mention all of the above to demonstrate the enormity of the gap between the shape and performance of the Italian economy up until, say, the turn of the century, and the situation that pertains today. In 2008, when the financial crash hit the still-infant eurozone, Italy was among the principal casualties. Since then, things have only got worse, so that as 2020 dawned the nation that gave us the Roman Empire, the Catholic Church and the Renaissance, to say nothing of Sophia Loren, Gianluigi Buffon and Gianni Agnelli, was a basket-case.

All this before the coronavirus!

Today, with the country’s 60 million people stuck in lockdown, the single currency in Italy is hanging on by its fingertips. Unemployment, which peaked at 13 per cent in 2012, was stuck at 9.7 per cent when the coronavirus sent the jobs market spiralling into what it is feared could be a bottomless pit. Confidence is at an all-time low, though it could still have further to fall. Politically, the country is on a ventilator, with the former law professor Giuseppe Conte, of no particular party, heading an administration in Rome whose only positive virtue is that it is none of the others.

Leaving to one side the economic and emotional impact of mass-immigration, of which Italy and Greece have borne the brunt, three issues dominate the present situation:

The currency. Italy and the euro are not a good fit. In 1999, the country was keen to give up the lire and adhere to the single currency. This was a mistake. The lire may have been a joke, but, somehow or other, it worked, giving the Government and the central bank the power to intervene and for the markets to decide what was the appropriate price, in real money, for a Fiat 500 or a Ferrari. The euro, a trophy wife as seen by Rome, became a millstone round Italy’s neck when viewed from Milan and Turin. Germany, which was rapidly overwhelming Italy in the field of manufacturing, could afford the euro. Indeed, it thrived on it, as did the Netherlands and Belgium. Italy could not. Italian goods that had been affordable in lire were increasingly overpriced in euros.

The banks. Most Italian banks, especially the smaller, city-based institutions with their origins dating back centuries, have been in difficulties for the last decade at least. A number, including the world’s oldest, Banca Monte dei Paschi di Sienna, founded in 1472, have been on life-support since 2008. There was much talk of the need for a thinning out, leading to the consolidation of bigger brands. But time has worked against this. In February, Intesa Sanpaolo made a bid for its smaller rival, UBI Banca, costed at €4.86 billion. But the uncertainties and chaos of the health crisis, with its vast financial and economic implications, could well derail this. For a start, UBI is headquartered in Bergamo, the city most affected by the virus, and a number of the bank’s senior staff are among the victims. An associated transaction, by which BPER Banca, based in Modena, was committed to acquiring 500 of Intesa’s retail branches, has been stalled as BPER struggles to find the cash.

The coronavirus could hardly have hit at a worse time. Banks throughout Italy, stuck with an estimated five trillion euros-worth of debt-related assets, had been under pressure from the European Commission and the ECB to reduce their exposure to risky loans. And they had made progress, with the ratio of non-performing loans (NPLs) falling from 9.8 per cent of the total at the end of 2015 to more like 3.3 per cent. But then Italians started dying – most obviously in the banking heartland of Lombardy – and the lockdown was put in place, at first in the North, then in every part of the country. What followed was inevitable. With no functioning economy and no income, debtors began to default at record rates.

Manufacturing. Given the atmosphere of crisis surrounding everything Italian, it will perhaps come as a surprise to many to learn that the country’s manufacturing sector remains active (or did until the lockdown) and that close to one third of the workforce in 2019 was still employed in making things. The problem was that government inefficiency, organised crime and banking instability, coupled with the chronic impact of the euro, had robbed the sector of much of its former vitality. And, it is worth repeating, this was before the coronavirus, which up until Friday morning had killed 22,170 Italians.

Productivity growth since the turn of the millennium has been sluggish at best. A report from the European Commission in 2016 noted that the “cleansing” effect of the 2008 financial crash had gradually been reversed, so that in the Milan-Turin-Genoa triangle, traditionally the industrial heartland, workers were once again underperforming compared to rivals elsewhere in Europe, including Spain, Portugal and Ireland.

So what changed between 1960 and 2016? Whatever it was, it was fundamental. Les trentes glorieuses had, it seemed, been replaced by a culture of stagnation, reminding me of an interview on the radio some years ago in New York in which a top executive of Fiat-Chrysler (the two having merged) complained that while his Italian employees were chock-full of ideas, it was his American workforce that was increasingly getting the job done.

