Italy’s Entanglement of Business and Politics

How Italy’s politics shares an espresso with business: when the state shields the oligarchy from a changing world.

Sun, pizza, and ease. Leisurely sipping a macchiato on the piazza. Italy has long been a favorite destination for travelers. Most of them have probably also heard stories about the Italian mafia. Estimates put its revenues from hotels and restaurants at €3.3 billion per year. Between the dolce vita and the mafia, however, there are gray areas, as a recent study by the Bank of Italy shows. And these shades of gray have consequences for everyone.

The Bank of Italy has quantified the damage from economic–political entanglements

(Picture Source: BalkansCat/shutterstock, 2024)

Regulations and Bureaucracy

Among developed countries, Italy is considered a difficult environment for businesses. This is mainly due to its much-loved bureaucracy. In Italy, it keeps growing.

The Bank of Italy once even described it as efficient and, for the most part, justified. Up to that point, the measures remained within tolerable bounds. That changed in the 1990s.

More and more, bureaucracy fuels frustration—also measurable in numbers: the bureaucratic burden costs the private sector around €31 billion per year. This corresponds to about 1.7 percent of Italy’s annual economic output.

Italy has, however, found a solution: politicians advise companies on how to navigate the bureaucratic jungle. That makes sense, since they are the ones who let it grow rampant in the first place. In Italy, ties between politics and business are therefore particularly close. In some cases, companies even hire politically connected staff specifically for this purpose.

It is important to note that this is not illegal corruption but legal practices. Yet this tight interweaving of politics and entrepreneurship has its pitfalls.

The Bank of Italy (Banca d’Italia) examined the mechanisms through which this politico-business complex affects society. It identified six core problems that arise from this arrangement.

Silvio Berlusconi

Hardly anyone embodies the entanglement of Italian politics and business more than four-time prime minister Silvio Berlusconi. Alongside his law studies, he worked as a vacuum-cleaner salesman and singer. Before his political career, he built up publishing houses and media companies. That visibility helped his rise as a successful politician. The media entrepreneur eventually founded his own party, Forza Italia, in 1993. Over the course of his career he was involved in various scandals; notably, he was convicted of tax fraud. Associates criticized him for his increasingly authoritarian leadership style. (Photo credit: Alessia Pierdomenico/Shutterstock, 2018)

Market Leaders Are Old-Fashioned

Market leaders in their industries are the most entangled with politics, yet the least innovative. They simply have no incentive to invest in innovation—they’re already at the top of their field. New things are costly: from research to implementation to marketing, every step is expensive.Research also always carries risk: no matter how much is invested, there’s no guarantee that anything useful or marketable will emerge.Lobbying is clearly cheaper by comparison: you win a politician over. Once in office, they support rules that erect barriers to entry for potential competitors. Under buzzwords like “environmental protection,” “consumer protection,” and “worker protection,” such laws can be pushed through parliament with ease.The Banca d’Italia actually finds a negative correlation between patent filings and political connections. Put simply: the more employees of a company are active in politics, the fewer innovative patents it files.

Does Politics Make You Lazy?

New technologies generally lead to higher productivity among workers in the market and often to higher employment, since new jobs are created. Well-connected companies, however, use their clout to secure preferential treatment or rules that block potential competitors from entering the market. Politicians, conversely, boost their popularity when the labor market looks good.

Apparently, it’s mutual back-scratching: companies with especially strong political ties hire more employees. In doing so, they accommodate politics.

These companies also increase their revenues in principle by hiring more workers, yet they do not become more productive. While revenues rise by one to four percent, output remains flat.

Being Politically Active Pays Off

In return, financial resources flow from politics to companies in the form of subsidies, tax breaks, or grants. These are shared between business owners and politically affiliated representatives within the company:

Twenty percent goes to the employee who is politically active on the company’s behalf, in the form of pay raises or bonuses. The remaining 80 percent ends up as additional profit for the company itself.

The central bank’s comparison shows: employees who are also active in politics earn on average 10 percent more than their colleagues.

The world’s oldest bank, Monte dei Paschi di Siena, founded in 1472 in Tuscany, is considered a prime example of the intertwining of business and the state. In the years after the great financial crisis of 2008, the bank came under increasing pressure.

