Italy: How to Ruin a Country in Three Decades

By Servaas Storm, a Dutch economist and author who works on macroeconomics, technological progress, income distribution & economic growth, finance, development and structural change, and climate change. Originally published at the Institute for New Economic Thinking website

While Brexit and Trump have been making the headlines, the Italian economy has been sliding into a technical recession (again). Both the OECD and the European Central Bank (ECB) have lowered the growth forecasts for Italy to negative numbers, and in what analysts see as a precautionary move, the ECB is reviving its sovereign bond buying programme, which it had started to unwind just five months earlier.

“Don’t underestimate the impact of the Italian recession,” is what French Economy Minister Bruno Le Maire told Bloomberg News (Horobin 2019). “We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France, because it’s one of our most important trading partners.” More important than trade, however, and what Le Maire is not stating, is that French banks are holding around €385 billion of Italian debt, derivatives, credit commitments and guarantees on their balance sheets, while German banks are holding €126 billion of Italian debt (as of the third quarter of 2018, according to the Bank for International Settlements).

In light of these exposures to Italian debt, it is no wonder that Le Maire, along with the European Commission, is worried by Italy’s third recession in a decade—as well as by the growing anti-euro rhetoric and posturing of Italy’s coalition government, comprised by the Five-Star Movement (M5S) and the Lega. The knowledge that Italy is too big to fail is fuelling the audacity of Italy’s coalition government in its attempt to reclaim fiscal policy space by openly flouting the budgetary rules of the E.U.’s Economic and Monetary Union (EMU).

The result is a catch-22. The more the European Commission tries to bring the Italian government into line, the more it will feed the anti-establishment and anti-euro forces in Italy. On the other hand, the more the European Commission gives in to the demands of the Italian government, the more it will fritter away its credibility as the guardian of the EMU’s Stability and Growth Pact. This stalemate is not going away as long as Italy’s economy remains paralyzed.

A Crisis of the Post-Maastricht Treaty Order of Italian Capitalism

It is therefore vital to understand the true origins of Italy’s economic crisis in order to find pathways out of Italy’s permanent stagnation. In a new paper, I provide an evidence-based pathology of Italy’s recession—which, I argue, must be regarded as a crisis of the post-Maastricht Treaty order of Italian capitalism, as Thomas Fazi (2018) calls it. Until the early 1990s, Italy enjoyed decades of relatively robust economic growth, during which it managed to catch up with other Eurozone nations in income (per person) (Figure 1). In 1960, Italy’s per capita GDP (at constant 2010 prices) was 85% of French per capita GDP and 74% of (weighted average) per capita GDP in Belgium, France, Germany and the Netherlands (the Euro-4 economies). By the mid-1990s, Italy had almost caught up with France (Italian GDP per person equalled 97% of French per capita income) and also with the Euro-4 (Italian GDP per capita was 94% of per capita GDP in the Euro-4).
Figure 1

Three decades of catching up, 25 years of falling behind: real GDP per person in Italy relative to France/Euro-4, 1960-2018

Source: author’s calculation based on AMECO data.

But then a very steady decline began (see Figure 1), erasing decades of (income) convergence. The income gap between Italy and France is now (as of 2018) 18 percentage points, which is more than what it was in 1960; Italian GDP per capita is 76% of per capita GDP in the Euro-4 economies. Beginning in the early to mid-1990s, Italy’s economy began to stumble and then fall behind, as all major indicators—income per person, labour productivity, investment, export market shares, etc.—began a very steady decline.

It is not a coincidence that the sudden reversal of Italy’s economic fortunes occurred after Italy’s adoption of the “legal and policy superstructure” imposed by the Maastricht Treaty of 1992, which cleared the road for the establishment of the EMU in 1999 and the introduction of the common currency in 2002. Italy, as I show in the paper, has been the star pupil in the Eurozone class—the one economy that committed itself most strongly and consistently to the fiscal austerity and structural reforms that form the essence of the EMU macroeconomic rulebook (Costantini 2017, 2018). Italy kept closer to the rules than France and Germany and paid heavily for this: The permanent fiscal consolidation, the persistent wage restraint and the overvalued exchange rate killed Italian aggregate demand—and the demand shortage asphyxiated the growth of output, productivity, jobs and incomes. Italy’s stasis is an object lesson for all Eurozone economies, but—paraphrasing G.B. Shaw—as a warning, not as an example.