The aggregate impact of each of these failings, or tendencies, has been dramatic. Even before the present crisis descended, blanketing the entire economy like ash from Vesuvius, Italy’s debt-GDP ratio was hovering around 135 per cent, the highest in the Eurozone after Greece, with a large volume of government bonds on the books of domestic lenders who themselves are now in deep trouble. The worst-case outcome, known as a “doom loop,” could see large numbers of investors and financial institutions sucked into oblivion.

“The situation is desperate,” Lorenzo Codogno, formerly chief economist at the Treasury in Rome, told the Financial Times this week. Only the fact that interest rates had been kept in negative territory for the last six years had prevented the state from defaulting on payments of its debt.

Which brings us to Italy’s present pass. Where does it go from here? How does it get out of the death spiral?

For years, successive Italian governments have cried wolf in respect of the single currency. Just three years ago, the two formerly fringe parties, La Liga (based in the North) and Five-Star (a populist movement founded by a clown) advocated pulling Italy out of the euro. There was even talk of abandoning the entire European Project and following the example of Britain by applying for Itexit. It didn’t happen.

Now Giuseppe Conte is once more prophesying armaggedon, arguing that if the EU does not agree to share Italy’s burden by issuing sovereign bonds on behalf of the 27, the entire house of cards will collapse, taking Germany with it. The role of the Anti-Christ in this scenario is the unlikely figure of Mark Rutte, the genial but fiscally conservative prime minister of the Netherlands, who last week vetoed the issue of “coronabonds” designed specifically to rescue Italy from insolvency. Rutte would like to help, he really would. But he is not willing to strap Italy’s ever ever weightier pile of sovereign debt onto the backs of his Dutch fellow-citizens. A similar reponse came from Germany’s Angela Merkel and Austria’s Sebastian Kurz, causing Conte to seethe with impotent rage.

The Italian dilemma is in essence the same as it has been for the last 15 years: the single currency has turned out to be a straitjacket that prevents the country’s inner lire from speaking with its hands. But what is the alternative? No one expects Conte to flounce out of the European Council and follow Theresa May’s example by invoking Article 50. Italy is a founder member of the club and has always taken pride in sitting at the top table. But pride, we are told, comes before a fall, and there is no guarantee that Italy will not go for broke or else cast around for some other white knight than the “traitors” of the European Union.

Just over a year ago, Conte shocked Europe when he signed up for China’s “belt and road” initiative – the first EU member state to do so (since followed by Portugal). It was easy enough to see why. Italy was literally falling apart. Its motorway system was crumbling. Last February, a vital bridge collapsed just outside Genoa, killing 43 people and leaving 600 homeless. And this month, when another bridge buckled in the same region, the only reason no one died was that the corona lockdown had resulted in an almost complete absence of traffic.

Italy depends on its impressive system of highways, built 50 years ago when the going was good. Now it can’t afford to maintain them. China has offered to step in, providing both cash and expertise. It is the quid pro quo – Chinese control of important aspects of the economy, including pipelines, steelmaking plants and public utilities– that has set alarm bells ringing. Brussels is deadset against it, while at home Matteo Salvini, the leader of La Lega, has warned that Italy could end up a colony of the Chinese.

Yet needs must. The only money the EU has offered, after days of bitter argument, was a package, nominally valued at €500 billion, made up of loans drawn out of the existing European Stability Mechanism (ESM) and cash found down the back of the Commission sofa. It sounds like a lot – and it is – but it would have to be repaid within a given timeframe at an agreed rate when what Italy wants is communautaire investment in which the returns, and the risk, are shared by all 27. Conte was outraged by the paucity of the offer and, as if a character out of grand opera, is threatening to tear down the temple rather than give in.

On Thursday, Commission president Ursula von der Layen offered her “heartfelt apology” for the fact that the EU hadn’t responded quickly enough to the health emergency in Italy. Crucially, however, she offered no more concrete assistance. Conte accepted the apology but has continued to insist that coronabonds – re-labelled “recovery bonds” by sympathetic members of the European Parliament – are the only practical way forward.

In the meantime, wise counsel will be provided to the government in Rome by Vittorio Colao, a graduate of both Harvard and Harvard Business School, who for ten years, from 2008 to 2018, was CEO of Vodaphone. He has been been brought in to head up a task force that will advise on the best way to exit the coronavirus pandemic and reboot the economy. Born in Brescia, in sight of the Alps, Colao has a famously cool head and is unlikely to endorse a rash response to EU intransigence. Rather, he can be expected to come up with a sequence that, as far as possible, secures the safety of all Italians while gradually unlocking the country’s productive capacity. Cool heads are what Italy needs right now. For good neighbours, it would appear, are in short supply.