Europe’s Japan?

by Federico Fubini

Federico Fubini is an Italian award-winning author and financial columnist. He is the author of Noi siamo la rivoluzione (We are the revolution).

MILAN – Since the global economic crisis began in 2008, Italy’s GDP has declined by about 8%, nearly a million workers have lost their jobs, and real wages have come under increasing pressure. In southern Italy today, a young person – especially a woman – on a permanent work contract, being paid on time and in full, is a statistical oddity. And yet, an uneasy coalition government seems unlikely to address the concerns that drove voters to reject the entrenched ruling elite in the last election. The most striking aspect of Italy’s recent turmoil is what has not happened: citizens have not poured into the streets demanding reform.

Indeed, throughout the crisis, Italian society has remained uncharacteristically stable. The subdued nature of the few public protests that have occurred contrasts sharply with uprisings in Europe’s other struggling economies – such as Greece, Spain, Portugal, and Ireland – not to mention those that have roiled the Arab world in recent years. Even Sweden faced riots this year, as did the United Kingdom in 2011. 

The absence of such outbursts of popular anger in Italy can be explained partly by the savings cushion built by previous generations. But there are also deeper social and political forces at play – forces that threaten to push Italy, like Japan after its asset-price bubble burst in 1990, toward silent decline.

Japan’s experience – characterized by more than 20 years of economic stagnation – offers important lessons for crisis-stricken democratic countries with aging populations. During Japan’s “lost decades,” successive Japanese governments allowed public debt to skyrocket and refused to confront the economy’s deep-rooted problems, allowing sclerosis to take hold. 

In fact, Japan’s leaders had little incentive to pursue bold reform, because voters consistently failed to demand it. This quiescence was at least partly rooted in demographics. Japanese society is one of the world’s oldest, with roughly 40% of the population older than 54 and a median age of 45.8.

Older citizens’ substantial savings make them amenable to economic torpor. When banks cut lending, the velocity of money declines and consumer prices fall, increasing the purchasing power of pensioners and fixed-rate investors. And those who are nearing retirement know that they are unlikely to lose their jobs in an uncompetitive economy. So, while older people do not prefer to live in a crisis-stricken country, they do not find it intolerable, as opportunity-starved young people do; they are simply more focused on purchasing power than on the economy’s animal spirits. 

Italy currently has the world’s third oldest population – 33% are at least 55 years old, and the median age is 44.2. As in Japan, these older citizens have ample savings. In the Piedmont region, for example, those with savings of at least €350,000 ($461,000) are 66 years old, on average. Moreover, 18.6 million of Italy’s 60 million citizens receive monthly pension benefits (though 11 million receive less than €1,000 per month), while only 12 million people are on a full-time permanent work contract.

Italy’s malaise, like Japan’s, has deepened as its generational disparity has grown. Simply put, whereas citizens receiving rents benefit from falling prices for goods and services, producers (and potential producers) do not.

Given this, the two groups advocate very different policies. For example, payroll-tax cuts – which would enable small business-owners and entrepreneurs to expand, innovate, and become more competitive, thereby bolstering job creation and economic growth – might require reducing rents.

In fact, Italy’s tax system is skewed in favor of savers. A 12.5% tax is levied on capital gains from government bonds, while entrepreneurs risking their own capital to launch new businesses must pay roughly 50% of their start-up costs in taxes. Similarly, Italy’s real-estate tax amounts to about 2% of total government revenue, compared to the OECD average of 4% – and the government intends to slash it further. And landlords pay a 15% tax on rents, while unskilled workers pay a 23% tax on their meager incomes.

But, while rentiers and producers are increasingly at odds, the former prevail at the ballot box – and not only because of demographics. According to the pollster EMG, 60% of Italians aged 18-34 are likely to vote, compared to 72% of those over 55. Pensioners have the highest propensity to vote (73%); students and the unemployed are among the least likely to turn out for elections. 

It is not surprising that those whose interests have been best served by politicians are more likely to vote. But this creates a vicious cycle: as young people and workers become increasingly alienated from the democratic process, political leaders continue to implement policies that favor the old, demoralizing producers further.

Recent developments in Japan offer reason for hope. Growing concerns about China’s rise encouraged Japanese voters to support Prime Minister Shinzo Abe and his bold reform program. While the results of “Abenomics” remain to be seen, the mandate to reinvigorate Japan’s long-stagnant economy was clear.

The question now is what kind of shock would be required to motivate Italians to demand similar action. Adopting the euro in 1999 clearly was not sufficient, nor has rising competition from emerging economies spurred Italians to halt their country’s decline. But, unless they begin demanding that their leaders address the country’s many economic challenges instead of attempting to wait them out, Italy may well be doomed to a Japanese-style lost decade – or two.

 

Copyright: Project Syndicate, 2013.
www.project-syndicate.org




 


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