Government, striking workers and employers agree economy is in crisis, writes Paddy Agnew

Is the Italian economy losing its competitive edge? In a week that started off with a fresh set of disastrous economic indicators and ended up with a general strike, that question is inevitably posed.

For months now, we have been bombarded with negative data on the Italian economy. Inflation is high (by Italian, if not Irish standards) at 2.6 per cent, unemployment is 8.8 per cent, and Italy will struggle to meet the government's forecast of a modest 0.5 per cent growth rate for 2003.

Compounding the overall negative picture of an economy bedevilled by stagnant economic growth, high inflation and a rising budget deficit, were figures released last week by ISTAT, the state statistics office.

ISTAT reports that, between August 2002 and August 2003, industrial orders dropped by 11.6 per cent and sales by 5.4 per cent.

In such a context, yesterday's general strike, called by trade unions in protest at the centre-right government's proposed reform of the state pensions system, hardly did much to relieve the gloom.

While the government, the centre-left opposition, trade unions and industrialists all have contrasting blueprints for the way forward, just about everybody seems agreed on one thing - Italy is currently facing its worst economic crisis of the past decade.

Even if international factors such as the strong euro and the post-September 11th recession have contributed heavily to the current poor performance of the euro-zone's fourth largest economy, it is at least still arguable that Italy suffers from endemic problems that could seriously undermine competitiveness in the future.

For a start, there are the environmental micro-factors. Can a country where most secondary-school children finish school at lunchtime, where computers in the classroom remains an electoral slogan, and where the minister for education "hopes" to achieve a 1-30 teacher-pupil ratio, ever hope to be seriously competitive?

Secondly, can a country where many careers are still fashioned more by "raccomandazione" and pull (familial, political or otherwise) than by merit, ever hope to be competitive?

Even if Italy were to undergo a miraculous reformation regarding education and job hire, there is still good reason for concern about the long-term economic future.

Put simply, the Italian model - one that has traditionally relied on small to medium-sized industrial concerns - may soon be heavily penalised both for its lack of investment in industrial research and also because its most successful "core businesses" now occupy sections of the global economy headed for decline.

That is certainly the opinion of Prof Gianmaria Gros Pietro, head of management economy at Turin University, a former president of state holding companies IRI and ENI, as well as current president of Societa Autostrada.

In an interview last week with Rome daily La Repubblica, Prof Gros Pietro argues that Italy has a large share of the global market in a range of goods (shoes, ceramics, glass, industrial and agricultural machinery, furniture) where growth is limited, but is absent in the markets of the "new industrial revolution" such as information technology, bio-technology and micro-electronics.

"If you look at the global shoe market, Italy has almost 15 per cent of it, but this is a sector that barely achieves 1 per cent growth. In ceramics and glass, it is the same, Italy accounts for almost 13 per cent but the growth rate is 1 per cent.

"In contrast, the information technology sector is growing by 4-5 per cent per annum but we account for less than 1 per cent of that global market," according to Prof Gros Pietro.

"We find ourselves in pole position where there is no future but we're not present where the future looks bright," he said.

It is at least arguable that Italy's post-war economic miracle was based not so much on industrial invention but more on the artisan's capacity to re-invent and reshape existing products - in short, on design. In other words, what oft was made, but n'er so cleverly or brilliantly executed.

Prof Pietro argues that the only way forward for Italy is to invest heavily in industrial research, bringing together the universities, industry itself and the banks for that purpose. An inevitable side effect of an Italian industrial miracle that relied heavily on small to medium-sized concerns has been the development of an economy that devotes little time, resources or respect to research. This could hardly be otherwise, given that small firms do not have the resources for research.

Prof Pietro also argues that Italy should move fast to prepare for the changing international scenario. He points out that, in the 43 years between 1870 and 1913, the innovative US economy increased its share of the global market from 9 per cent to 20 per cent, largely at the expense of the more old-fashioned British economy.

"If we don't change direction, Italian businesses, indeed the whole Italian system, is running a serious risk," concludes Prof Gros Pietro.