Italy’s amnesties damage the economy as well as the rule of law

The writer is author of ‘The Political Economy of Italy’s Decline’

Last Friday Italy’s government decreed an amnesty for illegal construction. Parliament is expected to ratify the decree, which could affect millions of buildings and homes, and even to extend it to cover 150 legally dubious restructuring projects in Milan. The amnesty exemplifies Italy’s enduring leniency towards mass lawbreaking. This attitude now threatens to hurt Italy’s post-pandemic recovery plan, funded mostly by the EU, and the effort to reverse the country’s decades-long economic decline.

Productivity has stagnated since the 1990s chiefly because Italian firms are on average too small and too slow to grow. The few firms that employ more than 50 workers are comparatively productive, the myriad smaller ones far less so. One explanation is that domestic competitive pressures are relatively low, especially in services. Stronger competition would help innovative Italian firms and push weaker ones out of the market. Another explanation is the weakness of the rule of law, which hinders innovation, the growth of firms and efficient allocation of resources. Tax evasion, for example, can save underperforming firms from failure.

The structure of Italy’s recovery plan — conceived by Mario Draghi’s technocratic cabinet in 2021, and revised by Prime Minister Giorgia Meloni’s government last year — reflects this analysis. Its key reforms, presented as critical for productivity growth and efficient investment of the funds, concern competition policy and three sectors that directly affect the quality of the rule of law: the justice system, public administration and business regulations.

These four reforms were designed by Draghi’s cabinet. Meloni’s dragged its feet on competition policy, to protect special interests as petty as beach operators. This attracted official rebukes from President Sergio Mattarella. But the relevant EU milestones have nonetheless been met.

To succeed, however, Draghi’s reforms must change the behaviour of millions of firms and citizens. In the past, other ambitious measures fell short precisely because they were not perceived as credible. By further weakening the rule of law, a policy of tolerance for lawbreaking may contribute to crippling the latest four reforms as well.

Urban and territorial planning policy offers an example. After 1985 reforms were often accompanied by amnesties for illegal construction. Disfigured Italian towns, valleys and coastlines display the consequences.

The repeated combination of reforms and amnesties had similar effects on tax evasion. The gap between theoretical and actual VAT revenue, which is comparable across the EU, is between 6.9 and 8.8 per cent in France, Germany and Spain. In Italy it reaches 21.3 per cent. Among small entrepreneurs, professionals and the self-employed, Italy’s income tax gap exceeds 68.3 per cent.

These so-called taxpayers, numbering about 2.6mn, are a subset of those generally unproductive small firms. Among them are many of the interest groups that have tended to support the right since Silvio Berlusconi entered politics in 1994, and have benefited from frequent tax evasion amnesties. Predictably, Meloni’s government issued one in 2022 and one in 2023.

In fairness, the problem is older (the first amnesty was in 1973), and is not confined to the right (Matteo Renzi’s centre-left government also sinned). But these latest amnesties, coupled with other lenient policies, do not simply fail to break that vicious circle. By weakening the credibility of official priorities, and of the law itself, they undermine a reform-and-investment plan that could appreciably raise long-term growth — in an economy that at last shows encouraging, if fragile, signs of vitality.

Italy is now debating Meloni’s plans for constitutional reform. A higher priority is the rule of law, an essential function of the state. Her government should strengthen it, not weaken it.