Perpetual Fiscal Austerity

Italy did more than most other Eurozone members in terms of self-imposed austerity and structural reform in order to satisfy the conditions of EMU (Halevi 2019). This is clear when comparing Italy’s fiscal policy post-1992 to that of France and Germany. Various Italian governments ran continuous primary budget surpluses (defined as public expenditure excluding interest payments on public debt, minus public revenue), averaging 3% of GDP per year during 1995-2008. French governments, in contrast, ran primary deficits of 0.1% of GDP each year on average during the same period, while German governments managed to generate a primary surplus of 0.7% on average per year during those same 14 years. Italy’s permanent primary surpluses during 1995-2008 would have reduced its public debt-to-GDP ratio by around 40 percentage points—from 117% in 1994 to 77% in 2008 (while keeping all other factors constant). But slow (nominal) growth relative to high (nominal) interest rates pushed up the debt ratio by 23 percentage points and washed away more than half of the public debt-to-GDP reductions of 40 percentage points achieved by austerity. Could it be true that Italy’s permanent austerity, intended to lower the debt ratio by running permanent primary surpluses, backfired because it slowed down economic growth?

Italy’s governments (including the left-of-centre Renzi coalition) continued to run significant primary budget surpluses (of more than 1.3% of GDP on average per year) during the crisis period of 2008-2018. Showing permanent fiscal discipline was a top priority, as Prime Minister Mario Monti admitted in a 2012 interview with CNN, even if that meant “destroying domestic demand” and pushing the economy into decline. Italy’s almost “Swabian” commitment to fiscal discipline stands in some contrast to the French (“laissez aller”) attitudes: The French government ran primary deficits at an average of 2% of GDP during 2008-2018 and allowed its public debt-to-GDP ratio to rise to almost 100% in 2018. The cumulative fiscal stimulus thus provided by the French state amounted to €461 billion (in constant 2010 prices), whereas the cumulative fiscal drain on Italian domestic demand was €227 billion. The Italian budget cuts show up in non-trivial declines in its public expenditure on social expenditure per person, which is now (as of 2018) around 70% of public social spending per capita in Germany and France. One doesn’t dare speculate what the “Gilets Jaunes” (yellow vest) protests in France would have looked like if France had put through an Italian-style fiscal consolidation post-2008.

Permanent Real Wage Restraint

When Italy signed the Maastricht Treaty, its high rates of inflation and unemployment were regarded as major problems. Inflation was blamed on the “excessive” power of labour unions and an ”excessively” centralized wage bargaining system, which resulted in strong wage-push inflation and a profit squeeze—as wage growth tended to exceed labour productivity growth, which lowered the profit share. Seen this way, the blame for Italy’s high unemployment could be shifted onto its “rigid” labour markets and too strongly protected “worker aristocracy.” Bringing down inflation and restoring profitability required wage moderation, which in turn could only be achieved by a radical deregulation of labour markets, or what is euphemistically called, “structural reforms.”

Italy does not have a statutory minimum wage (unlike France) and also does not have a generous unemployment benefit system (in terms of unemployment insurance replacement rates and duration, and entitlement conditions) compared with the E.U. average. Employment protection for regular employees in Italy is roughly at the same level as job protection in France and Germany. Italy’s structural labour market reforms involved drastically reducing employment protection for temporary workers, and as a result, the share of temporary workers in total Italian employment increased from 10% during 1991-1993 to 18.5% in 2017. Between 1992 and 2008, total (net) employment in Italy increased by 2.4 million new jobs, of which almost three-quarters (73%) were fixed-term jobs. In France, by comparison, (net) employment grew by 3.6 million jobs during 1992-2008, of which 84% were regular (permanent) jobs and only 16% were temporary positions.

In addition, the bargaining power of unions was reduced by the abandoning of the target of full employment in favour of public debt reduction (Costantini 2017) and by a much more restrictive (anti-inflation) central bank policy and the fixed exchange rate. As a result, real wage growth per employee, which averaged 3.2% per year during 1960-1992, was lowered to a mere 0.1% per year during the period 1992-1999 and to 0.6% per annum during 1999-2008. Within the E.U., Italy’s turnaround was remarkable: From 1992 through 2008, the growth of Italian real wages per worker (0.35% per year) was only half the real wage growth in the Euro-4 (0.7% per annum) and it was even lower compared to real wage growth in France (0.9% per year). Interestingly, from 1992 through2008, Italian real wage growth per employee was slightly lower than (already stingy) German real wage growth (0.4% per year). To see the long-run picture, Figure 2 plots the ratio of the real wage of an Italian worker to the real wage of the average French, German and Euro-4 worker from 1960 through2018. In the early 1960s, the average wage of Italian workers was about 85% of the French wage, and this ratio increased to 92% in 1990-1991. Starting in 1992, the Italian real wage began a steady decline in terms of the average French wage—and in 2018, the average Italian employee earned only 75% of the wage earned by her/his French comrade. The wage gap between Italy and France is bigger today than it was in the 1960s. The same pattern holds when one compares Italian wages to German and/or Euro-4 wages.
Figure 2

Three decades of catching up, 25 years of falling behind: real wage per employee in Italy relative to France / Germany / Euro-4, 1960-2018

Source: author’s calculation based on AMECO data.

