Farewell, Dolce Vita?(World Affairs)(Cover story)

Byline: Holger Schmieding; Schmieding is chief European economist at Bank of America.

Beyond issues like garbage rotting in the streets, Italy has another problem--its statistics are a mess.

Italy is in deep trouble. Or is it? With the fall of the Prodi government, Italian politics has reverted to its usual postwar mess. In economic terms, the land of la dolce vita seems to have turned into the "sick man of Europe," falling behind in GDP growth, while the French economy is holding steady and the German export machine is powering ahead. A few smart money managers around the world are betting a collapse in exports caused by excessive wage costs will force Italy to leave the straitjacket of the euro currency within three years and reintroduce its old devaluation-prone lira instead. But this bet against Italy looks set to go wrong.

Rotting garbage in the streets of Naples has shown the world how Italy's public sector fails its citizens. There are other examples. For instance, Italy's official economic statistics are a mess. The Italian data show that the country's economy expanded by an average of 0.9 percent in the last seven years, far behind the 2.1 percent for the rest of Western Europe. Even worse, in the age of rampant globalization, Italy barely managed to raise its export volumes at all, while its Western European peers boosted foreign sales by a total of 40 percent. However, the standard data also show Italy increasing its payrolls by an astonishing 1.2 percent per year since 2001, ahead of the 1.0 percent gain elsewhere in Western Europe. A job miracle in an almost stagnant economy that is losing global market share at an alarming rate? The Italian statistics defy belief.

Both sets of data are probably wrong. A key reason for the surging job count is that changes in labor regulations have brought many workers in the shadow economy into the open.

How to explain the Italian data showing near-stagnant real exports? There are two ways to measure exports, by adding up the total value and by counting the number of units. In terms of value, Italy has seen exports grow by an annual average of 4.4 percent in the last seven years, outpacing the 2.2 percent gain for France and just behind the 4.7 percent average which the European Statistical Office recorded for Western Europe as a whole. The Italian statisticians would have us believe that the volume of Italian exports (that is the value of exports adjusted for the rise in export prices ) increased barely at all, while French exports rose a satisfactory 2.1 percent per year.

Once you look hard at the data, the solution seems obvious. Under the onslaught of fierce competition, not least from China and South Korea, Italian producers have moved upmarket fast. While ...