In 2017 the state stepped in, and the bank received €5.4 billion. A year later, bank managers had to admit that they had financed 13 different political parties with a total of €10 million. The bank classified 97 percent of these loans as “non-performing.”

A further €67 million was paid directly to influential politicians, €61 million of which was “non-performing.” The names of the parties and politicians were not disclosed.

Politics Slows Market Dynamics

Companies with political connections, unsurprisingly, have higher survival rates. Their chances of being shut down due to bankruptcy, regulatory problems, or other reasons are far lower than those of their competitors.

The survival rate rises with the number of politically active people in the company. The more such employees a firm has, the higher its chances of survival.

In highly networked industries, entrepreneurs also found new firms far less often. And when someone does start a company, they are very likely to bring strong political ties—more often than in less networked sectors.

That makes sense: political connections dampen competition. Incumbents, in tandem with politics, make market access harder for new rivals by creating artificial barriers.

As a result, heavily networked sectors have few young firms and many older ones. To gain a foothold at all, a company must already be well connected—otherwise it is effectively kept out.

Everyone Pays for These Entanglements

The more networked an industry is, the smaller the share of young firms. It also shows lower growth and weaker productivity.

If an industry is dominated by well-connected companies, they also influence how politicians shape the rules in that field. The tighter the political ties, the higher the barriers to entry for new businesses.

These barriers are very often erected in the form of bureaucracy. This in turn affects productivity: the lack of competitive pressure leads to fewer goods and services for the public.

This impact can be measured: according to the Bank of Italy, it reduces economic output by four percent. Political support does raise firms’ output again—by 1.2 percent—but nowhere near enough to offset the negative effect.

Overall, political networks lead to a loss of around three percent of output. These losses are borne by the general public, while politicians and companies pocket the gains.

From Fiat to Stellantis

Fiat was once the flagship of Italian industry. As a systemically important company, it received state subsidies and orders from public agencies such as the police and the postal service. That worked until the Italian state itself ran into payment difficulties. The 2008 global financial crisis was weathered with short-time work schemes and tax relief. Fiat even took a stake in its large American competitor Chrysler.

But it soon became clear: the company had missed fundamental developments in the car market—hybrid and electric mobility, digital vehicle architecture, premium positioning, and platform strategy—and its models were widely seen as outdated. After a turbulent zigzag between restructuring, political maneuvering, crisis management, and slow technological catch-up, it merged with the French PSA Group to form Stellantis.

(Photo credit: Antonello Marangi/shutterstock, 2021)

Italy in International Comparison

At first glance, Italy looks stable with a gross domestic product of €2.25 trillion. This puts Italy eighth worldwide. Broken down to annual per-capita income, however, it stands at €32,800—below the European average of €37,000.

Per-capita economic growth is barely above its 2007 level—the eve of the global financial crisis and the subsequent euro crisis, at the center of which Italy also stood.

For comparison: incomes in Japan rose by 8 percent over the same period, in the United States by 21.6 percent, and in Germany by 14.9 percent.

In the crisis, Italy’s encrusted structures and obstructive political entanglements proved a ball and chain, delaying adaptation to new conditions.

By focusing on preserving long-established but little-innovative firms, policymakers did the young no favors: at 21 percent, Italy’s youth unemployment is among the highest in Europe. The older generation leaves little room for the young to develop.

People Were Already Networking in Ancient Rome

Political influence is by no means a new phenomenon. Ancient Rome offers no shortage of examples: politicians were allowed to accept only “small” gifts to prevent corruption and undue influence. What “small” meant was left undefined—much to the officeholders’ advantage.

Administration also varied across the provinces. Promagistrates were elected for this purpose. They often ran up debts during campaigns; if they won, they could repay them with taxes levied on their subjects.

So is this purely an Italian problem? Or did this mentality spread across Europe through the Roman Empire? Replication studies have found similar results in Germany of all places—a country that likes to cultivate an ultra-correct image.

Research yields another finding: Germans living on the former Roman side of the limes (frontier) show higher life satisfaction and better health. Perhaps the Romans brought not only nepotism but also a touch of dolce vita to the north.