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1) “Worse than a war”: the shocking effects of the crisis and austerity on the Italian economy

Record-level unemployment and corporate insolvency rates, industrial production down 25%, ballooning public debt and a massive and continuing 10-point GDP drop: despite the optimism of Italy’s young PM, Matteo Renzi, the numbers show a country utterly devastated by the crisis but more accurately by the disastrous policies pursued in its aftermath. Despite repeated promises of “recovery being around the corner”, the latest quarterly data show that the country is once again in recession according to European standards (where a recession is defined by two successive quarters of negative growth). But the truth is much worse, and that is that Italy has been going through one horrific, six-year long recession.

Figure 1. Real GDP in Italy, 2007 (Q1) – 2014 (Q2)

. Figure 1 . Real GDP in Italy, 2007 (Q1) – 2014 (Q2) At this rate,

At this rate, while a number of countries (both within and without the euro area, such as the US, the UK, Germany, etc.) have returned to – or exceeded – pre-crisis GDP levels, it could take Italy 15-20 years (if at all) to do the same – making it probably the longest recession in modern economic history and definitely the most serious crisis in the country’s 150 year-long history (worse than the Great Depression of the 1920s or the two world wars).


If we combine all this with the fact that we are also facing a massive

If we combine all this with the fact that we are also facing a massive sell-off to foreign capital of what remains of the Italian strategic industries and big banks (most recent cases include Alitalia, Indesit, Telecom Italia, Mediobanca, etc.), and privatisation of the remaining state assets, it’s clear that what we are witnessing is nothing less than a full- blown crisis of Italian capitalism – and thus of its entire post-war political-economic architecture – as well as the a perfect example of what Paul Krugman presciently predicted as the “Mezzogiornification” (or “Chinesification”) of the eurozone’s periphery countries, to the benefit of competing European capitalist interests (first and foremost Germany). Enrico Grazzini writes: “The wave of industrial sell-offs means not only the drastic reduction in employment, but also the impossibility of maintaining the conditions for autonomous – and where possible democratic – economic development



The most direct cause of the current crisis is a dramatic and unprecedented drop in consumption – i.e., demand.


This in turn has brought the country to the brink of deflation – with the

This in turn has brought the country to the brink of deflation – with the national inflation rate now standing at an almost-negative 0.3% and many the country’s major cities already in outright deflation



This has of course also affected the rate of capital accumulation, which over the 2012- 2013 period has collapsed by a staggering and unprecedented (in the country’s history)


2) “A problem of supply, not of demand” – really?

Yet, despite such overwhelming evidence of the fact that Italy suffers from a titanic problem of below-potential demand and industrial overcapacity, the national and European political establishment keep insisting that the country’s problems are on the supply side: excessive wages and labour market rigidity, and lack of “structural reforms”.

These problems have to be resolved through wide-ranging “structural reforms” – the old neoliberal mantra which is rapidly replacing that of fiscal austerity, increasingly unpopular (though of course it remains firmly in place), as the preferred topic of the European establishment. As one can easily infer, what is meant by structural reforms – though it is often omitted in official speeches – is wage compression; the deregulation, liberalization, flexibilization and precarisation of labour markets; and the reduction of collective bargaining (coupled with the privatisation of state assets). These – they say – will make Italy competitive once again, reduce unemployment and put the country back on the path to growth.

On various occasions Renzi has quoted the German Hartz IV reforms of 2003-4 – “a great reform package which has enabled Germany to overcome the crisis much better than other countries”, he said – as the model for his own package of reforms, beginning with the labour reforms of the so-called “decreto Poletti” – from the name of his


minister of labour and welfare, Giuliano Poletti –, also known as the cool-sounding “Jobs Act” (more on this later).

Now, if you were to believe Mario Draghi, Matteo Renzi and the lot, you’d think that Italy is a country tyrannised by all-powerful unions, where workers enjoy lavish wages (and benefits and holidays) and a pseudo-Socialist hyper-rigid and -protected labour market, and where any attempt for reform is instantly killed in its tracks. There’s little doubt that this is how many Germans and other Northern Europeans view Italy.

This is obviously what Draghi was implying when – clearly talking of Italy – he recently stated in a taboo-breaking speech that he was tired of member states falling short of the necessary reforms, and “that it’s probably high time now to start sharing sovereignty in that area as well, taking the structural reforms area in the marketplace, product reforms, Single Market legislation, implementation and labour market reforms, under common union discipline – in other words, trying to replicate our success in the budgetary area also in the structural reforms”.


3) Italy: the myth of the “missing reforms”

But is that really how things are? The truth is that Italy is probably one of the countries in Europe that has enacted the greatest number of neoliberal labour market reforms over the course of the past decades: a staggering nine labour reforms since 1997, seven of which in the past seven years. It’s important to stress that all these reforms pursued and obtained the same goals which the political establishment now presents as the solution to the current crisis: marginalization of unions, wage moderation and the progressive flexibilization of the labour market. And what effects did these reforms have on the country’s economy?

