The Staggers

The New Statesman’s rolling politics blog

Alternatives to austerity

The inevitable "structural reforms" Italy faces won't drag the eurozone's third-largest economy out of the mire.

By James Meadway Published 12 November 2011 13:59

Silvio Berlusconi's last few days as Prime Minister find him overseeing the introduction of extraordinary austerity measures, passed through the Italian Parliament yesterday on the back of wheedling promises made to EU leaders. Berlusconi's exit will doubtless come as a blessed relief to many millions of Italians. The clown is to be replaced - without, naturally, recourse to elections - by a European Commissioner, Mario Monti, hastily sworn in as senator-for-life. A new government of technocrats will oversee implementation of austerity, assisted by the IMF officials now taking up residence in Italy's finance ministry. Those austerity measures, in turn, will be backed up by the usual demands for "structural reforms" - deregulation and privatisation chief amongst them.

This will not end the crisis in Italy - and, with that failure, the prospect of a global slump is opened. Austerity across Europe has already driven economies deeper into the mire, Ireland and Greece chief amongst them. The mechanism is widely known: as government spending falls, it drags demand down still further. As demand falls, firms cut wages and make redundancies. A vicious circle kicks in. With Italian consumers and businesses keeping their wallets closed, and no real hope of a recovery in export markets, it is spending by government that could sustain economic activity. Yet the scorched-earth economics of austerity are now being forced onto Italy.

Deregulation and the loosening up of labour markets are the second leg of the EU and IMF plans. The hope is that by freeing capital to operate as it sees fit, it will recover its dynamism. But "structural reforms" have taken place in Italy over the last decade or more. On OECD measures, Italy's product and labour markets are now as deregulated as Germany. In conditions of stagnant demand, the chances of further assaults on employment and consumer protection prompting growth are slim.

Italy's economic malaise runs deeper. The rot set in decades ago. A post-war miracle, with growth rates averaging over 5 per cent from 1951-73, halted with sharp recession in the early 1970s. Growth never truly recovered, and for the last 15 years has averaged less than one per cent a year. Businesses and government acted in concert to casualise labour, promoting labour-intensive export industries at the expense of capital investment. Economic activity became increasingly concentrated in the centre and the north, leaving the south lagging still further. Rising public debt initially helped cover the costs of wider stagnation.

Recent governments have targeted that debt, at the expense of public spending - and those without Berlusconi at the helm most successfully. The burden fell from 120 per cent of GDP in 1996 to around 100 per cent by 2007. But the financial crisis of 2007-8 led to a sharp rebound. A decade of debt reduction was wiped out in two years. The combination of a seriously weak economy and sharply rising indebtedness is what has now panicked markets into pushing Italy's current borrowing costs above 7 per cent.

If there is a hope of recovery in the eurozone's third-largest economy, it cannot come through the standard IMF package of austerity measures and market-led reforms. Nor will it come through the erosion of democracy. Quite the opposite is required: supporting public expenditure to sustain demand; industrial transformation, led by public intervention; and an expansion of democracy against the rule of finance - including, ultimately, a recognition that odious and unpayable sovereign debts need not be honoured.

James Meadway is a senior economist at the New Economics Foundation

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18 comments

Fri, 2012-05-11 05:12 — WallaceNeville

We also need to train up our next generation of entrepreneurs and business people and getting them into the cooperative model of doing business, by setting up business schools, and a start could be made by bringing the public schools into the state system as Centres for Business Technology and Innovation. http://www.grantsforcollege101.com/

Sun, 2011-11-13 02:51 — Fergus Pickering (not verified)

Seize the banks! So who exactly SEIZE my bank HSBC, and presumably seizes my money? Does the seizing one seize the larger part of HSBC which is abroad, and, if so, how exactly? I never heard such cobblers. Shall we seize all the solicitors while we are about it and reform the legal system? Shall we burn Eton and Winchester and ditto the school system? Were you born bleeding yestarday?

Sun, 2011-11-13 09:07 — Luddite (not verified)

"A new government of 'appointed' technocrats will oversee implementation of austerity" What ever happened to elections?

matthew fox: Look here 1% don't presume anything. I apposed the sell-off of the TSB, which i was a member of.. Voted against the demutualisation of the Halifax Building Society. But when i did sell my considerable shares at £10.11p a share, myself and my wife, who still works at that particular bank.. We made a small fortune. Does that up-set you are you envious, jealous, what is it about folks such as yourself that hates success and despise others that can stand on their own two feet.. By the way we never paid more then 5% interest, and my wife's staff bonus was also wisely invested. Which allowed us to buy my daughter a home paying cash..... Isn't capitalism wonderful.