Italy’s wage moderation proved an effective strategy to kill three (not just two) birds with only one stone. First, wage restraint helped to bring down inflation—to 3.4% on average per year from 1992 through 1999 (from 9.6% on average per annum from 1960-1992) and further down to 2.5% per year from 1999 through 2008 and 1.1% from 2008 through 2018. Italy is no longer prone, in a structural sense, to high and accelerating inflation. Second, wage restraint increased the labour intensity of Italy’s GDP growth—and thus reduced unemployment. Italy’s unemployment rate peaked in the mid-1990s at more than 11%, but labour market deregulation and wage restraint successfully brought down unemployment to 6.1% in 2007 and 6.7% in 2008—which was lower than the unemployment rates of France (which equaled 8% in 2007 and 7.4% in 2008) and Germany (where unemployment was 8.5% in 2007 and 7.4% in 2008). Finally, as intended, wage moderation led to a substantial increase in the profit share of Italy’s GDP: The profit share rose by more than 5.5 percentage points, from 36% in 1991 to about 41.5% from 2000 through 2002, after which it stabilized around 40% until 2008. During the 1990s, the recovery of the profit share was considerably stronger in Italy than in France, and comparable to what happened in Germany—notwithstanding the fact that Italy’s profit share was already relatively high to begin with.

Italy’s structural reforms of the 1990s paid off handsomely in terms of a higher profit share, in other words, and Italy’s profit share remained substantially higher than that of France and Germany. With lowered inflation, effective wage restraint, declining unemployment, public indebtedness on the decline and the profit share considerably raised, Italy appeared to be set for a long period of strong growth. It did not happen. The operation was carried out successfully, but the patient died. According to the coroner’s post-mortem, the cause of death was a structural lack of aggregate demand.

The Suffocation of Italian Aggregate Demand after 1992

By keeping close to the EMU rulebook, Italian economic policy created a chronic shortage of (domestic) demand. Domestic demand growth per Italian averaged 0.25% per year from 1992 through2018—a sharp decline compared to the domestic demand growth (of 3.3% per year) recorded from 1960 through1992 and also much below domestic demand growth (of 1.1% per person per year) in the Euro-4 countries. Italy’s real export growth (per person) also declined, from 6.6% on average per year from 1960 through 1992 to 3% per year from 1992 through 2018. Average annual export growth (per person) was 4.4% in the Euro-4 countries from 1992 through 2018. Italy’s chronic demand shortage reduced capacity utilization (especially in manufacturing) and this, in turn, lowered the profit rate. According to my estimates, capacity utilization in Italian manufacturing declined by a staggering 30 percentage points relative to capacity utilization in French manufacturing between 1992 and 2015.

The utilization rate of Italian manufacturing relative to German manufacturing declined from 110% in 1995 to 76% in 2008, and sunk further to 63% in 2015—a decline by a stunning 47 percentage points. Lower capacity utilization reduced the rate of profit in Italian manufacturing by 3 to 4 percentage points relative to French and German profit rates. This must have considerably depressed Italian manufacturing investment and growth. Let me emphasize the fact that Italy’s profit rate declined even when the share of profits in income increased. This means that Italy’s strategy of fiscal austerity and wage restraint proved to be counterproductive, because it failed to improve the profit rate: The drop in demand and capacity utilization had a bigger (negative) impact on firm profitability than the increase in the profit share.

As I argue in the paper, this condition of chronic demand shortage was created, in particular, by (a) perpetual fiscal austerity, (b) permanent real wage restraint, and (c) a lack of technological competitiveness which, in combination with an unfavourable (euro) exchange rate, reduces the ability of Italian firms to maintain their export market shares in the face of increasing competition of low-wage countries (China in particular). These three factors are depressing demand; reducing capacity utilization and lowering firm profitability; and hurting investment, innovation, and productivity growth. They are hence locking the country into a state of permanent decline, characterized by the impoverishment of the productive matrix of the Italian economy and the quality composition of its trade flows (Simonazzi et al. 2013).

Italy’s manufacturing sector is not “technology intensive” and suffers from stagnating productivity. As Figures 3 and 4 illustrate, the cost competitiveness of Italian manufacturers vis-à-vis the Euro-4 countries depends on low wages and not on superior productivity performance. Whereas industrial workers in France and Germany were earning €35 per hour (in constant 2010 prices) in 2015, and their colleagues in Belgium and the Netherlands earned even more, Italian workers in manufacturing were bringing home only €23 per hour (in constant 2010 prices)—or one-third less (see Figure 3). But at the same time, industrial labour productivity per hour of work is considerably higher in France and Germany (at €53 per hour in constant 2010 prices) than in Italy, where it is around €33 per hour (Figure 4). Italian manufacturers are thus taking the low road, while firms in the Euro-4 countries are travelling on the high road. Or in other words, compared with German and French manufacturers, Italian firms suffer from a lack of technological strength, which in Germany is based on high productivity, innovative efforts and high product quality. True, Italian firms do stand out for their high relative quality in more traditional, lower-tech export products such as footwear, textiles, and other non-metallic mineral products. But they have been steadily losing ground in export markets of more dynamic products characterized by higher levels of R&D and technology intensity, such as chemicals, pharmaceuticals and communications equipment (Bugamelli et al. 2018).

