20090621 - Il Sole 24 Ore LESSONS FOR THE FUTURE Passera: Italy without vetoes: the peaceful revolution Address

> page 2

Italy without vetoes: the peaceful revolution

Common-sense and merit can put an end to the countrys traditional corporations and guarantee the community Just like a watch: if just one of the economys engines comes to a halt, growth is prevented. A watch, like the economy, works thanks to the interdependence of a series of mechanisms, each of which constantly requires rewinding. Tax incentives. A policy that rewards research Inefficiencies. They can be easily overcome at zero cost with enormous advantages Corrado Passera Right across the world, the governing classes have one fundamental priority, namely to relaunch growth and recreate trust in the economy in order to get out of the serious current crisis and prevent it from spiralling into a depression. While a great many questions require global answers (first and foremost the Global Legal Standard), and common European policies need to give the necessary impulse to the re-launching of economic growth, each country has its own specific needs. Italy clearly possesses a good range of resources and forces it can use in such circumstances, and it has undoubtedly fared better than many other nations during the present crisis; however, it still needs to find new ways forward, since it has been particularly affected by the fall in international demand, and because it has recently experienced a long period of insufficient growth. If we fail to kick-start a new phase of substantial, sustainable growth, things will become even more serious: a great many companies that are still managing to survive, will eventually run out of resources; unemployment will reach intolerable levels; the South of Italy in particular will be faced with dramatic social problems; and the countrys public accounts will get completely out of hand. We need to create conditions for growth regardless of whether the global recession continues which is a distinct possibility or is indeed tempered, as certain faint signs would now seem to indicate. Competition is going to increase in all sectors of the economy right across the world, and if we do not prepare the national economic system for this challenge, then we could fail to take as much advantage as other countries do of the next period of economic growth, or we may have to pay more than the others for the

persistence of the present recession. I personally believe that we can do a lot, and quickly, in order to favour a new phase of economic growth in our country. We need to adopt both contingency and structural measures that take account of the states financial constraints, and to capitalise on those measures already taken by government in recent months. We need two instruments in order to reactivate this new phase of growth: a medium-term plan to be implemented in a consistent manner, and a positive shock capable of quickly halting the economic downturn. Sustainable growth is the combined result of a series of interrelated, interdependent factors, and an enormous common effort. If we want to have a strong economy and a stable society, then we need to work, in the mediumterm, on all the principal factors at one and the same time. In general, the decisive factors of growth are company competitiveness, the competitiveness of the national economic system, and social cohesion and dynamism. The competitiveness of companies depends both on their capacity to innovate and globalise, and on their size and their economic and financial weight. The

competitiveness of the national economic system, on the other hand, is connected above all to the quality and quantity of the countrys infrastructures, its educational and research system, the efficacy and efficiency of the public administration, and the solidity and legitimisation of its rules and regulations as expressed, ultimately, by the countrys legal system. Social cohesion, which for the umpteenth time is proving to be just as important as competitiveness (so much for the Social Darwinists of this world!), is in turn determined to a considerable degree by the workings of the welfare state, and in particular by all those mechanisms that remove present and future fears: mechanisms such as the health system, the social insurance system, redundancy schemes, aid to the weaker sections of society, and volunteer solidarity networks. Then there is dynamism that is, the quantity of energy that society and the economy are capable of releasing - which can help compensate for other failings. This dynamism derives from a combination of several factors, although two such factors are of fundamental importance, namely

social mobility - both vertical and horizontal and all forms of meritocracy. The four engines of growth may all accelerate at the same time, but if just one of them stalls, then the whole economy will grind to a halt, just like a watch which can only function thanks to the interdependence of its various mechanisms, all of which require constant maintenance and daily winding. Together, these engines contribute towards recouping, and in indeed strengthening, faith in the system. Many observers are clear about what Italy needs to do, and their views often coincide. The tragic thing, however, is that for years now many of those things that we should be doing are simply not happening. There are a great many Italian companies that are competitive in various different sectors. Proof of this is the fact that Italys share of international trade has held fast over the years, even during the recent period of the strong euro. However, too often a great many other companies are simply not big enough or strong enough to compete in what are increasingly globalised markets. Instead of encouraging growth, Italys economic system is becoming a serious burden and constraint on it.

