Working class Europeans are increasingly facing declining living standards and are turning against the EU. The war in Ukraine and the energy crisis has exacerbated this trend, and national governments and the European Commission are only making matters worse.
A shocking 66 percent of the EU working class feel their quality of life is getting worse; only 38 percent of the upper class feel the same way. How long can the European project survive with such a divide?
There is one EU country where this process has already been occurring for decades: Italy.
As I read a recent study on Italy’s decades-long decline in living standards, it was shocking how many of the same policies that precipitated its decline are now being used across the EU. I suppose it shouldn’t come as a surprise since there has never been any admission that the economic playbook followed by Brussels and Italian elites has failed. Instead they only demand more. More privatization. More cuts in real wages. More labor flexibility. More austerity. In many ways that was the goal all along:
The idea of those who welcomed and promoted tighter external constraints was that a reduction in the country’s discretion in policy-making would facilitate economic modernization, breaking the negative trend in productivity growth; it would discipline trade unions due to the need to retain external competitiveness by keeping wage growth low, as the option of currency devaluation was no longer available; and it would discipline government expenditures, thereby making Italy more attractive for financial investors.
All of these policies have been disastrous for the large majority of Italians. It remains the only country in the bloc where wages have fallen since 1990, but maybe it will soon have company. Brussels, rather than seeing such a decline as failure of its policies in the bloc’s third-largest economy, seems to want to emulate it throughout the rest of the EU.
And the result will be the same for the large majority of the EU population as it has been in Italy now for decades. Just a reminder of what that has meant for Italians:
Annual net income of the Italian household, which was €27,499 (at constant 2010 prices) in 1991, declined to €23,277 in 2016—a drop in median living standards of 15%. Mean net household income fell by €3,108 between 1991 and 2016 or by about 10%. Italy is the only major Eurozone country that, in the past 27 years, suffered not stagnation but decline.
Other EU countries are now dealing with similar drops in incomes, and yet are pursuing similar policies to those that Italy has pursued for a quarter century, which leads to the question in an age of declining prosperity: just how much longer can the European project survive?
While there are obvious differences between Italy and the other members of the EU (Italy came into the common currency with a lot of debt, it relied heavily on state intervention so that privatization continues to have a more negative impact there than elsewhere, etc.), but the latter is still pursuing policies that were enacted with zeal by Rome, which helped lead to the Italy’s decades-long stagnation.
Wage suppression has long been the strategy in Italy:
Exporting became more difficult as the real exchange rate appreciated when Italy entered the Eurozone. Downward pressure on real wage growth due to intensified cost competitiveness strategies dampened household consumption. Investment declined as the economic outlook deteriorated and as privatisation promoted a decline in the number of large firms in crucial sectors from the 1990s onwards. And the constraints on fiscal policy led to a decline in the growth contribution of public expenditures, as Italy was forced to run primary fiscal surpluses to meet the European fiscal rules and appease investors.
The EU, and especially Germany, are confronting a similar export competitiveness problem. The response, similar to in Italy, is class warfare waged on labor.
Germany no longer has access to cheap Russian fossil fuels, and it is an importer of critical minerals used in manufacturing such as electric cars. The country’s export markets in Asia are shrinking. The only component of Berlin’s economic model still left is wage suppression, and its doubling down on those efforts. The same way Italy believed it could rely on a steady stream of low-paid workers from the mezzogiorno, Germany thinks it can continue to do much the same.
Germany is instead pushing employers to pay a one-off “inflation bonus” to their employees, which will be exempted from income tax and social contributions for a sum of up to €3,000. Other EU governments, including of course the Meloni government in Italy, are following Berlin’s lead and pushing the “wage restraint” argument. James Meadway writes at The New Statesman:
Real wages have fallen for the last two years, and German bosses are warning of worse to come. The alternative would be to abandon the export model and reflate the domestic economy – pushing up real wages as a primary objective, squeezing profits in the export-oriented sectors as needed, and driving up public investment to create jobs. But neither the current government nor its opposition appears willing to break with the post-reunification economic legacy. It will be German workers that are forced to pay the price.
Waging war on workers with the stated goal of controlling inflation is similar to what happened to Italy in the 1990s. While Rome’s wage suppression efforts did help tame inflation, they backfired “in terms of aggregate demand, productivity and, ultimately, growth.”
One of the first steps Rome took was to abolish wage indexation in a bid to restore “external competitiveness” and it was game on from there:
Italian governments reformed the labour market in several rounds from the early 1990s onwards. In theory, this was supposed to increase cost competitiveness of Italian firms, thereby allowing them to gain export market shares as they came under increasing pressure from competition in China and other emerging market economies while the option of currency devaluations was no longer available. Labor market reforms indeed contributed to reducing inflation and real wage growth. But cheap labour also increased the labour-intensity of production, as an increasing share of temporary employment contributed to reducing the incentives for innovation (Tridico, 2015). Private investment is key to rising productivity and particularly important in high-tech sectors(Kleinknecht, 2020), but the intensification of low-cost business strategies in a more flexible labour market took away incentives for private investment.
Similarly, German business investment has been declining for years and stagnation is an EU-wide trend.