Locked into a Position of Structural Weakness

For two reasons, this specialization in low- and low-medium technology activities locks the country into a quasi-permanent position of structural weakness. The first is that the exchange-rate elasticity of export demand is larger for traditional exports than for medium- and high-tech exports. As a result, the appreciation of the euro did hurt Italian exporters of traditional products harder than German and French firms exporting more “dynamic” goods and services. Thus, the overvalued euro penalizes Italian export growth more than it damages export growth in the Euro-4 economies.

The second factor is that Italian firms are operating in global markets which are more strongly exposed to the growing competition of low-wage countries and China in particular. In 1999, 67% of Italy’s exports consisted of (traditional) products exposed to medium to high competition from Chinese firms—compared to a similar exposure to Chinese competition of 45% of exports in France and 50% of exports in Germany (Bugamelli et al. 2018). The share of Italy’s exports in world imports declined from 4.5% in 1999 to 2.9% in 2016—and the market share loss was heavily concentrated in more traditional market segments characterized by high exposure to Chinese competition (Bugamelli et al. 2018). As Chinese and other developing economy firms continue to expand their production capabilities and to upscale, competitive pressures will mount in medium- and medium-high tech segments as well. Italian firms have difficulties facing competition from low-wage countries: They are generally too small to wield any pricing power, too often single-product producers unable to diversify market risks, and too dependent on foreign markets, because their home market is in the doldrums.
Figure 3

Real wage per hour of work in manufacturing: Italy versus the Euro-4 countries, 1970-2015 (euro’s, constant 2010 prices)

Source: author’s calculation based on EU-KLEMS (Jäger 2017).

Figure 4Manufacturing labour productivity per hour of work: Italy versus the Euro-4 countries, 1970-2015 (euro’s, constant 2010 prices)

Source: author’s calculation based on EU-KLEMS (Jäger 2017).

Italy’s Permanent Crisis Is a Warning for the Eurozone

There are rational ways to get the Italian economy out of the current paralysis—none of them easy, and all of them founded on a long-term strategy of “walking on two legs”: (a) reviving domestic (and export) demand, and (b) diversifying and upgrading the productive structure and innovative capabilities and strengthening the technological competitiveness of Italy’s exports (to get away from direct wage-cost competition with China). This means that both austerity and real wage growth suppression must stop. Instead, the Italian government should gear up for providing unambiguous directional thrust to the economy by means of higher public investment (in public infrastructure and “greening” and decarbonizing energy and transportation systems) and novel industrial policies to promote innovation, entrepreneurship and stronger technological competitiveness.

There is no dearth of constructive proposals by Italian economists to help their economy out of the current mess—including Guarascio and Simonazzi (2016), Lucchese et al. (2016), Pianta et al. (2016), Mazzucato (2013), Dosi (2016), and Celi et al. (2018). These proposals all centre on creating a self-reinforcing process of investment-led and innovation-driven growth, orchestrated by an “entrepreneurial state” and founded on relatively regulated and co-ordinated firm-worker relationships, rather than on deregulated labour markets and hyper-flexible employment relations. These proposals might work well.

The same cannot be said, however, of the “one-leg” fiscal stimulus proposed by the M5S-Lega coalition government, the aim of which is a short-run revival of domestic demand by means of higher public (consumption) spending. None of the proposed spending will help solving Italy’s structural problems. What is completely lacking is any longer-term directional thrust, or the second leg of a viable strategy—which the neoliberal Lega will be unwilling to provide and the “progressive-in-name-only” M5S seems incapable of devising (Fazio 2018). Plus ça change, plus c’est la même chose.

More importantly, any rational “two-leg” developmental strategy will be incompatible with sticking to the EMU macroeconomic rulebook and keeping financial markets calm, which are supposed to act as the disciplinarian of Eurozone sovereigns (Costantini 2018; Halevi 2019). This is clear from what happened when the M5S-Lega government came up with an expansionary Draft Budgetary Plan (DBP) for 2019. The total impact of the one-leg fiscal stimulus initially proposed in the 2019 DBP amounted to an estimated 1.2% of GDP in 2019, 1.4% in 2020 and 1.3% in 2021—and even this minute budgetary expansion triggered strong negative responses from the European Commission and increases in Italian bond yields.