As the following graph shows, they had absolutely no positive impact whatsoever on employment/unemployment levels, with the latter seemingly increasing with the passage of each reform.


This is not all, though. The labour reforms were also paralleled by – or better,

This is not all, though. The labour reforms were also paralleled by – or better, the cause of – a dramatic drop in the corporate investment rate and subsequently in the productivity growth rate, which since the mid-nineties (when the first reform, the infamous “Treu Law”, was approved) has decreased fourfold – from 1.65% to 0.39% – and today stands dramatically below the European average.

– from 1.65% to 0.39% – and today stands dramatically below the European average. E-mail:


Paolo Pini writes:

What happened in the nineties, from Treu Law of 1997, which kicked off the deregulation of Italy’s labour market, to the Biagi Law of 2003 (infamous for its “supermarket contracts”) and most recently the contradictory Fornero Law of 2012, was a progressive deregulation to promote the flexibility of the labour market. The goal was to create, at the margins, a dual labour market: precarious jobs to flank permanent jobs. This “drift” has prompted more companies to rely on precarious work, low pay, and unproductive labour, replacing stable jobs, instead of innovating in the workplace, investing resources in research, training and human capitalThe “drift of flexibility and wage moderation” has thus led us into the “trap of zero productivity”, which is where we are now, in the years of the euro.

4) Italy: already one of the most liberalised countries in Europe

This puts to shame the notion that the responsibility for the current crisis lies with the “profligate” Italian workers enjoying excessively generous wages at the expense of their “responsible” European peers – or, in other words, “living beyond their means”. The reality is that since the late 1990s Italy is the country that has had the lowest increase in real wages in all of Europe, which in turn has determined a dramatic 10 percentage- points loss in labour’s share of the national wealth, to the benefit of profits and financial returns.

wealth, to the benefit of profits and financial returns . The same goes for the notion

The same goes for the notion that Italy has a “hyper-rigid” labour market. According to the OECD, as a result of the aforementioned reforms, Italy now has the most flexible labour market among the industrial countries, and has reduced job protection without any increase in productivity, with the reduction in protection for workers actually leading to ever worse productivity (



5) Renzi’s labour reform: the final nail in Italy’s coffin?

And yet, despite the devastating legacy of Italy’s 20-year record of neoliberal “structural reforms”, Renzi, through his American-branded “Jobs Act” – which will see short-term job contracts extended for up to 3 years, workers’ protections further reduced and companies exonerated from the obligation of offering on-the-job training programs – is now prescribing more of the same toxic medicine applied since the turn of the of the 1990s. After being sold the ridiculous notion of “expansionary austerity”, we are now being sold that of “expansionary precariousness”, which would have us believe that with just a little more flexibility and simpler rules, companies will once again begin to hire, will regain competitiveness and will also increase productivity, because workers will have more certainty in finding a permanent job. Or so says Giuliano Poletti, Italy’s labour minister.

The truth is that the most notable consequence of this latest round of labour reforms

will be a further reduction in aggregate demand (as the result of a further reduction in the labour share of GDP as a consequence of increased wage differentials, etc.) and thus


further deepening of the crisis.

As for the often heard argument that wage compression will help boost exports, all we need to do is look at Greece, whose exports have stayed put in recessionary territory despite the program of brutal austerity and deep wage cuts imposed on the country in recent years. The reason is simple. As even DGEFIN was recently forced to acknowledge, about half or even three quarters of the total missing exports can be explained by the low quality of institutions, with in particular the dimensions of contract enforcement, business sophistication but also political stability, economy and employment as well as the macroeconomic situation playing a key role – all elements of structural competitiveness which austerity actually undermines rather than improving. Wages and wage costs, on the other hand, were not considered to be a relevant factor


The same goes for other countries as well, implying that the drastic rebalancing of intra- euro trade balances that has taken place since the crisis has much more to with the decreased imports – as a result of demand-crushing austerity – than it has to do with increased exports. And even worse, that the benefits of a marginal increase in exports as

a result of wage compression are offset by the devastating effects on the wider economy of stagnating or falling wages, and by the deterioration of the aforementioned real determinants of structural competitiveness.

And of course there’s the fact that in a monetary union boosting exports through the compression of internal demand can work if one country does it, while others are there to soak up its exports (as was the case with Germany prior to the crisis); it clearly can’t work if all countries do it at the same time.


6) Structural reforms: a policy by the 1%, for the 1%

In the face of such an awful track record, one might be tempted to conclude that those who keep insisting that countries need more “structural reforms” are simply crazy, or ignorant. This would be a mistake. The truth is that these policies do in fact deliver positive results – just not for workers, ordinary citizens or the real economy. It’s a well- known fact that austerity, in its various form, is leading to a dramatic increase in inequality, by creating what has been described as “the single biggest transfer of resources from low and middle-income people to the rich and powerful in history”. This is arguably not an accident, but rather an explicit aim of these policies. There are various ways in which austerity achieves this, such as forcing countries to reduce their primary budgets – public-sector expenses, welfare benefits, public investments and so on – to free up funds for the servicing of the debt, which amounts to a transfer from the “real economy” to the financial sector.

