What Europe Can Learn from Italy

The Italian case proves that economic policies, whereby the rich subsidize the poor, won’t fix Europe’s problems.
March 2, 2017 • Commentary
This article appeared on Politico on March 2, 2017.

Milan — Can turning the European Union into a “transfer union” — whereby its wealthier members subsidize the worse‐​off — help alleviate the bloc’s many ailments? Or will doing so simply feed the populist fire?

To many, the heart of the EU’s economic troubles lies in its minuscule budget — 0.9 percent of member countries’ GDP — and its lack of financial autonomy from its members. You can’t have a monetary union without a political union, the mantra goes, and only petty nationalism stands in the way.

Sadly, the prescribed solution — further centralizing fiscal policy — is likely to make the EU’s problems worse.

Advocates of a transfer union have floated various proposals to achieve their goal: eurobonds, stability bonds, a European finance minister, tighter tax rules for member countries and, eventually, permanent fiscal transfers between member countries. A fiscal transfer union, they argue, would both stabilize the eurozone in the short term and create the necessary framework for the convergence of countries’ competitiveness in the long run.

But is further centralization really the answer? The experience in Italy — where similar measures have done nothing to fix the country’s problems — would suggest that it is not.

Since its unification in the nineteenth century, Italy has had a common currency and fiscal transfers from north to south. And yet, the different parts of the country have grown at very different rates.

More than 60 years ago, at the end of World War II, the per capita GDP in the south of Italy was just half of what it was in the North. In response, a newly democratized Italy pledged to address the problem and established the so‐​called Cassa del Mezzogiorno, a government fund whose purpose was to update the South’s infrastructure and pave the way for economic development.

But the fund soon became a device for channeling public spending into industrial projects in the South for which demand was, to say the least, dubious. Italy ended up funding “cathedrals in the desert” — modern facilities built to make the most of the subsidies that had no reason to exist without them.

Between 1951 and 1998, the bill for extraordinary interventions led by Cassa del Mezzogiorno reached almost 380,000 billion Italian lira (about €216 billion), a third of which amounted to direct subsidies to private investment.

And as government investment poured South, public employment in the region boomed. Between 2005 and 2007, for example, the central government yearly has taxed some €76 billion more than it spent in the North and spent some €37 billion more than it taxed in the South. To put these figures in perspective, the fiscal transfers from North to South roughly equaled the entirety of the income taxes paid in the North.

And yet, the South has little to show for all the money it received. Today, the region remains on average half as rich as the North — just as it was at the start of the project. Government redistribution may have worked well for other purposes — such as growing political consensus — but it failed to bring about economic convergence.

That this flow of money did not spark a rebellion in the North is surprising; it tells us something about the political fecklessness of the Italian political parties that purport to uphold the interests of the North. An attempt to impose a similar system of transfers in the EU would surely elicit far stronger reactions.

Indeed, the idea of transfers from wealthier to poorer regions may help to revive enthusiasm for the European project in southern countries, but calls for more “solidarity” will only boost support for anti‐​European parties in the North.

The conclusion is hard to escape. If a transfer union helped keep the peace politically in Europe it might be worthwhile – even if it did not pave the way for economic convergence. But the truth is that it’s likely to make existing tensions not better but worse.

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