Blanchard et al. (2018, p. 2) formalize this status quo in a mechanical debt-dynamics model and conclude that the 2019 DBP risks triggering “unmanageable spreads and serious crisis, including involuntary exit from the Eurozone.” Blanchard et al. (2018, p. 16) argue for a fiscally neutral budget, which they think would lead to lower interest rates and “probably” (in their words) to higher growth and employment. Equations, graphs and technocratic econospeak are competently used to turn what in fact constitutes a very modest transgression of the EMU rulebook into a low-probability- catastrophic event—which everyone would want to avoid (see Costantini 2018). What is tragic is that the 2019 DBP does not come close to what would be needed for a rational strategy. All the sound and fury is for nothing.

Worse still is the fact that maintaining Italy’s status quo, which is what a fiscally neutral budget would mean, carries a real, but unrecognized low-probability, high-impact risk: a breakdown of political and social stability in the country. Continued stagnation will feed the resentment and anti-establishment, anti-euro forces in Italy. This will destabilize not just Italy, but the entire Eurozone. Italy’s crisis thus constitutes a warning to the Eurozone as a whole: Continued austerity and real wage restraint, in combination with the de-democratization of macroeconomic policymaking, make for a “dangerous game” (Costantini 2018)—a game which risks further empowering anti-establishment forces elsewhere in the Eurozone as well.

This is like opening Pandora’s box. No one can tell where this will end. Economists (including Italians) carry an enormous responsibility in all this, both because they are much to blame for the chaos and because they fail to continue to unite behind rational strategic solutions to resolve the Italian crisis. “Perhaps,” John Maynard Keynes wrote, “it is historically true that no order of society ever perishes save by its own hand” (Keynes 1919). Rational economists have to prove Keynes’ verdict wrong, starting in Italy—if only because the Brexit mess appears to be beyond redemption.

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  1. Yikes

    Article seems to ignore why Germany is holding so much Italian Debt, which to my reading is Germany wanted to create a captured market and kill off export competition with the foundation of a currency union at the exchange rates set and provision of easy credit for German goods, with the long term goal of creating a 4th Reich by means of capital slavery. Like climate change, many Italian intellectual elite knew this was going to happen, but that it would enrich them at the cost to both the old capital elite and working classes, with the bill falling due long after they had passed away.

    1. Summer

      When all roads lead to one destination, the people will then be bombarded with “speculation” about how they arrived instead of how they get out.

        1. Summer

          When all roads lead to one destination and you’re trying to get out…maybe time to dig a tunnel.

        2. Summer

          But also in reference to your original comment: Yes, it is often more about the things NOT said.

    2. F.Korning

      I agree there is a macro structural take on this, but it’s not as simple as the big bag german wulf narrative. Italy, like many paternalistic catholic old world countries, suffers from defiscalised old aristocratic wealth, establishment inertia, corruption, nepotism, and organised crrime. The end result is that there is a dearth of real productive economic growth, ie real wealth creation, versus rent extraction. It’s not the hot german money that is the problem, is that it is mal-invested in rent-seeking, which only exacerbates inequity and instability.

  2. Ignacio

    One month ago I visited two fairs simultaneously held in Madrid. One was on renewable energy systems (95% of it was solar) and the second was on water management. Italian companies were almost absent in the first but were very abundant in the second in strong competition with german companies. And I have to say that during my visits, the italians (well, their spanish representatives there) were infinitely more friendly and helpful compared with arrogant spaniards representing their german counterparts.

    1. a different chris

      How weird is it that sunny Italy seemingly* lags in renewable energy companies?

      *I am generalizing from your data point, admittedly.

      1. Ignacio

        Italy enjoyed a short solar boom between 2010-2012, similarly as Spain did in 2007-2008 in both cases associated with large public incentives. Currently, solar PV is slowly increasing again. In Spain, we had an awful utility-friendly regulatory framework aimed to avoid PV but It has recently been changed and solar PV is booming again.

    2. orange cats

      I love interesting comments like this based on experience, although I have a tendency to extrapolate…the Italians are, historically, experts on water management.

        1. Listener2

          Seems to me they were the first ones moving water around long distances no ? As for solar, we stayed in a B&B in Tuscany. The fellows that ran it complained about the high cost of energy needed to heat water for their residents. When asked about solar, the talked about “rules” in Tuscany preventing solar panels on the roof. The powers that be wanted to keep Tuscany “pure” and beautiful. Can’t argue with that but ………..

  3. DJG

    When people talk about Italy being unstable: From the post, which describes the stability of austerity >

    Italy kept closer to the rules than France and Germany and paid heavily for this: The permanent fiscal consolidation, the persistent wage restraint and the overvalued exchange rate killed Italian aggregate demand—and the demand shortage asphyxiated the growth of output, productivity, jobs and incomes. Italy’s stasis is an object lesson for all Eurozone economies, but—paraphrasing G.B. Shaw—as a warning, not as an example.