But the crudest and most direct way in which Europe’s austerity policies lead to a transfer of resources from labour to capital is through wage moderation. And this for the simple reason that any reduction in the wage share is mirrored by an increase in the profit share. A recent study by the ILO attributes the sharp increase in inequality in advanced economies beginning in 2010 to declining and increasingly polarised wages (suggesting that there has been a “hollowing in the middle” of the wage distribution), and to a strong recovery of corporate profits, which by 2011 had returned to pre-crisis levels – or exceeded them – thus continuing the almost uninterrupted rise in profit shares registered in developed economies since 2000. The latest data shows that large European non-financial corporations, far from feeling the bite of the crisis, are actually awash in cash about 500 billion, 30% more than at the beginning of the recession. Yet capital expenditure – that is, productive investment – is at a historic low. In other words, large corporations are hoarding more than ever: as the French CGT trade union, which has recently launched a study into the matter, has stated, it’s time we started talking of the “cost of capital” instead of that of labour (http://revolting-

Interestingly, this process of accumulation has been more marked precisely in those countries most affected by the crisis. In Italy, during the first quarter of the year, the total real estate assets managed by investment funds exceeded 50 billion; in the 15 years since the industry began in Europe’s fourth largest economy, assets have grown 16-fold, the largest expansion on the continent, after Luxembourg. Then there’s sectors like insurance, which have invested in government bonds to the tune of 270 billion and corporate bonds amounting to 90 billion.

But at the other end of the scale it’s a sorry tale: 94% of the Italian businesses that have folded in the six years of the crisis were small craft enterprises. This has driven inequality in the country up to unprecedented levels. As the Bank of Italy recently confirmed, Italy’s richest 10% of households have grabbed even more of the nation’s wealth – now as high as 46.6%, up from 45.7% in 2010. The same goes for other countries as well,


with the ILO report noting that there is a growing polarisation between small and larger firms.

The fact that these policies have disproportionately benefited large firms shows that the silent class war currently being waged in Europe is not simply one of capital against labour. It is also one of large-scale corporate-controlled capital (commonly known as “big business”) and finance against small- and medium-sized businesses.

7) What “structural reforms” for a progressive exit from the crisis?

This is not to say that “structural reforms” are bad per se. On the contrary, reforms are deeply needed – just not the kind proposed by the neoliberal establishment. This is clearly not the place to discuss all the necessary reforms for a progressive exit from the crisis, but to remain on the issue of wages, a good starting point would be to… raise them. There is a growing consensus among non-mainstream economists that one of the main “structural” problems of advanced economies in the past decades hasn’t been excessively high wages but rather the contrary: excessively low wages.

From the 1980s to mid-2000s, the economy of advanced countries continued to grow but the share of national income going to salaries registered a steep decline. As well as leading to an increase in inequality, this also posed a risk for the wider economy and the profitability of capital, because it caused the purchasing power of labour to decline. Profits, after all, can only be made if there is a sufficient demand for goods and services. As Nouriel Roubini writes, the response to the aggregate demand deficiency caused by the falling wage share was a “democratization of credit”. Basically, households borrowed more and more to make up the difference between spending and income, leading to a colossal rise in private debt, particularly in the United States, but also in a number of European countries, thus fuelling the asset and credit bubbles that exploded in 2008. As we have seen, austerity is only making the problem worse. The conclusion is that raising wages should be a key component of economic growth strategies across the world.

Ozlem Onaran and Engelbert Stockhammer write:

The good news is that a wage-led recovery as a way out of the crisis is economically feasible. For the large wage-led economic areas with a high intra- regional trade and low extra-regional trade, like Europe, macroeconomic and wage policy coordination towards a higher wage share can improve growth and employment. At the global level, Europe… would be one the main beneficiaries of a coordinated wage-led recovery. Globalisation is not in itself a barrier to egalitarian policies. The solution to the current race to the bottom requires a step forward by some large developed economies in terms of radically reversing the fall in the wage share at home first. This, in turn, can create space for leveling the global playground through international labour standards and domestic demand- led and egalitarian growth strategies rather than export orientation based on low wages in the developing countries.


Given that a rich body of research shows that one the most important causes of the fall in the wage share has been the fall in the bargaining power of labour, welfare state retrenchment, and financialisation, the solution in turn “lies in reversing this process through a reform to increase the bargaining power of the unions and the collective bargaining coverage, establishing sufficiently high minimum wages as well as macroeconomic policies to bring back the public goods and welfare state, and to re- regulate finance” ( should-be-a-key-component-of-economic-growth-strategies-across-the-world/).