There are too many sectors in which the market and market competition fail to realise their potential. The development of all forms of infrastructure is being intolerably delayed. We possess a poor educational and training system which on the whole fails to satisfy the requirements of the labour market, and continues to add to the numbers of the unemployed. We have a public administration which, with very few exceptions, tends to paralyse decisionmaking. The judicial system, for its part, can no longer be defined as such, since the timescale of its decisions no longer corresponds to the needs of individuals, households or companies; as a result, our society, bereft of this vital regulatory framework, is coming apart at the seams. On the other hand, we do possess a greater degree of cohesion, and thus of resistance to hardship and difficulties, than that of many other countries. The survival of the family and of local communities, together with an expensive welfare system that, although it needs to be rendered more efficient, is nevertheless suitably effective on the whole, has shielded us from the effects of social hardship which elsewhere have reached

intolerable levels. This welfare system, however, needs to increasingly integrate with the services sector, and in particular with the nations many social enterprises. As far as dynamism is concerned, Italy unfortunately finds itself towards the bottom of the international league table: Italian society reeks of immobility in all directions, and the selection process is often not based on merit at all. Italian society is one in which castes, corporations and interest groups operate virtually through cooption alone, and the anachronistic marginality of entire social areas first and foremost that of women contributes to the overall level of mediocrity. If we want to be an open, democratic society, one which it is worth being a member of, and if we want to grow and develop in an economically and socially sustainable manner, then we need to move in all four directions, in the knowledge that the most profound results in terms of the efficacy of our education system, for example will only come about as the result of years of consistent effort. However, while we work towards medium-term targets, we can also achieve significant results in the shorter

term. So how do we go about providing the necessary positive shock to the system, and embarking on a new phase of stable growth? We take it for granted that the redundancy and welfare support schemes designed to deal with increasing unemployment and social disadvantage are adequate: were this not the case, then we would certainly have to start from here. Apart from public measures, rightly implemented in order to stimulate demand in certain specific sectors, if we wish to reactivate the business cycle once again we need a broad phase of private and public investment to create new forms of competitiveness and employment as soon as possible. As regards private investment, we need a policy of tax incentives that effectively and specifically reward those firms, both large and small, which invest in R&D, new technology and markets, which capitalise, and which consolidate through mergers and acquisitions. In fact, there has never been any greater need than now to use fiscal measures in order to accelerate the principal engine of growth and employment, namely the competitiveness of firms. With regard to this, it is comforting to hear speak of a third Tremonti law.

With regard to public investment, on the other hand, we need to start with the nations infrastructures, ranging from the telecommunications networks (in particular the broad-band systems) to the motorways network, from the ports to the logistic hubs, from the regional railway networks to the HighSpeed Train system, from waste-to-energy plants to gasifiers, from water supply systems to soil protection works, and from the nations schools to its hospitals, prisons and museums. In many cases, new infrastructures are required, while in others existing infrastructures require maintenance or upgrading work which can be carried out very quickly. Some of these items apparently concern the matter of human dignity alone, but they are all direct or indirect engines of growth and employment. While current expenditure continues to rise, the states capital expenditure has been virtually obliterated. The share of expenditure on investments, in relation to GDP, has returned to the 1998 level. It is this item of expenditure that represents the countrys future. We need to raise investment on infrastructures by at least 3% of GDP if we are to bridge some of the accumulated gap,

and to reduce the enormous cost of inaction. In order to kick-start the economy once again, we need to invest something like 250 billion euros over the course of the next five years. These are large sums, of course, but we should not be afraid to spend them, since we can manage to do so without endangering the nations finances. A large number of projects are self-financing, and can be covered to a substantial extent by private investment. Motorways, waste-toenergy plants, ports and many urban projects that envisage the valorisation of stateowned areas and properties, are examples of measures which it should not be difficult to fund through private investment, provided that the duly simplified authorising procedures are put in place. There are many such projects that would attract private investors: 25-35 billion euros of such funding could be found I think. European funds provided we know how to, and wish to, use them could represent an important contribution to the aforesaid investment requirements. The European Investment Bank alone has earmarked some 15 billion euros, and then there is the 50 billion euros made available by the Seventh Framework

Programme 2007-2013, of which we risk not receiving a share commensurate with our weight in Europe. Some of the funds at least 50 billion euros have already been included in public funding plans (for the Italian State Railways and for ANAS the Italian Autonomous Roads Corporation - for example) as well as in recently approved plans (CIPE Italys Interministerial Committee for Economic Planning), or will hopefully be included in coming budgets. A further 50 billion euros may be forthcoming as a result of the rationalisation of current government spending on public works. How can we reach the figure of 250 billion euros, which is the investment required in order to create millions of jobs and strengthen Italys global position? Why cant we earmark 1% of public expenditure, to be recouped through the reduction in the enormous wastage still clearly present, to such a project? In this way we could recoup 40-50 billion euros of funding over a five-year period. Could we not then allocate 0.5% to public heritage per year, in order to create the said infrastructures? Thats another 50 billion euros that is available. Could we not assign 10% of the embarrassing amount of evaded

