By Alexander Smoltczyk
After so many centuries, the secret door sticks a bit. But it still exists, hidden behind an image of Italy in the "Hall of Maps" of Florence's Palazzo Vecchio. "Eccolo," says Francesca, the custodian. "It happened here."
This is where it all began. Starting sometime in the mid-14th century, the leather-bound ledgers the city of Florence used to record its debts were kept hidden in this secret place. Someone in the city government had apparently hit upon the idea of using the citizens' money to fund the next military campaign. After Florence's (supposedly certain) victory, the city would simply repay the debts -- and with interest.
The wealthy Florentines, who were required to buy their city's debt securities, had their names recorded in the ledgers at Palazzo Vecchio. But, for them, paying up was still preferable to putting on their own suits of armor to defend the city. Besides, they could also sell these new debt securities to others.
The arrangement marked the beginnings of a system of state borrowing and trading in government bonds. Today's $50-trillion (36-trillion) market in government bonds, which is now forcing governments to their knees, originated in Italy -- first in Venice and, later, in the hills of Tuscany.
The concept of debt securities quickly caught on, and soon the cities of Siena, Florence, Pisa and Venice were hopelessly in debt -- a condition that persists to this day.
Inheriting the Bill
"We currently pay more in interest than we spend on our schools," says Matteo Renzi, who makes the Palazzo Vecchio his home as the mayor of Florence. Renzi, only 36, was voted into office on the strength of his reputation as a "bulldozer" -- and his pledge to finally clean house in Florence. He is the youthful face of his party, the center-left Democratic Party (PD), a mayor who wears jeans and has Apple stickers on his oak desk. "Our fathers walked into the restaurant, and we inherited the bill."
The bill -- at least for his city of Florence -- currently amounts to 518 million.
Many see Florence as the embodiment of the euro-zone nightmare, with massive government debt, close to zero growth and a government led by a man who has been charged with tax evasion.
No other European country, except Greece, is as deeply indebted as Italy. The country's debt level has reached 120.3 percent of its gross domestic product (GDP). At the same time, Italy has one of the lowest birth rates in the Western world, which means that there will be fewer and fewer people to pay off its debts in the future.
'It Was Like a Drug'
On October 4, this combination of factors prompted the Moody's rating agency to downgrade Italian sovereign bonds. Another rating agency, Fitch, downgraded its Italy rating soon thereafter.
Next year, Italy will pay interest amounting to 5.1 percent of its economic output. Greece, at 7.5 percent, is the only European country with a higher ratio of interest to economic output.
Robert Mundell was one of the intellectual fathers of the euro -- and he happens to own a palazzo in Tuscany, as well. But the Nobel laureate in economics still sees Italy's debts as the greatest threat to the euro zone.
"The caste of old politicians ran up the debt without restraint," says Mayor Renzi. "It was like a drug."
Debts were the basis of the "bella vita" period in the 1980s. The political parties pumped massive amounts of money into Italy's poor south, including funding for government agencies and state-owned companies, to keep the social peace and hold on to power. Even today, clientelism, corruption and tax fraud remain symptoms of what is often described as "the Italian sickness."
The constant pressure to reach political compromises drove the bills up. And this continues to happen to this day, as can be seen by the fact that the 10 provincial capitals with the highest debt levels are run by grand-coalition governments.
Bloated Public Sectors
The Italians' behavior didn't improve with the introduction of the euro. On the contrary, Italy took the position that if it could not print its own money anymore, the next-best solution was to incur more debt.
Some 3.5 million Italians are civil servants. Italy spends a full 14 percent of its aggregate output on pension benefits for retired government employees. Only France spends more.
In the south, in particular, nepotism has resulted in bloated public administrations. Mayors, provincial governors and regional prefects shamelessly incur debt to service their clientele with construction contracts or positions in garbage collection. They also line their own pockets.
"We have almost twice as many members of parliament as the United States," adds Florence Mayor Renzi, and the ratio of members of the Italian parliament to the total population is almost twice as high as it is in Germany, as well.
Renzi is determined not to make the same mistakes as his predecessors -- but without spending more money in the process. Renzi is currently suing three banks -- Merrill Lynch, UBS and Dexia -- for allegedly having foisted 50 million in substandard derivative securities on the city. "But it isn't a problem," says Renzi. "We expect to win these cases."
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