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Are we the new Italy?

Our economy is suffering the same problems of low growth and poor productivity experienced by our Italian neighbour

Image: The New European

In 1987, Italy’s economy overtook the UK’s. The so-called Il sorpasso (the overtaking) was a temporary phenomenon, in part caused by currency movements, and it happened at a time when the British economy was swallowing some extremely bitter Thatcherite “medicine” for the British economy.

Italy soon fell back and now there seems no chance of it ever really regaining its place among the large economies of Europe. For all its strengths – it is still the second largest manufacturing country in the EU – it is not in the same league as France or the UK, and certainly not Germany. It has been called the “sick man of Europe” for so long now that it is a bit of a cliche.

How has this happened? Because Italy, once one of the most dynamic economies in Europe, has failed in the last few decades to build on its strengths and has suffered decades of relative economic decline in return. The long years of Italian sluggishness are a lesson in what can and will go wrong for countries that fail to adapt.

Italy has been damaged by low growth and poor productivity, bad government, political instability, regional disparities and a failure to adopt new technologies.

Sound familiar?

The Italian economy, like those of France, Germany and many others, made a miraculous recovery from the damage of the second world war. Helped by the Marshall Plan, which kickstarted the boom, it grew by more than 5% a year for almost 20 years, from 1955-1974. But then growth started to slow, and between 1995 and 2019, Italian growth has been at a terrible average of just 0.68% a year.

But the UK also now has a long-term productivity problem. Since 2008, it has been running at less than a quarter of its usual trend rate. This is only the case for 15 or so years – compared with 30 years in Italy – but what makes this so worrying is that the government seems to have no idea what to do to improve things.

In many instances, it seems almost to be deliberately trying to make things worse – by limiting immigration, erecting barriers to trade with the EU or running down the apprenticeship system.

What the economy needs if it is to grow faster is a well-functioning government, massive levels of investment by both the public and private sector, better training and education and far better management.

But investment by British firms has flatlined since Brexit, foreign investment has fallen and the government has slashed so many jobs that even the accountancy profession is complaining that HMRC is so inefficient and understaffed that it is stifling the creation of companies, jobs and wealth.

We are still nowhere near the levels of tax inefficiency that Italy is famous for, but we are heading their way. Given that we have had a chancellor avoiding tax, a PM’s wife who was a non-dom, billions of Covid loans that have just disappeared, and billions more wasted on crony contracts for PPE, it is getting a bit rich for us to look down on the Italians’ black-market economy.

Italy may also have become a byword for political instability, but if you think that the unique British constitution and its first-past-the-post electoral system is a guarantee of stable, consistent, reliable and professional government, you haven’t been paying attention recently. Yes, the Italians have had five prime ministers since 2016. But guess what – we have had five too, along with six chancellors, six foreign secretaries and seven home secretaries, all from the same party but with completely different policies. We have had Boris Johnson, who could out bunga-bunga Silvio Berlusconi, and Liz Truss, whose mini-budget made Mariano Rumor’s disastrous pension reforms look like a model of fiscal responsibility.

Yet unlike the days of Il sorpasso, this does not look like a temporary loss of direction or an unexpected aberration that will soon pass.

Until the government puts Britain back on the right course, what are the chances of British or foreign companies investing in the UK? The collapse of inward investment is extremely damaging, Britain is now seen as too risky to invest in and France has overtaken the UK as the top destination for foreign investment in Europe. The UK had been No 1 for years.

Education would be one way out, but the government has cut spending on pupils – another austerity measure with no logic to it – and has created a worse apprenticeship system than the one got rid of in 2016. It has failed to replace the Erasmus scheme with anything similar, and its stupidity over the Northern Ireland Protocol has led to thousands of research grants being lost by UK universities as the EU has blocked them from the Horizon scheme. Threatening to limit foreign student numbers at universities is just another own goal, coming just as many continental colleges have started teaching in English to attract more students.

Then we have other things in common with Italy. Regional disparities are far too high, and there are far too many small family-run firms – badly managed ones at that.

In Italy, the industrial north is wealthy, and the agricultural south is poor. In the UK, London, the south-east and the odd island of prosperity such as Edinburgh and Bristol are among the richest parts of northern Europe, but they sit right next to whole regions that are among the poorest.

Levelling up by giving taxpayers’ money to Tory constituencies not only isn’t going to work, but would be condemned as corruption if it happened in Italy. Regional disparities mean massive levels of support for much of the economy, wasted resources and an economy that overheats easily as the few wealthy areas over-expand, meaning the government has to stand on the brakes when many areas are hardly growing at all, just to contain the hot spots.

Just as in Italy, increasing numbers of people are returning to live with their parents as they cannot afford to buy or even rent in the UK. The lack of labour mobility and wasted talent as the young have to take local jobs rather than more distant ones they are better qualified for, acts as a drag on the economy.

Family businesses are a problem, as Italy and the UK have found to their cost. There are many exceptions, but family businesses – especially ones run by family members rather than professional managers, as 80% are in the UK – tend to be badly run, and in many cases, they are uninterested in expansion, risk-averse and inefficient. They also often fail to attract the best people.

Finally, for all the talk of a green industrial revolution, it is obvious that the UK is losing the race to be a leader in new technology, echoing the failure of Italy to grow by adopting new ways of working over the last 30 years. Just look at the billions that the US and EU are throwing at the new green, carbon-reducing industries and technologies and compare that with the collapse of Britishvolt. Once again, the UK is failing to ride the latest hi-tech wave of potential growth.

The UK still has advantages that Italy doesn’t have, such as much lower levels of borrowing, the English language and many excellent universities. It has the science base and large multinationals necessary to relaunch growth, and it has the room to increase borrowing to invest.

Unfortunately, we have a government that insists on undermining further education, refuses to listen to business and is obsessed about balancing the budget. The UK still has the second lowest level of borrowing in the G7 and a low tax rate. It could and should borrow more to invest, train, and educate, but it won’t.

Still, there is very little prospect of the UK being overtaken by Italy again, not because it is performing much better, but because it is performing in a similar way. Sharing problems with the sick man of Europe is not something to boast about.

But Italy is not the only competitor the UK has. If France were to get its act in order it would easily overtake the UK, and do it rather quickly. The UK and French economies have been neck and neck for decades; a few more years of Italian levels of productivity growth in the UK and we won’t be talking about Il sorpasso but le dépassement.

Being overtaken by the French… that will go down well with the Brexiteers

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