taxation still present in many sectors of the economy? This could provide another 50 billion euros for muchneeded investment. We all know that it is not easy mobilising sums of this entity; however, if there is sufficient will to deal with the current national crisis, then the target of 250 billion euros over five years is well within our grasp. If we wish to relaunch economic growth through the large-scale structural reinforcement of a national economy characterised by its good balance of industry, agriculture, tourism and services, the most difficult problem is not one of money, but of a decision-making system that is in fact paralysed at both institutional and judicial levels, and at the level of the countrys public administration. Even if we had 50 billion euros available to spend each year, we would not manage to spend it, and there lies the paradox. We all need to focus on this crucially important point, and to do everything within our powers to see that it is partially or definitively resolved. If we fail to remedy the present situation, then our country will be as good as finished. Five institutional levels, all more or less inefficient from the decisional point of view, due to the confusing overlapping of powers and

responsibilities; a myriad of other bodies with a say in everything; the need for agreement on every single decision; veto power for all concerned; extremely lengthy procedures that may always be appealed against; the lack of responsibility for those decisions made or those vetoes employed. Each decisional step taken is incredibly slow and energy-draining, and all of this hinders growth and employment, impedes the necessary recovery of productivity, facilitates corruption, dissuades foreign investors, represents a ball and chain around the feet of company competitiveness, and results in individuals and households losing a considerable amount of their valuable time. This is where the reform of all reforms comes in: it costs nothing, and indeed it helps save money and create wealth and employment. A reform consisting of ability and common sense, the major opponents of which are going to be those who get democracy and irresponsibility mixed up in their minds, and who wish to preserve the right to impose a duty on all forms of movement. This reform is one that produces the most valuable form of capital, that of trust. The simplification, clarity and trustworthiness of the

rule of law, the clear identity of the decisionmakers, the shortening of the decisional chain, the full application of the principle of responsibility, a drastic reduction in the chance of veto-powers overlapping a priori, together with the strict, objective assessment of actual results, a process of modernisation spurred on by the utilisation of democratic management tools, and a whole series of other instruments that would not bear unnecessarily upon state finances and institutions, but would act as a dynamic catalyst for the benefit of the entire economic system. Credit: at the present moment in time, credit is the only positive variable that is still growing. The banks, just like all other players, can, and must, do more than they have in fact been doing. More courage is needed to take out loans now than was the case two years, or even one year, ago: however, if entrepreneurs do have the courage to invest, then banks should also have the courage to lend. We should be wary of creating unrealistic expectations however: credit mainly finances turnover and investments, and both items are falling dramatically at present: the credit trend is not an independent variable. Bank rates are at an all-time low, as are

banks margins, due among other things to the fact that the cost of medium-term bank deposits is still at its highest level. Losses on loans are at their highest level, as is the tax burden. The banking equation should be of concern to everyone; if high-street banks were to weaken beyond a certain point, the entire system would be heavily affected. Italys banks are generally considered (by foreign observers) to be those that have managed to avoid finance for finances sake more than others, thanks largely to good rules and supervisory practices, and that are involved to the greatest degree in financing business enterprise. However, I must underline the fact, once again, that even the banks know they have to make further improvements, and as such are ready to play an important role in the re-launching of Italy and the Italian economy. To sum up then, if we do not make substantial efforts, we risk a yet lengthy and serious recession, or at the very least, we risk missing the next boat. Italy can grow more than it currently is, but

it needs a multiyear plan that will structurally reinforce the country, and in the short term it requires a positive shock capable of stopping the current downturn. Numerous measures have been taken to deal with the emergency in recent months: we can now work towards creating a new phase of economic growth. This task shall involve everyone: the private sector, the public sector, and the service industries. It would be absurd to let the state-market pendulum continue swing from one extreme to the other, as we have done in the past. One of the many lessons we have learnt from the present crisis is our awareness of the damage that all forms of fundamentalism including that of the pure market can cause. The present challenge is to a certain extent unique, in that it could affect the quality of our democracy, and as such is one that requires courageous, shared decisions. The author is Chief Executive Officer of the Intesa Sanpaolo Group.

THE FIGURES 250 billion euros The required investment The figure which, spread out over five years, would re-launch the Italian economy 25-35 billion euros Private funding The part of the 250 billion euros global investment that could be provided by private investors 10% Recouped from evaded taxes The percentage contribution resulting from the recouping of outstanding taxes, to be assigned to investments designed to help economic recovery THE COST OF INACTION Investments in infrastructures need to be increased by 3% of GDP in order to bridge part of the accumulated gap THE NECESSARY FUNDS 250 billion euros would be required over the course of five years, to re-launch the Italian economy: this figure would not represent a risk to the nations public finances.