Curious Case of the ITALIAN ECONOMY - A Footy perspective

Raj Shekar 
Aditya Raghavan


With EURO 2012 making news everywhere lets take a footy perspective of the Italian Economic Crisis.


Imagine an Italian national football team, with 2 forwards, 4 midfielders, and 4 defenders(and, of course, the goalkeeper).

Consider, a situation, where this football team resembles the country's current economy.The following players will take the positions, as listed:


Forwards-Product market regulation

One can think of two types of (bad) product market regulation:
-Call the First-inward oriented". It aims at protecting incumbent Firms from
potential domestic competitors, through entry restrictions and other means.

The result is the creation of rents, and their distribution to incumbents,                             
to the state, and to politicians. The inefficiencies generated by regulation
may be substantial, but incumbent firms are better off, and the state and
politicians are happy enough to go along.
- Call the second -outward oriented". It aims at protecting domestic Firms
from foreign competitors, through barriers to trade and other means.

 In this case, maintaining the first
type of regulation may become quite costly for incumbent firms. The inefficiencies
generated by inward oriented regulation may make it difficult to compete with
foreign firms. So, from the point of view of incumbents, the best reaction to
a decrease in outward oriented regulation may be to decrease inward oriented
regulation. In other words,One type of deregulation may well trigger
the other.Hence,the goals dry up !!




Midfielders/Playmakers-The country's economy

So why is Italy in soup ?

The reason is because its economy is so weak.The midfield is the heart of any football team, and if it is unable to  play ball, the team is bound to suffer on all the fronts.

Italy is plagued by poor regulation, vested business interests, an ageing population and weak investment, all of which have conspired to limit the country's ability to increase production.

Defence - Labor regulations

There is a clear inverse relation across countries between the degree of employment protection and the degree of unemployment insurance.If unemployment is painful, workers will lobby hard to avoid it, and ask for high employment protection. Governments may go along, thinking that it is much cheaper to have the firms provide employment protection, than having the government to pay for unemployment insurance.Starting from the Italian starting point, more generous unemployment insurance, in exchange for a reduction in employment protection, appears to hold the scope for an improvement in efficiency at little or no cost in social protection.A football team, in a crunch situation,tends to take a defensive approach.As a result, the team has no lead secured, to play for.

Goalkeeper- Financial Framework

In Italy there are a few large banks and many small and medium-sized banks operating on a regional scale. The crisis touched the larger banks, which lost funds as a result of the Lehman Brothers crash, or found their assets devalued by the stock-market collapse. However, Italian banks were  not very heavily involved in highly speculative sectors. The main problem for Italian banks, apart from the reduction in liquidity, came from links with Central and Eastern European countries,where had extended their network of branches.There was a risk of the collapse or illiquidity of this part of the network. Small and medium-sized banks instead reacted to the liquidity crisis by reducing credit to clients and consumers and raising the amount of collateral required for new loans. This policy reduced investment in machinery and houses and threatened the  small and medium sized firms in various sectors, in particular the most export oriented of them.  So, sectors such as real estate, house building and cars collapsed.A weaker financial framework affects the other industries as well.Thus, an incompetent goalie not only allowed goals, but also triggered the collapse of the entire team.

Hence,it is not all that difficult to envisage how and why did Italy, inspite of being such a superpower,land up in such a mess.

Full Time !!! :)


Content : Raj Shekhar
Concept : Aditya Raghavan