Italy Should Heed Dutch Advice
The country would be better off if it accepted, rather than resisted, Dutch demands for reform.
The Dutch government is criticized in the international media for resisting EU grants (it prefers loans conditions on reforms) to help pay for the economic recovery in coronavirus-struck Southern Europe. But the critics are oddly incurious about the Netherlands’ motives.
An editorial in Monday’s Financial Times is typical. It accuses Prime Minister Mark Rutte of singlehandedly putting the EU economy at risk, but it resorts to stereotype and innuendo to explain why he’s unwilling to sign off on a €750 billion recovery fund: the Dutch are stingy and Rutte is worried about losing voters to the Euroskeptic right. (He’s never been more popular.)
Mr Rutte pays lip service to the idea of a stronger, geopolitical Europe but is unwilling to accept the price tag that comes with it, especially with national elections looming next year.
I single out the Financial Times because it should know better. There have been worse opinion columns in the Italian and Spanish press.
At least the Financial Times hints at the need for “productivity-enhancing reforms” in Italy and Spain, which have borne the brunt of the coronavirus pandemic. But it doesn’t say which reforms or why.
In an opinion column for EUobserver, I do.
Although more Spaniards than Italians have contracted COVID-19, Italy has had the highest death toll in the EU and its economy is projected to suffer the worst contraction: -11 percent this year compared to -8.3 percent for the bloc as a whole.
But Italy’s economic woes didn’t start with the coronavirus. Growth has been lackluster for years. Just 45 percent of Italians under the age of 30 were in work before the pandemic, compared to a eurozone average of 63 percent. Of those, eight in ten could only find a part-time job.
Italy spends less on tertiary education that its neighbors. The result: only 27 percent of Italians in their thirties have a higher degree, the second-lowest rate in the eurozone, where the average is 40 percent.
Real incomes for Italians of all ages have barely grown in two decades. The Italian economy as a whole was a miserly 4 percent larger last year than in 2000. The Dutch economy expanded 30 percent in that period.
Many Italians blame the EU. Since the days of Silvio Berlusconi, Italian politicians have consistently blamed outsiders for everything that ails the country. Self-criticism is rare.
Italy is a net contributor to the EU budget, but the difference between what it pays in and takes out is .3 percent of its GDP. That can’t be the reason it’s not doing well.
Nor is it the case that Italy has faithfully implemented EU policies. Every year, it predictably ignores the recommendations of the European Commission, which include:
- Simplifying the tax code and shifting the tax burden away from capital and labor and toward consumption and property.
- Using windfalls to reduce the national debt.
- Investing more in education, job training and requalification services.
- Improving the efficiency of the justice system to tackle corruption and attract foreign investment.
Italy is one of the worst rich countries to start and run a business in. Getting credit and permits, enforcing contracts and resolving bankruptcies is expensive and takes a long time. This benefits well-connected incumbents and drives a considerable amount of economic activity into the informal sector.
Licensing requirements make it almost impossible for young Italians to start a career as a lawyer, notary, pharmacist or even a taxi driver. The result is a two-tiered labor market where young workers can’t find job security and older workers are expensive and impossible to lay off.
The current government, a coalition of the center-left Democratic Party and the populist Five Star Movement, hasn’t made the situation much better by:
- Cutting taxes for professionals and entrepreneurs without cutting spending to pay for it;
- Granting a special pension to certain cohorts of workers;
- Passing a €20 billion tax-evasion amnesty;
- Proposing to abolish all limits on the use of cash, which would further ease tax evasion; and
- Watering down the imperfect labor reforms of the last center-left government (which, at the insistence of trade unions, did not even apply to anyone in work, but only to new contracts).
It has no plan for reform. The only thing the ruling parties agree on is that they want more money from the EU. How to spend it is another matter.
The Democrats argue for investing in infrastructure. The Five Stars have opposed grand infrastructure projects in the past, arguing they are wasteful and damaging to the environment. They would prefer tax cuts.
