The Failure of Berlusconi’s Free Lunch Economics

The New Economist predicted the failure of the Berlusconi coalition:

But these all take second place to Silvio Berlusconi’s central crime since his coalition came to power in May 2001: economic mismanagement. As the German economy has steadily improved its competitiveness and boosted exports in recent years, Italy has lost a lot of ground.

This post notes the incredibly low GDP growth even in the face of rising government spending.

Francis Rocca of NRO similarly suggests that Berlusconi fared poorly because of the economy:

With growth at barely more than zero, unemployment over 8 percent, and the national debt at 108.5 percent of GDP in 2005, Italians are scared. The manufacturing industries that were the engine of Italy’s boom in the 1950s and 1960s, and which are largely responsible for its position today as the world’s seventh biggest economy, now face fierce competition from China and other East Asian countries. A rapidly aging nation with one of the lowest fertility rates in the world, Italy urgently needs to reform its pay-as-you-go pension system and rationalize its immigration policies. Of course, this is not all, or even mostly, the fault of Silvio Berlusconi.

So beyond increasing in government spending from an allegedly conservative government, what were Berlusconi’s economic policies? Almost a year ago, the International Herald Tribune had this rather prophetic article:

Elected on a growth platform, Berlusconi promised the kind of liberalizing initiatives that Margaret Thatcher gave Britain in the 1980s. Four years into his second term as Italy’s prime minister, the public sector remains badly bloated and the crisis in the country’s pensions system has, if anything, deepened. Last week, Italy fell into recession for the second time in two years, even as Germany, another struggling economy, showed better-than-expected growth. Berlusconi “promised a new economic miracle but the situation actually got worse,” said Francesco Daveri, an economics professor at the University of Parma. Odds of a turnaround seem remote. Italy’s productivity has been slipping since 2000 and for experts like Daveri, Berlusconi’s lackluster economic record adds up to likely defeat at the next election. “People don’t want to be fooled by promises,” Daveri said. Nonetheless, Berlusconi has stuck by some pledges, for example by raising the retirement age to 60 from 57 in the face of opposition from unions. He approved tax incentives for small companies to merge with each other and better financing for research and development to help Italian competitiveness. Berlusconi is also credited with keeping the country’s joblessness under control. About 8 percent of Italians are unemployed – more than the 5 percent in Britain but far fewer than rates above 10 percent in Germany and France. Even so, changes have been less remarkable and less effective than promised. Italy’s economy last year grew at 1.2 percent, well under the euro zone average of 2 percent, and the country’s manufacturing base is not evolving fast enough toward high-technology manufacturing to compete with Asia’s powerhouses.

Berlusconi has been compared to Bush in several ways. Thatcher & Berlusconi and Reagan and George W. Bush: tax cuts not offset by reduction in government spending sold as free-lunch supply-side economics. Sorry – but I could not resist this analogy.