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Why the guild system is bad for Italy

Never mind a fishing shack in the woods. Your real dream property is a small villa in Tuscany or Umbria, and you've heard that rural Italian properties are good value compared to those in France or England. But, being a prudent Canadian, you do your pre-purchase homework and, suddenly, your dreams of sipping Brunello under the Tuscan sun vanish.

There's a registration tax, a land-registry tax, a value-added tax (on new properties), mortgage-origination fees, legal fees, estate agent's commission, and surveyors and inspection fees. The shocker is the notary's fees: up to 4% of the sales price—often several thousand euros—for doing little more than verifying a deed and certifying signatures.

Welcome to the world of the European guild system, an enduring, rent-seeking marvel that hinders growth and employment and keeps the prices for services artificially high. In the European Union's Mediterranean countries, notably Italy and Greece, the guild system virtually guarantees a closed-shop economy and is one of the biggest obstacles to sustained wealth creation. Yet spurring growth by dismantling the hoary old guild system is not high on the strategic agenda.

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Italy has some 28 professional guilds, including pharmacists, taxi drivers, architects and engineers. Even producers of traditional balsamic vinegar in Modena and Reggio Emilia, in northern Italy, are protected by a guild, one that is sanctioned by the EU's "geographical indications" scheme. A Romanian or Croatian vinegar maker could use the same ingredients to make essentially the same product, but can't call it "traditional Balsamic" and flog it for €50 a bottle to gourmand tourists.

Many guilds are much more than a quaint impediment. They can be hugely powerful lobbyists. Italian taxi guilds have successfully fought back against Uber. In Rome, Uber is limited to the expensive UberBlack and UberLux services, which pose little competition to local cabbies.

In many European countries, guilds have been around since the Roman era, when trade associations of dyers, goldsmiths, weavers, flute players and other groups of craftsmen were formed. Their power and influence grew in the medieval era, and scholars consider them the forerunners to the modern labour unions.

Guilds are not evil. The best ones establish high professional standards, certify their members' education and training, and offer high-quality products and services. Italian pharmacies are wonders. With well-trained employees, they essentially operate as walk-in treatment centres for lesser illnesses and pains. But they charge high prices because they are protected from competition.

Worse, they are utterly incompatible with growth. If margins are high and remain high for decades, there is zero incentive to innovate, to become more productive or to borrow to expand. The guild system often ensures that jobs are not created. In Italy, many trained pharmacists and architects can't find professional work, so they drive taxis.

Busting up the guilds can unleash a job-creation revolution, even if it means sacrificing some professional standards. In 1986, Maggie Thatcher deregulated fixed commission charges among brokers and dealers in the City of London (the name for London's financial district). The Big Bang, as it was called, saw employment—and pay—explode. Today, the City is the world's premier international financial centre, and its office towers dominate the London skyline.

Northern Italy never allowed the guild system to smother its economy, and it became a manufacturing powerhouse. The north's big companies are also less vulnerable to Mafia shakedowns—particularly an extortion tax known as the pizzo. The small companies in the south, where the guilds remain strong, generally pay it.

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Of course, other problems have sucked away at the high-growth potential of Italy and the other Mediterranean countries. Their governments are top-heavy and inefficient, tax collection is half-hearted, enforcement of contracts through the leaden legal system is pathetic, and their populations are aging rapidly. But the guild system is also a huge drain.

The EU competition gnomes in Brussels would love to see the guilds broken down. So would the Italian government. In the past decade, it has made at least two serious attempts to poke holes in the guilds, with middling to no success. Traditions die hard in Italy, and any professional who is not yet in a guild yearns to be in one. Monopoly pay is alluring.

But Italy's sclerotic economy can no longer afford to keep the guilds intact. The biggest threat to the integrity of the EU is not Brexit, but Italy itself and its inability to emerge from economic stagnation. It's time for one more stab at ensuring the notaries are denied their legal extortion racket.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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