Illegality And Italy’s New Government

Andrea Lorenzo Capussela

One trait that distinguishes Italy from her Western peers is the gravity and coexistence of corruption, tax evasion, and organised crime. One encouraging trait of the new governing coalition, among many concerning ones, is its pledge to fight those criminal phenomena. But one member of it, the League, was often involved in corruption scandals, has governed for nine years under the leadership of a convicted tax evader, Silvio Berlusconi, and has generally been tolerant towards white-collar crime.

Damaging though they are, those criminal phenomena are not the sole or even the main causes of Italy’s worrying decline. In a book on this subject, I argue that they are components of the country’s politico-economic system, whose logic is the primary cause of low growth and political discontent. Besides its immediate effects, therefore, achieving a perceptible reduction of illegality would both attest to and strengthen the country’s capacity to shift itself onto a fairer and more efficient equilibrium.

A legislative policy that weakened the rule of law

Corruption and tax evasion have been systemic problems for decades. In 1992-94, the political parties that had ruled Italy since 1948 were swept away by popular anger at the pervasive bribery unveiled by the so-called ‘Clean Hands’ judicial investigations. But the centre-right and centre-left coalitions that succeeded them were equally tainted by corruption, albeit to a different degree. Suffice it to say that they effectively sought to prevent a repeat of those investigations by passing a series of laws aimed at obstructing, not strengthening, the repression of white-collar crime (see, e.g., this post on LSE’s EUROPP blog).

Although respectable arguments were also used to defend this legislative policy, such as the autonomy of politics vis-à-vis the judiciary, the post-1994 political establishment undercut them by failing to clean its own stables. To quote but one recent example, on 16 March 2017 a bipartisan senate majority refused to expel from its ranks, as the law required, a senator convicted – by an irrevocable third-instance judgment issued by the supreme court – of embezzlement of public funds. This goes some way towards explaining the high level of political distrust, the sudden and unprecedented rise of an insurgent movement, Five Star, whose foundational message was precisely a call for greater public integrity, as well as the harsh defeat that at the March elections voters inflicted on Italy’s mainstream left, embodied by the Democratic Party.

Criticism of the new coalition’s anti-corruption proposals

The part of the coalition’s programme devoted to fighting white-collar crime elicited sceptical reactions not just in centrist and centre-right circles, those traditionally most closely associated with bribery and tax evasion, but also among centre-left ones. In part, the criticism is persuasive. In particular, the coalition’s overall approach suggests an excessive reliance on prison sentences, which ignores the deplorable conditions of some of Italy’s prisons and neglects the questions that anyway exist on the effectiveness of imprisonment as a means of preventing crime and re-educating criminals. Stiffer financial penalties and tougher rules on the confiscation of ill-gotten or unexplained assets would seem a better policy.

Other critiques are less well founded. One example is the claim that the coalition’s plan to encourage whistleblowing is comparable to an autocracy’s requirement that citizens inform Stasi-style against each other. But even those more reasonable reservations are often used as a lever to usher in a sweeping critique of the whole part of the programme devoted to the rule of law, one which seems to target the very intention of fighting white-collar crime with greater determination than in the past.

The background: tax evasion and corruption

Little data is needed to set this criticism within its proper context. The total amount of taxes that are evaded each year is now estimated at between 7 and 8 per cent of GDP. This is equivalent to about one sixth of actual government revenue, a level considerably higher than in Italy’s peers. Within that larger aggregate, VAT, which has a uniform EU-wide regime, allows a narrower but fairly reliable cross-country comparison: according to the latest estimate, in Italy unpaid VAT is 28 per cent of theoretical revenue, a level twice the EU average and between two and three times higher than in Britain (10), France (14), Germany (10), and Spain (9).

Turning to corruption, all available indicators place Italy much closer to the average Balkan country than to her peers (see, e.g., figure 9 of this post). And, to cite but one pointer to the scale of the direct costs, the European Commission recently remarked that over the past two decades in Italy the per-kilometre construction cost of high-speed railway tracks was – at constant prices – between four and ten times higher than in either France, Japan, or Spain.

One important reason why white-collar crime is so widespread is that it is rarely punished. A comparison with one of the world’s least corrupt countries, Finland, will suffice. Council of Europe data show that in 2015 the number of people serving a prison sentence for white collar crimes was about six times greater in Finland than in Italy, in per capita terms, and that, inversely, the share of the total population serving a prison sentence (for any crime) was 20 per cent greater in Italy than in Finland. This suggests that Italy’s law-enforcement system is not comparatively lenient, but is particularly tolerant with white-collar crime: about seven times more tolerant than Finland’s.

