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Categorized | Economy

Italy undermined by ‘crony capitalism’

Posted on June 30, 2014

Italy’s economy has been undermined by “crony capitalism” and parts of the country’s public spending is directed to satisfying lobby groups and rent-seekers, the Italian competition authority warned on Monday.

“Crony capitalism is based on privileges, rather than merit, and aggravates inequality,” Giovanni Pitruzzella, competition authority chairman, said as he presented the group’s annual report. “It makes society static and not open to competition and innovation.”

    He continued: “Countries like Italy have favoured the expansion of public spending . . . directed to satisfying particular interests of lobbies and rent seekers”.

    The comments from the competition authority chairman could be seen as a sign of a growing awareness inside Italy that its entrenched and inward-looking business culture can be counter-productive.

    The country is often shunned by international companies, being mainly dominated by small-to-medium family-run businesses with strong ties to local and central government politics and frequent cross-holding among the bigger companies.

    Mr Pitruzzella also said that “unproductive and inefficient” government largesse was a key reason for the country’s “enormous public debt that represent the biggest obstacle to economic growth”.

    While Italy’s borrowing costs are falling, the country’s national debt has continued to rise; it currently stands at €2.15tr. The government of Matteo Renzi has set itself a goal of shrinking debt to 133.3 per cent of gross domestic product in 2015, from 134.9 per cent this year.

    However, hope of reducing the debt-to-GDP ratio, the second highest in the eurozone after Greece, will depend on an economic recovery that still eludes Italy.

    “A state like ours, that needs some €400bn each year to service its debt, has significant limits in the use of fiscal policy,” said Mr Pitruzzella, as he urged Mr Renzi to pass structural reforms and push ahead with liberalisations, forgotten in the past year due to a greater focus on political legislation.

    Even though the prime minister’s centre-left Democrats won the most votes in May’s European parliament elections, there is growing concern that his coalition is not strong enough to approve difficult legislation and kick-start growth.

    In a further criticism of Italy’s corporate landscape, the competition authority noted that former monopolists in the country “continued to have privileges established by law, thus distorting competition”. It cited as examples Poste Italiane, the state-owned postal service, and Telecom Italia, now a listed company but which was formed in the early 1990s from the state monopoly phone carrier

    The watchdog has in the past few years ruled against Poste Italiane over VAT exemptions on certain postal services and against Telecom Italia for preventing competitors from entering the market. In the past 18 months, the competition authority has imposed sanctions totalling €314m. One of the most recent actions has been a €180m fine to Roche and Novartis, after ruling the two pharmaceutical companies colluded to protect one of their best-selling drugs against a cheaper alternative.