Prime Minister Giuseppe Conte has called for investments in the green economy and reform of the justice system. That sounds like a step in the right direction, but it’s not yet a plan.
Compare Italy to the Netherlands, where corruption is virtually non-existent, half the people in their thirties have a tertiary degree and the pension system is so well-funded and -run that it is considered the best in the world.
All the major Dutch universities rank in the European top 25. The first Italian university on the list, the Sant’Anna School of Advanced Studies in Pisa, comes in at 64.
Youth employment was 78 percent in the Netherlands last year. Many Dutch workers under the age of 25 are on temp contacts as well: 67 percent. But the share falls dramatically in the 25-to-44 age group, to 19 percent. More than two-thirds of those 25 and older have a stable job.
Dutch workers aren’t easy to fire either. When you add up all forms of employment protection, Italy and the Netherlands score about the same. Yet 11 percent of Dutch workers change jobs every year against 7 percent of Italians. Labor productivity in the Netherlands is higher.
The Netherlands is considered economically freer than Italy, ranking fourteenth in the world. Italy is at 74. The Dutch could ease up on entrepreneurs. According to the World Bank, it’s not that much easier to start and run a business in the Netherlands than it is in Italy.
The Dutch have almost the same political system as the Italians, with myriad parties and constantly shifting coalitions. Rutte is on his third cabinet, which is the Netherlands’ twenty-ninth since the war — not as bad as Italy’s 66, but still high by Western standards. Few Dutch governments sit out their four-year mandate. Yet there is a seriousness to Dutch politics which is lacking in Italy.
The Dutch have their own populist clowns (Thierry Baudet and Geert Wilders), who try to turn every parliamentary debate into a spectacle. But few mainstream politicians take the bait. Compared to political interviews on Dutch television, Italy’s look like a gameshow.
Dutch politics isn’t perfect. A big scandal this year has been that the tax agency wrongly accused hundreds of parents of drawing child subsidies they didn’t deserve, forcing them to pay back thousands of euros they were in fact entitled to.
But it’s notable that one of the lawmakers who unearthed this injustice is a member of the ruling Christian Democratic party and now a contender for its leadership. The government didn’t try to hush things up, but appointed a commission, led by a former justice minister, to investigate, which demanded that the wronged parents be paid back in full.
Willingness to reform
When systems don’t work, the Dutch reform them. They replaced their government-run health care system in 2006 with a private insurance system to cut costs and reduce waiting lists. An overhaul of the tax system is due next year. Four tiers of income tax will be folded into two. Taxes on labor will be cut and taxes on pollution and wealth increased. The government raised tuition fees in 2015, but now that research has found this puts undue stress on students, all but one of the major political parties want to go back to the old system.
The Netherlands takes EU policy recommendations seriously. In 2018, the European Commission advised the country to clamp down on international tax evasion and extend disability, unemployment and old-age insurance to the self-employed.
The Dutch for years enabled multinational corporations to avoid paying taxes in their home countries by registering an address in the Netherlands. This will end in 2021. (The Financial Times still accuses the Dutch of “poaching” the tax revenues of other countries.)
Earlier this year, employers and trade unions agreed that freelancers would be obligated to buy disability (but not unemployment or old-age) insurance; a compromise the government is expected to ratify.
This is what a functioning political system looks like. The Dutch are willing to reform and willing to listen. The Dutch approach of involving all relevant stakeholders in making policy can slow things down, but it also means that once a decision is reached it usually has broad support and is actually implemented.
In Italy, by contrast, governments frequently make decisions which are ignored by lower authorities or overturned by their successors.
Italy doesn’t have to become the Netherlands, but it couldn’t hurt its economy if it tried to become a little more like the Netherlands.
If it doesn’t want to, that’s Italy’s choice. But then it can’t expect the Dutch to still give it tens of billions of euros.