    And people wonder why the Movimento Cinque Stelle arose? Or why Matteo Salvini, Trump imitator, now has so much influence?

    All of the graphs show that the average person in Italy has been made poorer because of EU policies and the euro. The remarkable thing is that Italians still want to remain in the EU and in the euro because these supranational structures keep the Italian state in line. Yet job creation is stalled. There is a considerable brain drain. The Mezzogiorno is gradually losing population–emptying out because the economic prospects are so dire.

    And the left is in collapse because of years of Renzi’s Blairism / Clintonism.

    This is all according to plan.

    1. BillC

      Well, let’s think about immigration as a piece of the big picture.

      I have lived in Italy for 18 years in three periods since 1980, working for a small Italian IT company during the first two, and then as a retiree. My 3 periods map well to the GDP/person curves above: (1) the conclusion of the growth phase, (2) most of the capstone, and (3) the post-great-recession tail of the decline. Storm’s analysis fits my impressions as a resident and workforce participant.

      I think that the economic changes for average Italian working-class member that Storm’s analysis implies is a fully sufficient explanation for Italians’ current hostility to immigration and their turn to populist politicians. Doesn’t look to me a bit different from middle America’s reaction to immigration and its turn to Trump in either cause or effect.

      In both cases, rapidly increasing immigration is due in large part to US-sponsored destabilization of the immigrants’ counries of origin: war and toppled states in Africa and the middle east and NAFTA’s destruction of the Central America’s farming and small business economy.

      If you’re feeling precarious and see a future that promises only decline, it’s hard not to resent an apparent flood of immigrants that can easily be characterized as contributing to your misery. (Not intended as excuse or apology … just noting common human behavior.)

      1. Anon

        And so… Instead of explaining the cause of the immigration (common human behavior to flee conflict/deprivation) demagogues like Trump (and other politicians) exploit fear of the “other” as the cause for national decline. When, in fact, those same politicians/voters were the source of these foreign wars/economic deprivation. . . just noting American exceptionalism.

      2. Ignacio

        I think yours is a sensible and well focused comment. Much of what you say applies to Spain, mediterranean sister of Italy, even though we are following somehow different political pathways. It worries me that we are following suit with “indepes” the guys that believe independentism is the solution to their struggles and other populist movements like Vox that recently polled at 12% and formerly played a pivotal role in Andalusia where they govern in coalition with the conservatives (Cs) and elder conservatives (PP). Vox is quite a rancid political option which roots on Franco and the fascists.

        When I think of the Lega-5Star coalition I always conclude what strange couple made politics as strange was that Berlusconi governed Italy for so many years. He would just been made an entertaining oppositor but the millionaire leading the country strikes me. Looks like modern democracies have degenerated into something that brings the worst of us to the top.

        1. BillC

          Thanks for backing up my argument, Ignacio!

          Looks like modern democracies have degenerated into something that brings the worst of us to the top.

          … because for the last 40 years, when the best and brightest of us* were running things, seems like only they prospered. Funny how dashed expectations make us dumb.

          * You might want to except George Bush, but for his constituency, I figure he counted.

      3. Andy Raushner

        If you are hostile, but yet still don’t get it, I can’t support that conclusion. I don’t get why this board think somebody like Trump matters. He couldn’t even get the majority of the country to like him.

        The truth is, capital has a tendency to concentrate and concentrate it is. Not in southern europe. Debt won’t help.

        1. drumlin woodchuckles

          Trump couldn’t get a majority of the country to like him? True.

          Clinton couldn’t get a majority of the country to like her either. Also true.
          No? Well . . . if Clinton could have gotten all the non-voters to like her enough to add their votes-for-Clinton to the Clinton-liker votes-for-Clinton, then Clinton would have won.

          All the Trump voters + all the non-voters = the majority of the country which did not/ does not like Clinton.

          1. Tony Wright

            So the non voters are a big part of the problem – sometimes in life you simply have to choose the lesser of two evils.

            1. sierra7

              “…..sometimes in life you simply have to choose the lesser of two evils.”
              That sentiment is precisely what is destroying our political system.

              1. Tony Wright

                If you do not choose the lesser of two evils you risk enabling the greater evil. However, I agree the ‘system’ is largely broken, but choosing the lesser of two evils does not prevent you or I working towards change for the better.

              2. Tony Wright

                Further to the above, and on the maybe erroneous assumption that you sierra7 are a progressive leaning US citizen, that means organising to overcome the corrupt ,self-serving DNC ,so that the next Democrat candidate for US Presidency is genuine progressive, not sleazy Joe or some other establishment candidate. The fact that a serious recession/market crash is fairly likely to occur later this year or next year will help. Desperate times will help motivate people.
                The alternative is revolution, which given the crazy levels of gun ownership in the US, would make the French Revolution look like a teddy bears picnic by comparison.

