It’s the Government, Stupid: Why Politics is to Blame for Italy’s Economy

Time has just published my article on Italy’s S&P downgrade.

There’s nothing wrong with the Italian economy that can’t be fixed. That was the judgment delivered by the ratings agency Standard and Poor’s on Tuesday, even as it cut the country’s credit rating from A+ to A and slapped it with a negative outlook. The problem, S&P explained in its report, is that it’s unlikely the country’s politicians have what it takes to provide the overhaul the economy needs.

Italian Prime Minister Silvio Berlusconi was quick to dismiss the downgrade as “influenced by political considerations.” And in at least one sense of the phrase, he was right. The ratings agency described Italy as having “a diversified economy and few external imbalances,” one in which “both household and corporate balance sheets” were “relatively strong.” The country’s heavy government debt should be manageable, if not for an entrenched ecosystem of competing economic interests that have become so entangled they not only strangle the country’s growth, they cut off any efforts at reform. “Even under pressure, Italian political institutions, incumbent monopolies, public-sector workers, and public- and private-sector unions impede the government’s ability to respond decisively to challenging economic conditions,” the report concluded. “With elections due in 2013, and the government’s parliamentary position tenuous, it is unclear what can be done to break the deadlock between these political institutions and the government.”

Read the rest.