Italy: The Roman’s on the Edge of Default Once Again

On the old-fashioned train bringing me from Rome to Perugia, in the green heart of Italy, I have the same feeling each time I return from college in the US. I am catapulted to the past, 15-20 years behind. Boston, the Massachusetts Institute of Technology, the American start-up scene, the whole environment is just a faint memory.

I managed to get the last train ride before the general strike announced by the Unions against the new Job Act ratified by the Parliament this month. Renzi’s Labor Reform is the first step towards the modernization of the Country, but many Italians refuse to understand the benefits. A more flexible labor market would encourage investments, promote a more entrepreneurial environment and foster growth. Undoubtedly, it will push many companies out of the market, impacting jobs and social welfare: a small price to pay if the Country wants to create better, higher paid jobs in key sectors such as High Tech, Sustainable Energy, Biotech, Pharma etc. in the medium-long term.

I look at my phone and Bloomberg updates me with an unexpected jolt: “S&P cuts Italy sovereign debit to BBB-“. We are just one step away from “Junk Bond” status. I remember the words of one of my professors at LSE “Future economists will undoubtedly present Italy as the perfect example of a country which has managed to degrade from the position of a wealthy, leading industrial power just two decades ago to a condition of clear economic desertification, complete demographic unbalance, rampant unemployment, sinking cultural production and rising bribery and malpractice.”

Although Italy has had periods of growth in the past 30 years—even during the first years of the Euro—and its people remain wealthier than most other countries in the world, its standing as one of the world’s most vibrant economies is a distant memory. Three decades of political ineptitude have returned the country to where it stood in the 1980’s with no significant advancement in arts, education, commerce and technology.

The financial crisis catalyzed Italy’s demise. The country lost almost 20% of its manufacturing power (more than 40,000 companies have filed for bankruptcy in the last 5 years according to the Italian Employers’ Federation) and it is on the verge of a major financial collapse with 5 of the top 10 Banks failing to comply with minimum capital requirements according to the stress tests performed by Mario Draghi’s ECB.

However, the actual loss goes beyond the net 7.5% GDP contraction over the last 5 years. Similarly to the nervous system, where brain cells cannot be replaced once dead or damaged, the loss in production capacity, skills and capability will have repercussions for years to come. It will be particularly difficult to revitalize many of the damaged sectors, to reallocate resources – including the labor force – and to retain talent.

In fact, a similar destructive pattern applies to the educated youth of the country. Italy’s brain-drain has become increasingly dangerous with regards to both the absolute number of emigrants and to the quality of the labor force leaving Italy. Not only has the number increased dramatically but the migrating population now includes managers, businessman and start-up founders together with “classic” emigrants: researchers, scientists and doctors. It is particularly difficult to estimate how severely this will impact our economy in the future. The uncertainty that these emigrants will return and the impact that will have on productivity and innovation is difficult to quantify.

As my train approaches the city of Perugia the landscape turns into the classic Tuscan and Umbrian painting of a sweet countryside dotted by medieval cities. Italy still has much to work with and there is more that the Erasmus generation can bring to the table. But we must act fast.

Alessandro Piccioni, Italy


Alessandro, 27 yr-old from Perugia (Italy), holds a BSc in Economics from the University of Perugia and a MSc in Accounting and Finance from the London School of Economics. He is currently an MBA student and a Teaching/Research Assistant at MIT. Most recently, Alessandro worked at Goldman Sachs in the Miami office focusing on Alternative Investments in South America. Prior to that he worked for Bain & Company in the Private Equity Group and in the Financial Services practice. As an undergrad he was the Co-founder of a APY Inc., non-profit organization active in the sport event industry.

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