  4. a different chris

    >which in turn could only be achieved by a radical deregulation of labour markets

    “could only” — yeah, TINA. And there is never any proof linking one to the other. It’s like a coffee enema. A scalding hot one.

    Hey, maybe an distinct but interested third party (a government representing all the people’s interests, high and low, does anybody recall such a thing?) could have evaluated wage vs. productivity growth and said “hey back off a little, that’s an order” in afflicted sectors. Or in the case of Ameruca, F’ Yeah! they could have said “pay these people a bit more in this industry”.

    Not exactly communism, not exactly capitalism, more like a referee’d capitalism. Step in when things get too out of kilter. We had that once, the referee was what we called Shame. He made sure that the boss was more than fine with “only” 50x what he paid his employees. Stocks weren’t a retirement lifeline.

    Everybody would likely have to accept shorter wage horizons than unions used to get (two years, maybe), but their living standards would better track productivity. Crazy talk, I know.

    1. drumlin woodchuckles

      It wasn’t just Shame. It was also New Deal Progressively-rising-by-bracket Income Tax rates.
      Beyond 50 X what-a-worker-would-make, excess income paid to a CEO or other high-level EO would be taxed at 90%. So the pay-setting authorities ( Board of Directors or whomever) decided to not even bother paying that final excess to The Boss. They spent it on The Corporation or The Bussiness instead.

  5. Susan the other`

    So the chaos of it all is virtually inscrutable. In these times we are wise to revert to the wild – no “economic” models please. Someday we will learn to harness wildness. You’ll notice that no species (aka ancient clan of some or other divergent animal) ever has a pogrom on another. Instead they diversify. You choose your niches. Wildness is pretty flexible. Just imagine if they were all trying to make a “profit” by racing to the bottom. Maybe to make our obsession (globalization) work we humans all need to diversify ourselves peacefully and secure our own positions. Just a silly thought. Must force ourselves to look to nature because we are such an aberration.

    1. Summer

      “Must force ourselves to look to nature because we are such an aberration.”

      For all the chaos, it is a conditioned state and I sense the desperation around making ao many human behaviors and living arrangements/situations seem natural.

  6. Andy Raushner

    I think the paradox Italy and frankly, all of southern Europe has, they need a EU that will share the wealth and force capital to decentralize. The funny thing is, my guess the neoliberals up north wouldn’t like it and the EU…………….my gosh.

    This is the problem with capitalism. Centralization of wealth. Funny how Libertarians completely try and make you forget it. Instead just getting rid of the “welfare” state, “public” central banks(lets be honest, private banking cartels are SOP in capitalism so there is always a central bank hanging around) and all those rules, will make a perfectly created paradise. How Orwellian of them.

    Right Wingers can’t whine about Venezuela, I just bring up “Central America”, which Venezuela if left alone would be a bigger mess. Venezuela has been hammered because their government(even before Chavez era) wouldn’t play ball since the revolt of 89. What a mess righties created there. Then their rich pigs traffick in immigrants to be their off the book “workers”. Donald Trump is the definition of this scam artist as to get a nomination of his party supporters who imo are just emasculated and with a beta male mindset wanting the state to give them special rights. Not unlike Feminists.

    If Italia wants to change, then you have to lose faith in capitalism first. Once that is gone, anything is possible.

  7. DavidEG

    A couple minor quibbles aside (not worth pointing out), I think this is a very good analysis. Let me add some personal considerations – many italians today would read this and conclude that the EU is responsible for all their country’s ills, therefore exiting would be the only way to return to prosperity (actually, some wouldn’t care to read because they innately know that out is better). I think they’re wrong, for two reasons:

    – the responsibility for the horrible italian public debt lies not with the EU but with the country’s abysmal political class of the ’70s and ’80s, which in the face of a galloping inflation (kickstarted by the oil crises) kept running double-figures public deficits (and paying very fat interest rates) to endear the electorate, and with the equally abysmal Berlusconi governments, which despite having a large majority and being among the longest running of the republic, never addressed – or actually worsened – the country’s structural growth-stifling issues (low education, low labor force participation, ‘small is good’ enterprises, insanely arcane and constantly-changing fiscal system, bloated and corrupt public administration, etc). Today’s government is no better than these illustrious predecessors – in fact it may actually be worse still.

    – it is very likely that Italy would be in an equal or worse predicament today had it not adopted the euro. The euro allowed Italy to have cheaper imports and consistently lower interest rates (much lower in the early years, which Berlusconi mostly squandered), to increase demand for its debt and to rein in (just a little) its generally profligate political class. The Lira was a disaster, and would most likely have stayed the same to this day – remember that the country was forced to ‘divorce’ the Treasury dept. from the central banks in 1981 due to adverse economic forces (no credibility in the markets), so monetization would have been a no-go anyway.

