This article originally appeared in
5 Mar, 2008
  Italy on the precipice

Does the current political and economic crisis in Italy mean the country is in
danger of becoming the world's wealthiest failed state, ISN Security Watch's
Eric J Lyman asks.

Commentary by Eric J. Lyman in Rome for ISN Security Watch (5/03/08)

Italian news reports out of Naples most nights tell a putrid tale of rotting mounds of
garbage and uniformed military patrols in the streets. Meanwhile, Italy has been without
an official government for more than a month after the previous one crumbled when a
single figure - under investigation for corruption - withdrew his support.

Credit-rating agencies have downgraded the country's debt to within two steps of junk
bond status; unemployment rates in the country's south are the highest in western
Europe; government statistics are notoriously unreliable; citizens' expectations for the
government are near an all-time low; organized crime controls huge swaths of
territory; the justice system lacks authority; and economic growth prospects are grim.

It's fair to ask whether Italy is on its way to becoming a failed state.

This is not a notion to consider lightly. A failed state is one in which the central
government is too ineffective to exert practical control over its territory. The think tank
Fund for Peace and Foreign Policy magazine publish an annual index of such countries,
which last year included 32 members, headed by Sudan, Iraq and Somalia.

According to World Bank figures, only two of the 32 states on the list last year have a
per capita GDP even 1/12 the size of Italy's. None participate in international
peacekeeping efforts, as Italy does. None have a foreign aid budget. None use the
euro currency. None sit on the United Nations Security Council.

But there is no doubt that the situation in Italy is becoming extreme enough to rethink the
way such terms are defined.

An ungovernable nation?

When Romano Prodi resigned as prime minister in January, Giorgio Napolitano, Italy's
head of state, called on the president of the Italian Senate, Franco Marini, to head a
temporary caretaker government charged with passing an electoral reform that would
make the government more stable. The vast majority of Italians - on all points along the
political spectrum - agreed that this was imperative.

The attempt failed. And so Italians will go to the polls in April with little chance of
electing a government that will last for its full term.

"We all agreed that for too many years we've been living in a country that has no
equals in the world in terms of its incapacity to govern and make decisions," Luca
Cordero di Montezemolo, the head of the country's main industrial association,
Confindustria, said after consultations with Marini. "Italy has been for too many years
an ungovernable nation, like few others in the world."

Beppe Grillo, a political comedian and social commentator, put it more succinctly:
"Please, invade us," Grillo has pleaded to the rest of the world. "We need your help!"

The politics of economics

Estimates place the size of Italy's black market economy at anywhere between 25
percent and 45 percent the size of the official economy. As such, using a mid-range
estimate means that if the unofficial parts of the economy were figured in, Italy would
leap from the world's seventh largest economy to the fourth. But oft-reported fact
obscures the reality that Italy really was the world's fourth largest economy a decade
and a half ago, without anything extra.

That slide is thanks to anemic economic growth that has trailed the European Union
average in 13 of the past 15 years. Productivity has remained more or less flat since
the early 1990s. The country has inherited monetary stability thanks to the adoption of
the euro currency in 2002, but the inability to periodically devalue the currency as the
country did regularly with the old lira has severely damaged the competitiveness of
most Italian exports.

"The economic problems in Italy are absolutely connected to the political issues,"
Franco Pavoncello, the president of Rome's John Cabot University and a frequent
commentator, told ISN Security Watch.

"It's no secret that Italy has been in need of a wide array of structural changes for
many years, but there's been no government with the stability and the mandate to force
these changes."

The April vote is unlikely to solve much. Without the electoral reform Marini worked to
pass, the side that wins will likely be backed by a fragile coalition that will shift in and
out of a crisis mode for most of its tenure.

As far as the health of the political system, it is telling that one of the biggest news
events of the political season came when one candidate - former Rome mayor Walter
Veltroni - attracted disbelieving newspaper headlines simply by declaring that no
convicted felons would appear on his list of parliamentary candidates. (Indeed, before
it was dissolved in the wake of Prodi's resignation, Italy's parliament included 27 felons;
some five dozen others were under criminal investigation.)

Veltroni's prohibition would not quite eliminate his main rival, billionaire media tycoon
Silvio Berlusconi, who has sidestepped dozens of criminal charges over the last 20
years and who convinced courts to suspend two more criminal cases against him so
that he could campaign full time.

"Italy is not a market economy, it is a relationship economy," Giovanni Canepa, the
director of the executive committee for the think tank Glocus, told ISN Security Watch.
"The system is uncompetitive by nature, based on connections rather that merit. You
see the same faces and ideas over and over again for years, whether it's in politics or

On the precipice

The lack of fresh ideas in a country like Italy may seem out of place to casual
observers accustomed to Italy's flair in the fields of design or fashion. But according to
Alberto Mingardi, author and co-director of Milan's Bruno Leoni think tank, the lack of
competitiveness and innovation in may sectors stems directly from whether or not
those qualities have been required by the free market.

"In the early 1990s, 70 percent of the Italian economy was controlled by the state,"
Mingardi told ISN Security Watch. "Today, the least innovative big companies in the
economy are those former state companies that for most of their history were
guaranteed a market by their monopoly status. These companies often struggle with
competition today. But in sectors like design or fashion, companies had to innovate to

Still, Mingaridi assesses the situation in Italy as "grave but not serious" - an apparent
contradiction that, all things considered, probably sums up the situation well enough.

He points to the numbers of thriving small- and medium-sized businesses, the prospect
that an electoral reform will pass at some point, and the state's decreasing role in the
economy as signs that the situation in Italy will eventually improve.

"I believe the changes that are needed will eventually be made," he said.

The majority of commentators and expert observers agree. However bad the situation
in Italy becomes, and however close the country seems to inch toward becoming truly
ungovernable - toward the cusp of becoming the world's first wealthy failed state -
few predict it will ever get to that point.

"When things are at their worst, that's when Italy starts to make things happen," John
Cabot's Pavoncello said. "Nobody thought Italy would qualify to adopt the euro, but the
country put its accounts in order and it made it. Of course we relaxed afterwards. We
said, 'We did it, we're in. Now let's go to the beach.' That reaction is partially
responsible for the current crisis situation.

"Italy may be approaching the precipice," Pavoncello went on. "But it's never wise to
underestimate Italy when it is near the precipice."

Eric J. Lyman is ISN Security Watch's senior correspondent in Rome.

The views and opinions expressed herein are those of the author only, not the
International Relations and Security Network (ISN).