Liberalize in order to recover

First feared, then avoided the "double dip recession" has finally arrived and, as in 2008-2009, it hit Italy harder than other Countries. According to Confindustria Italy's 2012 GDP will fall 1.6%, erasing in just a few months the weak rebound achieved over three years. In the next months our Country will go back to the same level of the trough reached after the so-called Great Recession: more than six and a half points under pre-crisis levels. It is not a biased opinion because other institutions (Goldman Sachs, Citicorp and Deutsche Bank) have recently produced the same sort of estimates. Instead, this could be the best foreseeable scenario. It is in fact possible that the expected 1.6% drop could be undervalued; for many reasons.

The first reason is that forecasts tend to be extrapolated from past data and in a phase of falling GDP, the decline is underestimated. In November 2008, when a full recession was already underway, 2009 GDP was expected to drop 0.5%; only in April 2009 the forecast of that year came close to the actual number: -5.1%.

The second reason is that after two years of stagnation, households today have much less savings to face the strong uncertainty that surrounds them, accentuating its impact on demand. They already used their wealth to support normal consumption levels and what is left was wiped out by the loss of value of public debt and banking bonds. The same reasoning holds true for businesses, especially the small ones that count on family savings as a source of financing. Ignoring this impact, as forecasts do, underestimates the drop in income. Assessing the extent of this is difficult (and is why it is ignored) but it depends on the extent of uncertainty and today market volatility is at the same levels seen before the collapse of Lehman Brothers: at 40-year historical peaks. The third reason, the most important, is that these forecasts, and it could not be otherwise, are based on the possibility that we do not fall off the edge of the precipice: that a solution to the sovereign debt crisis, and therefore of the common currency, is found, that markets calm down, that the lack of confidence disappears and, as far as we are concerned, that spreads return to normal levels.

However, the alternative scenario cannot be ruled out. The probability is small, but it cannot be ignored; and the consequences would be dramatic. No one know how dramatic, also if very alarming assessments are starting to emerge. The outlook that we face has two possibilities: one in which we face a new harsh recession and a very slow recovery; the other in which the Great Recession becomes a depression, a risk raised by the director of the International Monetary Fund, Christine Lagarde. It is necessary to be fully aware of these two possibilities, inside but more importantly out of Parliament. Yesterday's approval at the Chamber of Deputies of the budget bill was a necessary deed in order to circumscribe the risk of sliding off the precipice. Boycotting the few and limited liberalization measures was proof of irresponsibility.

Who sponsored it and who carried it out should know that if we want the Country to pick itself us from the stagnation ahead there is no alternative to opening up to competition and to undoing the monopoly gains created by primary law because they weigh on the productive system. But they should also know that they transmitted to the world the idea of a Country that cannot be reformed; of a country, as the New York Times said, whose Government "is bound to hit strong headwinds from vested interests that grip every corner of Italy's complex, neo-feudal economy". The Government is making important efforts, some of which are in the budget bill, to recover and better use the few available resources, not to scatter them around but to dedicate them to a few worthy projects, like those proposed by Minister Barca.

But it has to prove the same courage and the same firm resistance that was used in carrying out the pension reform to propose and impose a broad liberalization program. If it faces the problem with a wide ranging approach, as it should, it will have against it taxi drivers, lawyers, notaries, pharmacist and maybe also bankers and airline companies. However on its side will be millions of citizens, who are silent and do not shout: those same people that accepted almost without hesitation the pension reform because they are aware that, even though with sacrifice, they are contributing to avoid that the Country falls off the precipice and they are giving tomorrow's generations a pension system that is less generous but more reliable.
(Translated by Yael Schrage)

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