McManus: All pain, no gain in southern Europe

Banca d'Italia, Italy's central bank located in Rome, is seen in May. Unemployment has topped 10% in Italy and news broadcasts have given lavish coverage to a wave of suicides by small businessmen who couldn¿t meet payrolls or tax bills.
(Alessia Pierdomenico / Bloomberg)

Milan, Italy — From the American side of the Atlantic, the debate over Europe’s economic future often sounds like a bloodless, mind-numbing discussion of currency zones, bank recapitalization and interest rates. But in countries with fragile economies like Spain and Italy, it takes on real-life urgency.

Pain is everywhere. Unfinished construction sites litter classic landscapes, monuments to businesses that have failed and bank loans that didn’t come through. In Italy, where I have spent the last three weeks, the unemployment rate has topped 10% and news broadcasts have given lavish coverage to a wave of suicides by small-business owners who couldn’t meet payrolls or tax bills. On Monday, the country’s main stock index plunged and the interest rate on 10-year government bonds soared, prompting fear that Italy could soon need a massive bailout like the one Spain received last week.

The burden of Europe’s recession is felt disproportionately by the young and unemployed. But it’s affecting middle-aged business people too.

“Austerity has a psychological effect on everybody,” an Italian management consultant told me. “Entrepreneurs turn into pessimists. Businesses aim lower.”


About the only relief comes in the form of black humor. “It’s so bad,” he said, “that to save money, they’ve turned off the light at the end of the tunnel.”

Voters are blaming incumbents, no matter who they are. In November, Italians rejoiced when the economic crisis forced mercurial Prime Minister Silvio Berlusconi to resign. He was replaced with the country’s most eminent economist, Mario Monti.

But Monti’s program of reforms quickly got bogged down in Parliament, except for a package of deficit-shrinking tax increases, that is. So Italians have seen higher taxes, but no economic growth.

Monti’s popularity, once measured at 71%, has plunged to 43% in one recent poll. Instead, the fastest-growing political force is a populist movement led by a burly stand-up comedian, Beppe Grillo, an Italian version of Michael Moore, who condemns all traditional parties as corrupt.

Grillo doesn’t have a well-defined program beyond “throw the bums out,” a sentiment he expresses with a shorter, unprintable epithet. But his Five Star Movement has surged into second place in the polls, a testament to the failure of conventional politicians to seize the moment for reform.

How bad is it? Bad enough that references to the 1930s have begun gingerly creeping into Italians’ conversations, beginning with the unfortunate fact that it was a wave of bank failures in 1931 that paved the way for Hitler’s rise to power in 1933.

How bad is it? Bad enough that to many Italians, President Obama’s economic policies look like a success story, even with the U.S. unemployment rate stuck at 8%.

The economics remain mind-numbing. In Italy, I asked everyone I know — bankers, businesspeople, teachers, even a real live economist — how the downturn has affected their lives. Their main worries are taxes, which have gone up; prices, which haven’t gone down; and, above all, jobs for their college-age children. Youth unemployment in Italy has risen to 36%, and it’s little comfort that this is better than in Spain, where it’s more than 50%.


Italy’s situation is a bit different from elsewhere. Spain and Ireland had calamitous real estate bubbles; Greece and Portugal ran big budget deficits. In Italy, it’s long-term debt that’s the problem, even though Monti has brought the budget under control. There’s no single remedy that will fix all these problems.

Add the fact that there are two Europes, not one. The southern economies are shrinking, losing jobs and GDP; but Germany, the biggest country of the north, is growing about as fast as the U.S. economy.

Time and again, Chancellor Angela Merkel has asked German taxpayers to help bail out bankers — not only German bankers, but French, Italian and Spanish bankers too — who made bad loans.

Europe has been trudging through its own version of a TARP-style bailout, only in slow motion. So far it’s been expensive enough to make voters angry, but never big enough to solve the problem.


As the Italian American economist Luigi Zingales has pointed out, the result is a continuing state of uncertainty that prompts European investors to move their money to safe countries like Germany or the United States, causes businesses to freeze hiring and postpones economic recovery even longer.

Italy’s is a big economy, the third largest in the Eurozone, bigger than Spain and far bigger than Greece. You might think Italians would resent German demands for economic reform, but polls show the opposite: Italians admire Germany’s success and are willing to undergo the pain of austerity reform — if it carries the promise of economic growth.

The problem the Italians and the rest of southern Europe face, at least in the short run, is that they are getting all the pain of economic reform but, so far, none of the benefits.