It is not just the Euro. Southern Europe faces a major structural crisis
Major shocks to social and economic systems ruthlessly expose weaknesses which can be contained in more normal times. When the price of oil quadrupled in 1973/74, the different levels of resilience in the labour markets of Western Europe were quickly revealed. Inflation initially rose sharply everywhere. By 1976, it had fallen to 4 per cent in Germany, but was still 14 per cent in the UK. German workers realised that the oil price rise was out of the control of their own government. Demanding bigger money wage increases would be self defeating. It took the deep recession of the early 1980s, when unemployment rose to 3 million, and the defeat of the miners to bring British inflation back under control.
In the same way, the financial crisis of 2007 to 2009 uncovered deep structural faults in most of the economies of Southern Europe. The recovery in the UK took a long time to get hold, and it was only really in 2013 that we began to get over the shock. But GDP here is now 6 per cent higher than it was at the start of 2008, when output began to contract. In contrast, in Spain GDP is now 5 per cent lower than it was nearly eight years ago, and Portuguese output is 6 per cent lower. In Italy, the fall in GDP is as much as 9 per cent. So between 2008 and 2015, a dramatic gap of 15 per cent has opened up between the levels of GDP in the UK and Italy.
Membership of the Euro does not help. But there are much more fundamental issues. A fascinating paper by Gianluigi Pelloni and Marco Savioli in the latest issue of the Economic Affairs journal focuses on why Italy is doing so badly. A crucial reason is that Italy has a high level of corruption. Transparency International ranks the countries of the world on this measure. The least corrupt is Denmark. Germany and the UK come into the charts at 12 and 14 respectively. Italy is at number 69, along with Greece, Romania and Senegal.
Italy has suffered from a lack of restructuring of production. The products in which Italy specialises are very similar to those of twenty years ago. And the economy continues to be populated by vast numbers of tiny firms, specialising in commodities with low technological content in both the manufacturing and service sectors.
There are many barriers to both innovation and expansion. For example, access to credit is difficult and complex, as a 2013 World Bank study highlights. Start up costs are high. The average number of years of tertiary education in the population aged over 25 is only half that of France, Germany and the UK, so the workforce is less capable of dealing with technological advances.
Pelloni and Savioli do detect some positive signs in sectors such as chemicals, food and pharmaceuticals. But mere tinkering will not be enough. Drastic reforms are needed to deal with the structural weaknesses exposed by the financial crisis.
As published in City Am on Wednesday 25th November