Model economy? Consider Italy ERIC REGULY Globe and Mail Update May 18, 2009 at 6:00 AM EDT

ROME - As the world pulls back from the edge of financial collapse, the visionaries are sifting through the debris to find the model economy of the future. It is no easy exercise. The United States and Britain, the poster children of laissez-faire markets gone mad, are obviously out.

But who is in? The Scandinavian countries? Canada, Germany, France? How about Italy? (Hit laugh-track here.)

In recent weeks, the theoretical crafting of the ideal economy - one shorn of the sharp edges of the Anglo-Saxon model, yet not weighed down by excessive regulation and state meddling - has filled newspapers and magazines.

The Financial Times ran a series on "The Future of Capitalism." The cover story of last week’s edition of The Economist was called "Europe’s new pecking order," which examined who’s hot and who’s not in the new economic order.

In the various reports, Norway gets the odd mention, though loses points for painfully high taxes (not to mention booze prices) and lack of diversification - when the North Sea oil runs out, then what?

While Germany is Europe’s economic powerhouse, its export focus has proved more liability than asset during the downturn. Canada has better social safety nets than the United States and its nannyish financial regulations have proved their worth, but suffers from a trade strategy overly geared toward one product (energy) and one market (the United States).

France seems to have won the economy-of-choice sweepstakes. Its social safety nets and "automatic stabilizers" have supported demand and kept the growing ranks of the unemployed largely solvent. Its banking system still functions fairly well. Vast infrastructure programs are creating jobs and giving the economy a competitive edge. Support, from overt to subtle, for French industry has created a family of corporate superstars, among them nuclear energy giant Areva and Total, the world’s fourth-largest integrated oil company. Mortgage debt and national deficits are relatively low.

Yes, France’s GDP is expected to shrink by 3 per cent this year. But the downturns in Britain, Germany, Spain and a few other big countries are worse. "The French way of doing things looks pretty good - at least in these troubled times," The Economist concluded.

What about poor Italy? (Laugh track again.) In none of the analyses is Italy mentioned as a model, post-crisis economy - quite the opposite in fact. Italy’s debt-to-GDP ratio, already one of the highest in the world, is set to climb to 120 per cent or so. Its fiscal deficit is forecast to jump to 4.7 per cent this year, from 2.7 per cent last year, well above the European Union’s 3-per-cent ceiling. It can’t afford a stimulus package of any size; the one it did announce, valued at some 80-billion euro ($127-billion us), was composed largely of existing funds.

Recession is becoming the norm, not the exception; Italy is in its fourth downturn since 2000. Corruption is rife, government institutions are ineffective and stuffed with lifers, and the infrastructure wouldn’t be tolerated in Bulgaria. The red tape is suffocating. Walter Veltroni, the former Opposition leader, last year said 60 permits are required to open a simple business such as an auto repair shop. Yet the picture is not nearly as bleak as it looks on paper.

Italy’s vast "grey," or untaxed, economy, whose existence seems no embarrassment to the government of Silvio Berlusconi, is alive and well and has taken the edge off the recession. Restaurants and cafes are full, to the point the recession is barely noticeable in Rome (where I live) and other big cities. The banks, like those in France and Canada, are holding up remarkably well. Italy’s financial regulations actually work and the Bank of Italy boss, Mario Draghi, is well respected.

While the country itself is mired in debt, Italians themselves are famously frugal. Italy is still largely a cash society. Many Italians, even many well-paid professionals, don’t use credit cards. As a result, Italy’s household debt, while rising, is only 70 per cent of income (according to the OECD), compared to a thundering 180 per cent in Britain. Italy’s official GDP will fall 4.4 per cent this year, says the International Monetary Fund, but that’s not as bad the declines in Germany and some other EU countries. What truly sets Italy apart is entrepreneurial flair and creativity. UniCredit’s London economist, Marco Annunziata, says he admires "the part of the economy that is entirely self-sustaining, the entrepreneurs who rely on their own ingeniousness to build self-financed, successful businesses carving out a niche or even becoming market leaders."

Take Geox, the northern Italian shoe maker. It used "breathable" sole technology to take itself from nothing in the mid-1990s to the global No. 2 brand, after Clarks, in the casual footwear market. Italy’s Technogym has become a global leader in fitness equipment. These companies are used to fending for themselves and seem to thrive on it. Even the biggest Italian companies are developing an entrepreneurial streak as global markets become more competitive. With virtually no help from the government, Fiat is shaking up the auto industry with its plan to take control of both Chrysler and the European and Latin Americans operations of General Motors. If it succeeds, Fiat will emerge as a rival to Toyota and Volkswagen.

The bad news, of course, is that Italy, perhaps more than any other EU country, has developed a two-tier economy. There are the Fiats, Geoxes, Technogyms and a thousand other success stories. Then there is the enormous, stifling, jobs-for-life public sector, which is a definite drag on economic growth. So is Italy the economic template for the future? Let’s call it a leading indicator rather than a model. If countries like France use the recession to grab control of huge chunks of the economy, they could end up like Italy - that is, with bloated bureaucracies offset somewhat by what Mr. Annunziata calls the "economic freedom fighters," the companies that succeed in spite of the government, not because of it. But consider this. If Italy could streamline its government and bureaucracy, while leaving the entrepreneurial sector alone, it really could become the model economy. Halfway there is a good start.