Economic View: The pros and cons of Italy

The death of Gianni Agnelli will doubtless clear the path to a break-up of Fiat, with the ailing car division being separated from the mostly successful other activities. But this is much more than just a business story. Agnelli was Italy's most famous business figure, to be sure, but he was also one of the key people who created Italy's post-war economic miracle.

For most Britons, including our Prime Minister, Italy is the place for a holiday: culture, food, music and style have been interwoven into a way of life that is hugely seductive for many British people. Alongside the obvious attractions is the wonderful "slow food" project of a clutch of Italian towns, which are trying to get people to pace their lives in a more healthy and relaxed manner – for example, to walk rather than drive as well as to eat traditional food instead of junk.

But there is of course another Italy. This is the country that delivered explosive growth during the immediate post-war era and which during the mid-1980s passed the UK in terms of the total size of its economy. For the past decade Italian economic performance has languished, but even now there are parts of northern Italy that are richer than much of Britain. This Italy has great strength in its smaller engineering companies as well as in the better-known luxury industries. For example, the only company that could apparently make the convex glass in the gondolas of the London Eye was Italian.

But core Europe has a problem and Italy is a member of core Europe. It is still the seventh-largest economy in the world, just behind China (first graph above), but if you take GDP per head (next one) it is the poorest of the large industrial countries. Nor is there any great sign of improvement, for in recent years Italy has vied with Germany for the wooden spoon in the European growth league.

This poor economic performance raises two questions that have relevance for all of Europe. One is whether there is really a clash between a comfortable lifestyle and a competitive economy. The other is what will happen to population and birth rates in Europe.

Until about 1990 there were no serious concerns about Italian economic performance. The wealth generated by companies such as the Fiat group pulled the whole economy along. There were legitimate worries about the distribution of that wealth and in particular about the gap between the north and the south. But despite this uneven performance, the overall numbers were impressive.

But there has to be a growing concern that this is no longer sustainable. While the country was industrialising rapidly, with a large supply of labour coming off the land and moving north, it could achieve high growth rates. Once that process tailed off, the growth engine ground to a halt. Companies that had been slow to adapt, like the car division of Fiat, found they had little comparative advantage in a harsher world.

Now, there are several unusual features to the Italian economy. One is that the number of hours worked is relatively low. But more remarkable is the low labour participation rate: less than 60 per cent of the people of working age are in jobs, compared with 76 per cent here. You could say that the country manages to achieve a high standard of living – as well as a high quality of life – without having to work too hard. Many would find that a rather attractive combination – if it were sustainable. Sadly, I fear it is not.

You can see why in the next two graphs, which come from United Nations population estimates. The first shows the likely changes in population for selected countries over the next half century. Even if you take those with a pinch of salt, which you should with all such projections, there is a prospect of Italy losing a significant proportion of its population. The ratio of people of working age, relative to over-65s, will shift from the present 2.2 to 1 ratio to a 0.8 to 1 ratio in 2050. In other words there will be fewer workers than pensioners.

The reason for this is shown in the final graph, showing estimated total fertility rates for 1995-2000. Italy has the lowest of the G7 and vies with Spain to be bottom of the EU league. Italians are said to love children – they just don't have very many of them.

In the coming months all eyes will be on the Fiat empire, which is so indebted that its future is really in the hands of its bankers. The Agnelli family is only in nominal control, so the group will be broken up. The intriguing issue is whether this acts as a catalyst for wider economic reforms in Italy. You could say that this is a matter for the country's Prime Minister, Silvio Berlusconi, himself an industrialist though of a rather different reputation to Agnelli. To some extent it is: governments matter, even in Italy. But accepting basic economic realities, such as the fact that the Fiat car division is too small to survive as an independent entity, is also crucial. The more that big business delays reform, the harder it is for smaller companies to pick up the pieces.

If there is indeed to be a bout of economic reform in Italy, the country will be better placed to start growing again. But it will only grow briskly if it wants to. The danger is that the brightest young Italians will look elsewhere for jobs.

For example, Italy happens to produce very good economists, many of whom have come to Britain. Were outward migration to rise, the population decline would become even more serious.

The big issue for Italy is in some ways the same as for Germany: how quickly can it reform? Fiat will now reform because it has no choice. It is sad, is it not, that it takes the death of a giant for that to happen? But a catalyst for wider changes? I know this is the question that matters. I just don't know the answer.