Business investment in the €zone is well below its pre-pandemic trend. pic.twitter.com/awlkJj4k1D
— Philipp Heimberger (@heimbergecon) June 20, 2023
Again from the early days of Italy’s decline:
…wage repression negatively affected growth dynamics by weakening the linkage between aggregate demand and the ‘Kaldorian’ processes of learning, innovation, and industrial renewal. Second, the persistent availability of cheap labor encouraged the spread of low-cost competitive strategies, which, in turn, discouraged alternatives based on investment, innovation and training.
While business investment declines, the EU continues to push labor market flexibility as one of the main pillars of the European policy framework. It is perceived as an instrument to promote growth with positive spillover effects on the workers’ income. But in reality it often leads to wage suppression and more poverty.
Again, one need look no further than Italy:
Since the mid-1990s, labour market flexibilization has been at the centre of the Italian political agenda, notwithstanding the orientation of the governments in charge. Italy’s score for regular contracts was marginally stricter than in Germany and France in the 1990s, but it declined below German levels by 2019.
Temporary, low-paid contracts now account for the majority of new jobs and 5.6 million Italians — including 1.4 million minors — currently live in poverty, an all-time high.
While correlation is not causation, the weakening of organized labor in manufacturing helped pave the way for this flexibility during and after European integration and has meant the increasing precarization of labor from the 1990s onwards.
Economists typically point to too much state interventionism in market processes for Italy’s stagnation and argue that Rome must always enact more market-friendly reforms.
This is what Italy has been doing for two-plus decades. As Philipp Heimberger shows:
Italy’s “reform efforts” have been significant; Italy is actually a top performer in liberalising reforms over the past decades compared with other advanced economies. Overall, Italy has adhered much more closely to the EU’s reform policy rulebook than Germany or France.
Now the EU Commission’s legislative proposals for reform of EU fiscal rules would bring even more austerity not only to Italy but the entire bloc. The EC is pushing this despite its own polling of EU citizens showing that nearly 80 percent favor stronger social policies and more social spending.
Although austerity mandates will hit countries like Italy with higher levels of debt harder, it will also mean fewer jobs, lower wages, less public services and higher poverty across the bloc. The German economy is already stagnating, largely the result of a decline in government and household consumption.
The working class across the EU will of course be hit the hardest, and one wonders how much more they can take of the EU elites’ greed before the cracks in the EU foundation start to crumble. Brussels’ neoliberal austerity policies continue to increase the gap between rich and poor.
Once again, the case of Italy is instructive. The divide between the wealthier north and poorer south is often described as some insolvable problem, but in reality state intervention from the 1950s to 1970s in fiscal and industrial policies closed, and in some cases, erased the gap. Then EU rules destroyed those efforts:
The European regulatory framework made the use of industrial policy interventions
much more difficult while fiscal policy turned restrictive. During the Euro Crisis, Italy lost about 25% of its industrial production; reconstruction of Italian industries was limited by restrictions on fiscal and industrial policies. Importantly, the South of Italy experienced a much larger contraction in manufacturing value added than the Northern parts; business investment, household consumption, and public expenditure in the South also fell significantly more, which further increased the deep territorial divide.
Back to that aforementioned number of 66 percent of the EU working class feel their quality of life is getting worse. Trust in EU institutions also continues to decline. Brussels’ policies are creating a groundswell of opposition to the EU.
Despite Italy’s problems, a majority of Italians so far continues to be in favor of EU and Eurozone membership. However, support has been falling fast. Another round of harsh austerity in Italy could accelerate that trend.
As is the case across much of Europe, support for the EU in Italy is already largely divided along class lines:
Recent survey evidence suggests that support for the euro has a clear income and class bias. The perception of having benefited from the euro grows with income and is highest among self-employed professionals and large employers, technical (semi-)professionals, and associate managers, while production and service workers and small business owners are much less likely to report that they have benefited from the euro. In brief, in Italy support for the euro is concentrated among the economically better off and, with regard to partisan choice, among voters of the centre-left. In turn, the more a person has benefited from the euro, the more likely she/he is to report that she/he would vote to remain in the euro in a hypothetical referendum. Importantly, the majority of Italian voters report that they have not benefited from the euro, which makes support for the single currency rather fragile.
With youth unemployment through the roof, younger Italians overwhelmingly believe their lives will be worse off than their parents and hold more eurosceptic positions. In last year’s elections, voters went with the fake eurosceptic candidate Meloni. What happens when they get a real one?
And what happens when Italy’s problems increasingly begin to be experienced by much of the EU? The European elites won’t like the answer, as detailed by The Political Costs of Austerity:
Fiscal consolidations lead to a significant increase in extreme parties’ vote share, lower voter turnout, and a rise in political fragmentation. We highlight the close relationship between detrimental economic developments and voters’ support for extreme parties by showing that austerity induces severe economic costs through lowering GDP, employment, private investment, and wages. Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment.
Here’s looking at you, Germany.
— Adam Tooze (@adam_tooze) June 22, 2023
Rather than change course when faced with the prospect of a nationalist, euro-skeptic party faring well with voters, we instead have German spooks sounding the democracy-threat alarm. Thomas Haldenwang, the chief of the Federal Office for the Protection of the Constitution, said at a news conference last week that far-right views and positions pose the biggest threat to German democracy – or at least whatever is left of it.