    There’s no easy way out of the mess Italy is in.

  8. bruce wilder

    Two things struck my eye in the article:
    1.) the emphasis on the need for “structural” reform. I do not get much sense for what this could mean. Surely any serious reform policy means quite different things in the north than in the south. (The weird hybrid political coalition surely reflects the differing “structural” situation north and south.) I wish something more than a simple acknowledgement of pre-Euro Italy’s high inflation and high unemployment (and high perceived public corruption, let us not forget) had been included. What was the “structural” problem then?

    2. This: “maintaining Italy’s status quo, which is what a fiscally neutral budget would mean, carries a real, but unrecognized low-probability, high-impact risk: a breakdown of political and social stability in the country.”

    Isn’t there a high-probability risk of Italy being caught in a slow-motion deflationary fiscal undertow of high rates of interest (higher than growth) draining the country?

    1. Grebo

      “Structural reform” is simply Neoliberal code for wage cuts and elimination of worker protections. It means the same everywhere.

    2. DavidEG

      Structural reforms are interventions that are thought to increase the growth potential of the economy. It’s not just crushing workers’ rights. See my previous post for a short list of issues that impair Italy’s growth – definitily not exhaustive.. I could have added a constitutional reform to end perfect bicameralism and re-organize the administrative arrangement (thinking about regions and provinces), reforming the justice system (currently slow as hell), actually combating tax evasion (the worst in Europe), and more. Italy has been postponing these measures for several decades – it cannot keep doing that anymore.

      1. Marc

        On the above, the point I think you are missing from the article is the impact of austerity imposed by the EU on Italy (in part due to the adoption of the Euro). Agree with the point that noting fundamentally changes if the politics/political economy doesn’t get its act together but this probably only works through a concerted effort by both the public and private sector and Europe is a block to that. Would I trust that they can get their act together? Not really so I’m not sure where that leaves us. As you said, very difficult.

        1. DavidEG

          Yes, austerity is not a solution and certainly curtailed growth. I’m not necessarily justifying the EU on this matter – what Greece had to endure (and still is) is pretty cruel. It’s just that I’m not positive Italy could have escaped fiscal consolidation anyway – god only knows how much appetite for Lira-denominated there would have been during the 2008 and 2011 crises, and at what interest.

          But of course, counterfactual analyses aren’t a thing in economics. This considerably reinforces the case of EU detractors, in Italy and elsewhere.

  9. Ramore

    Italy’s population is rapidly aging and its demographics are in terminal decline. This needs to be brought into the analysis. They don’t have the people to consume what they produce and don’t have a tax base to fund government expenditures given they don’t have control of their currency.

    1. Felix_47

      Has the cost of raising kids become prohibitive? Are they outsourcing child production to the refugees?

  10. domenico

    it was global forces, the IMF, and a public opinion lead by Confindustria, Italy’s powerful employers’ lobby, that compressed salaries and undermined centralized wage negotiations in the country.

    The E.U. focused its efforts on budget consolidation, until under the premiership of Matteo Renzi it endorsed a ‘jobs act’ deregulation of its labor legislation. This was widely welcomed by both establishment and non-establishment forces as the only way to preserve the italian industry.

    IMHO: The crisis of the Italian manufacturing, which leaves Italy an exporter of only food, luxury and fashion goods with only tourism as its leading services industry, should be seen in the light of the country’s inability to catch up with global value chains. Not the resut of a primary surplus that was inevitable, given Italy’s dangerous debt levels.

  11. Mael Colium

    The first two AEMCO graphs reveal a deeper problem than just the Italian economy. The GDP and Wages (in real terms) of France, Germany and Italy are all back at or below the levels of the 1960’s which is pre EU formation. Italy’s is worse by a stretch, but my point is that if none of the three greatest economies in the union have improved since the formation of the EU, how can Europhiles keep calling it such a great success?
    I would like to see a graph of the income distributions of economic outputs which no doubt would demonstrate that even though the economies are no better than pre EU, the elites have garnered more of the reduced output than ordinary citizens who are worse off than they were pre EU. No wonder movements like Gilet Jaunes are taking to the streets. Interesting the French Revolution was the key proponent of social change in Europe. Are we witnessing it again 21st century style? What will replace Madame Guillotine?

    1. St Jacques

      All those countries are vastly wealthier today than they were in the 1960s. There would be riots and revolutions if they had fallen back to 60s levels. The first two graphs compare relative differences between the named euro countries and the last two show actual levels of wages and productivity per hour worked of France and Italy to show the divergence. The point of the graphs has been to show Italy falling behind (but still rising if slowly) the last 25 years after gaining on the others the previous thirty. None of them shows an actual decline in real terms.

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