One important reason for this is the legislative policy I mentioned earlier. And, although no equally egregious misuse of the legislative function was observed during the past parliament, tolerance for illegality nonetheless persisted. In December 2015, for instance, the (centre-left) government trebled – from 1,000 to 3,000 euros – the threshold within which cash payments are permissible. This choice, which reversed a policy of the 2011-13 technocratic government, is less anodyne than it might seem. As Kenneth Rogoff has persuasively argued, in fact, limiting the use of cash can be an effective measure against tax and regulatory evasion: indeed, that same year France, where the shadow economy is less than half the size it is in Italy as a share of GDP, lowered that same threshold from 3,000 to 1,000 euros.

Public debate and credibility

Reasoned debate may therefore allow Italian public opinion to distinguish between the reasonable reservations raised against the coalition’s rule-of-law programme, and those critiques that conversely disguise a defence of the status quo sketched out above. For the same reason, the coalition would have every interest in stimulating such a debate and imposing that programme on the nation’s agenda.

I mentioned the League’s tolerance for white-collar crime, however. Admittedly, this position was more closely associated with the party’s previous leaderships. But the coalition agreement contains a clear sign of continuity, because it reproduces the League’s electoral pledge of a one-off measure of ‘fiscal peace’.

This is an amnesty for tax evasion, in fact, which the League linked to its flat-tax proposal, which was in turn justified also with the argument that it will improve tax compliance. Even leaving the merits and the very feasibility of that proposal aside, the argument is very dubious. It seems more likely that a fresh amnesty will, just like the country’s many previous ones, raise the incentives to evade taxes. Especially if accompanied by the lifting of any restriction on the use of cash, as the League’s leader has proposed in one of his first speeches after taking up the function of interior minister.

Enacting such measures is also highly likely to undermine the coalition’s proposed anti-corruption measures. For their effects largely depend on changing firms’ and citizens’ expectations, and therefore on the credibility of the effort to strengthen the rule of law: but a state whose first act in the fight against white-collar crime is a tax amnesty is hardly credible. In other words, the tension between the defence of the status quo and the aspiration to change it, which traverses both society and, apparently, also the coalition, could sink this part of its programme.

A political battle: imposing the rule of law on the national agenda

Only an open political battle, fought before public opinion, can solve that tension credibly. And, at present, only the Five Star Movement can take up the flag of the rule of law and begin such a battle. But, although such a move would be certain to receive wide support within civil society, it is unclear whether the party has the ideas, the organisation, and even the will to wage that battle.

I do not refer only to the movement’s own weaknesses, such as the lack of a recognisable political culture or a meaningful political selection system, or even to its involvement in some scandals, to which the leadership’s response was not without ambiguity. The deeper problem, rather, is that Italy’s governance problems are properly systemic, as I said. And although the material underpinnings – the use of public expenditure to secure consensus, for example – of Italy’s governance system have been eroded over the past decade, its logic still shapes the incentives of political actors. So it would not be surprising that, having taken power, the Five Star Movement would bow to them.

Should the Five Star Movement open that battle, those who desire Italy to shift toward a fairer and more efficient balance of forces might consider supporting it. For all this party’s shortcomings, in fact, if its apparent determination to fight white-collar crime overcame the four obstacles I just mentioned two important consequences could follow: a potentially serious attempt to strengthen the rule of law would begin, which the country has needed for at least three decades, and this priority could also gradually impose itself on the rest of the political spectrum.

The legislative policy I mentioned earlier was only possible, for example, because the rule of law effectively lacked a constituency in parliament. This would change if the Five Star Movement won that battle, thanks to the broad popular support that it is certain to elicit, thereby forcing the rest of the political spectrum to bow to that priority.

Should the party duck that battle, conversely, the vast political space that the collapse of Italy’s establishment has opened, and which has hitherto been filled by the Five Star Movement, would begin to open again. For this party would have effectively abandoned the message that underpinned its spectacular rise: but the widespread aspiration for ‘cleaner’ politics, and for a fairer and more efficient equilibrium, would not vanish, and might well stimulate the emergence of better political alternatives.

Since March the Democratic Party has repeatedly pledged to its electorate to begin a discussion on the causes of its defeat and the ideas that could blow fresh life into its declining organization. But thus far the debate has not been encouraging. The cross-roads before which the Five Star Movement now hesitates arguably provides an opportunity also for the mainstream left, therefore; it could consider challenging them on this front. The same, regrettably, cannot be said of the existing representatives of the mainstream right, whose stance seems well represented by the League’s agenda.

This is an amended version of a post that originally appeared on the European Politics and Policy (LSE) blog.