Social Reform in Italy

“The faster Italy resolves its own contradictions, the greater role it will be able to play in helping Europe achieve its three main goals: political integration, institutional efficiency, and competitiveness in the global economy.” With these words, Antonio D’Amato, chairman of the Italian Business Federation, concluded the meeting with MIT and Harvard students at the MIT Faculty Club last Wednesday, January 30, which was organized by MIT Professor Thomas Lissey.

The 43-year old D’Amato has earned a law degree from Naples University and has enjoyed a very successful entrepreneurial career. The topic of his talk centered on the political and economic challenges facing Italy and Europe in the near future.

He started by highlighting what he sees as the main hurdles that could obstruct Italy’s development path: a high unemployment rate, a rigid labor market, an unusually large informal economy (about 27% of the GDP and double the average of other EU nations), a large and widening gap between the “rich” North and the “poor” South, and, perhaps most importantly, a social welfare system on the brink of collapse.
The agenda for tackling these issues was laid out, starting with the most urgent and controversial point, the reform of the labor flexibility law. In Italy, every firm employing more than 15 people can fire an employee without “a fair cause,” but if the worker sues the firm, she must be reinstated.

The firm does not have the option of compensating the worker through a severance package instead of re-hiring her. This is considered one of the main reasons why Italy has so many small enterprises that are reluctant to grow since they fear that the growth of their ranks would result in loss of flexibility and an inability to adapt to a changing market environment.

Another area that requires crucial reform, according to Mr. D’Amato, is the social welfare system. “The current system overprotects those currently using the welfare system and underprotects those who are not,” Mr. D’Amato said.

The result is that companies’ social security expenses remain very high, early retirement is becoming a worrisome trend, and young workers not benefiting from, yet paying for social security are facing an increasingly uncertain future and the whole system is on the brink of financial collapse.

The current Italian majority must address these issues quickly and decisively, Mr. D’Amato said, even though this may cost them some votes in the short term. Tough decisions and an “unavoidable social fight” are necessary trade-offs that would enable the government to increase employment opportunities, secure more wealth for its citizens and achieve a sustainable level of economic long-term growth.

Moreover, Mr. D’Amato stressed Italy’s commitment to Europe, and encouraged Italy to continue playing a leading role in strengthening the European Union. In particular, Mr. D’Amato noted the need for a harmonization of liberalization and privatization processes across Europe and the importance of creating a sense of being “European citizens” especially in light of the future enlargement of the EU to include several Central and Eastern European countries.

Professor Franco Modigliani, a Nobel Prize laureate in Economics, and the 2nd speaker of the day, agreed with Mr. D’Amato’s call for urgent reforms and congratulated the Italian Business Federation for “having chosen such a good chairman.”

The meeting was concluded by a Q&A session in which Mr. D’Amato fielded some tough questions about the consequences of changes in the labor flexibility law. The discussion provided the audience with a good sample of the heated debate that is currently going on in Italy in regards to this important issue.

February 11, 2002
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