Amid Institutional and Money Problems, Italy Is Nearly Prostrate

Amanda Knox with her mother and sister at a press conference in Washington on Oct.4, 2011 Michael Hanson / The New York Times-Redux

Italians are no different from other nations: like squabbling families, whatever they may say about their faults, they deeply resent it when outsiders start to list them. This summer’s descent into political chaos and economic woe has turned Italy’s always strong collective inferiority complex almost into self-hate. Last week, in a bizarre kind of national catharsis, Italians vented their frustrations in an explosion of anti-American prejudice.

The Perugia murder trial of Amanda Knox and her Italian boyfriend, Raffaele Sollecito, was the spark. It had showed the world Italian justice at its slipshod, conspiratorial worst. The clearer it became that the forensic evidence had been bungled and the prosecution flawed, the more Italians felt themselves to be in the dock. What went wrong was all too familiar. In Italy, investigations are conducted by a prosecuting judge instructing the police (who are also allowed to conduct unrecorded interrogations). Since the judge in charge of collecting evidence also conducts the prosecution in court, he will be out to confirm the findings. The system is so open to challenge that nearly half of criminal convictions fail on appeal, even those where there is scant cause for “reasonable doubt.”

You might therefore have expected that Italians—who have scant faith themselves in the Italian judicial system—would have seen Knox’s acquittal on appeal as somewhat restoring national honor. On the contrary, vox pop is seething over Knox’s acquittal, absurdly insisting that she was freed only because she was American (although Sollecito was acquitted too), and because she, unlike most Italian defendants in criminal cases, had the money to pay for independent forensics experts. The millions Knox is expected to make from her judicial ordeal didn’t help: for socially conservative Italians, this was brash American commercialization of a human tragedy, the still mysterious murder of Knox’s British flatmate, Meredith Kercher.

Above all, what made this Italian outcry so bitter is that the case had become a cloud the size of a national obsession, a parable of everything that ails the country. And the unexpected acquittal came at a time of maximum tension.

As recently as July, as the storm that is Greece spread through the Mediterranean, people hoped that the ill winds might do Italy some good by at last compelling its self-serving political elite to get down to actually governing, curbing the profligacy of the bloated state, and getting the stagnant economy moving. Three months, two emergency austerity budgets, and a welter of political bickering later, the only certainties are yet-higher taxes, even lower growth, and further demonstrations of private incontinence and political irresponsibility on the part of their “prime minister in my spare time,” as Silvio Berlusconi has described himself.

Even now, few Italians actually believe that their country has become incapable of helping itself. But their faith was sorely tested last week by three hammer blows to national pride. Moody’s followed Standard & Poor’s in a sharp downgrading of Italy’s credit rating, and, like S&P, cited political fragility as a contributing factor; the Kercher case collapsed; and Corriere della Sera published a leaked letter to Berlusconi from Jean-Claude Trichet, president of the European Central Bank. Trichet in effect told the Italian government how to run the country and set tight deadlines for implementing “a comprehensive, far-reaching, and credible reform strategy.”

Delivered in August just before the ECB stepped into the Italian bond market to help bring down the cost of financing Italy’s sovereign debt, the letter set out tough conditions for ECB intervention. It demanded that Italy balance its budget by 2013, a year earlier than planned and thus before, not after, the due date of the next election. It was to do this “mainly via expenditure cuts,” reducing public-sector spending through tough staff-turnover rules and wage cuts, rationalizing or privatizing swathes of Italy’s €571 billion worth of real estate and business holdings, as well as raising the pension age for all to 65. These savings must, the letter said, be cemented in place by an automatic deficit-reduction clause to ensure that any legislative slippage was made up by across-the-board cuts. But the ECB’s most radical, and politically explosive, demands were for “pressing action,” no later than Sept. 30, to remove the systemic blockages that keep Italy’s growth rate so miserably low. In a first big-bang reform, the government must, it said, immediately liberalize Italy’s notoriously closed professions, open public services to competition, reform the national collective-bargaining system to allow local-level agreements, free up the laws on hiring and dismissals and improve unemployment insurance. That should speedily be followed by performance indicators for the health service, education, and the judicial system, and abolishing or consolidating the entire useless provincial layer of government. In a kind of pincer movement, the letter was cosigned by Mario Draghi, the greatly respected governor of the Bank of Italy who takes over from Trichet at the end of this month.

This extraordinary missive puts Italy’s politicians in a dire spot. Not only does the ECB expect a revolution in the way Italy operates, but its checklist will be used not just by the ECB but by financial markets to assess Italy’s economic health. It has emboldened Confindustria, the traditionally quiescent employers’ federation, to insist upon immediate action on its own wish list—deregulation, cuts in payroll taxes funded by a small wealth tax, labor and pension reforms. But to be so publicly put under European tutelage not only offends professionals and trade unions whose perks are under fire but disturbs many Italians who broadly agree with the treatment prescribed.

Italy’s real economy, they protest, is even today far healthier than Spain’s, which has huge private as well as public-sector debts, banks that are badly compromised by its massive property bubble, and more than 20 percent unemployment. Why then pick on Italy? And why insist on a big-bang approach that, while it would boost growth long term by unleashing Italy’s entrepreneurial power, risks short-term contraction just when its main French and German export markets are weakening?

The short answer is the conviction that Italy’s politicians will do nothing at all without being kicked, hard. The Senate ganged up behind the restrictive professions earlier this year, just as the unions cling fiercely to the ironclad protections of the existing law on dismissals. Berlusconi is so entangled in lawsuits that his government’s efforts to reform the legal system lack all credibility. Yet those delays and obfuscations are a major deterrent to foreign investors.

Giulio Tremonti, the astute minister for the economy, has pounced at the chance of “big structural reform.” He is promising a 10-year growth plan by mid-October and planning ambitious sales of state assets. But Tremonti and Berlusconi have barely been on speaking terms for months and are now close to open warfare. Berlusconi outrageously suggests, through “sources,” that Tremonti colluded with the ratings agencies to embarrass him. And Tremonti obliquely hints that early elections would be better than paralysis. Something has to give: but until it does, Italy’s agony of uncertainty makes its familiar old slough of despond feel almost like a comfort zone.