Professional services reform in Italy

The Berlusconi government has announced a package of emergency measures to liberalize the Italian economy that includes a “constitutional” change to speed up the liberalisation of professional services.

The measures included a plan to amend the constitution to make a balanced budget mandatory, a second constitutional change that would force “closed professions” to liberalise services, a speeding up of welfare reforms, and other structural reforms designed to boost Italy’s stagnant economy. via FT.com.

Italy’s challenge is not, in fact, its current fiscal deficit. That’s a rather modest 4.5% of GDP according to the IMF. The problem is that the consolidated Italian public debt (long-term) is about 120% of GDP. That, too, might be sustainable in a high-growth economy, but Italian growth rates are miserable; projected to be about 1% this year. In a climate of bearish pessimism about Southern Europe, Italy’s sovereign debt looks discountable.

The country has a huge public pension liability (14% of GDP says the NY Times) and, although unemployment at 8% is lower than in other parts of Europe, it has very low labor-force participation rates (61% for men, vs 75% elsewhere in Europe).

The “constitutional” reform to open up professional services appears to relate, among other services markets deficiencies listed in the IMF Article 4 Consultations report, to the re-introduction (contrary to the EU Services Directive) of minimum fees for lawyers.

Professional services (accountancy, legal, engineering etc.) are among the most important services inputs to production. The productivity of these industries play a key role in the productivity of the economy as a whole because nearly every other business relies on them. Here’s a classic paper on the impact that more competitive Business Services (the Balance of Payments category that includes professional services) had in allowing the Anglophone economies to outpace the continental European economies in the earlier part of this decade (Inklaar, Timmer and Ark’s 2007 “Mind the Gap!”).

If you find the econometrics eye-glazing, just skip to the comparisons of contribution to growth in Table 3 of the paper to get an idea of how much difference it makes to have a competitive price from law firm, accountants, engineers etc.

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