Sun, 2011-11-13 10:39 — swatantra nandanwar

Asany good bsinessman or woman will tell you: tomake money, you have to spend money; that means investing for the future, quite a bit of the profit going back into the business to grow the business and paying off interest on loans, and not into the pockets of greedy shareholders, greedy to get a larger slice of the ckae than they deserve.
The Banks should be doing their bit for growth by lending; and this they are not doing. So the call for a 'Peoples Bank' is a good one.
We also need to train up our next generation of entrepreneurs and business people and getting them into the cooperative model of doing business, by setting up business schools, and a start could be made by bringing the public schools into the state system as Centres for Business Technology and Innovation.

Sun, 2011-11-13 11:19 — Luddite (not verified)

swatantra nandanwar:
Agree with a state, or better still, a publicly owned investment bank, investing directly in industry. All government contracts placed with British based companies. Local councils awarding contracts to local companies, but before you can do that we have to leave this over regulated, bureaucratic, undemocratic and corrupt EU. "bringing the public schools into the state system" That an awful idea. Why not bring the state system into the public domain. Were standard are far superior..

Tue, 2011-11-15 18:37 — Luddite (not verified)

Leveller.. "Crises are built into the Capitalist system" That maybe so, but it's still remains preferable to the alternative. Exactly what is that alternative?

Mon, 2011-11-14 06:27 — Leveller (not verified)

> Isn't capitalism wonderful.

Since crises like the 1890s depression, the 1920-30s depression, 'stagflation' in the '70s, the '97 Asian crash, the 2000 crash, the 2001 South American crisis were all caused by the internal contradictions of capital accumulation, I would not say, 'Capitalism is wonderful.'

Crises are built into the Capitalist system.

Sat, 2011-11-12 14:35 — Indu Pendent (not verified)

"Rising public debt initially helped cover the costs of wider stagnation."

The UK experienced the same issues as Italy 1997-2010. UK industry shrank at its fastest rate since the 1970's and the government borrowed £350Bn before 2008 and the banking crises.

Italy should follow the UK's example - tightening of fiscal policy rather than austeriy measure. A key action which Italy must also take is to reduce the burden on the economy of unfunded public sector pensions.

We can look at Italy with its 7% interest rates with no one wanting to lend it money and think what the UK without the AAA and its 2% rate.

Labour policy gives very little weight to the importance of AAA. Labours Plan B is to sacrafice the AAA by using borrowing for fiscal stimulus ie the very poisition Italy is currently in that it is desparitely trying to move away from.

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Sat, 2011-11-12 18:33 — bluplanet (not verified)

I really don't get it. Either the Italian so-called 'austerity' measures (akin to the Spanish Inquisition's 'comfy chair' punishment from Monty Python) are pathetically inadequate or there really is no debt crisis at all. And yet, the markets seemed to like what they heard! This is developing into the biggest case of cry-wolf the world has ever seen.

Sat, 2011-11-12 19:32 — Luddite (not verified)

The political-left in England no longer lives in the real world... Greece is fucked. Italy likewise, but there again we can all keep pretending there's an alternative to living with-in ones means.

Sat, 2011-11-12 20:29 — swatantra nandanwar

The Markets were pleased to see the back of Berlusconni and the incompetant Papandreaou. There was also money in it for the speculators betting down elected politcians for one of their own ie an unelected technocrat with allegiances to nobody. the technocrat will get the austerity measures underway which will please the speculators no end, until elections are held. I don't think they will be able to postpone elections until 18 months. Then, it'll probably be back to square one for Greece and Italy.
That is unless Greece and Italy realise that the world doesn't owe them a living and everyone tightens their belts. Belt tightening is not enough; there has also to be growth which Dave doesn't seem to understand.

Sat, 2011-11-12 20:36 — mike cobley (not verified)

We are all being screwed over by the banks and the investment sector, plain and simple. Time the main malefactors were brough to account - seize the banks and the investment institutions (and their assets) and force them to either cancel debts or cut interest payments to nominal levels. These psycho-gamblers caused this gigantic clusterf**k - its long past time that they got whats coming to them.

Sat, 2011-11-12 21:03 — matthew fox (not verified)

The " political left " pay there taxes, stay out of trouble, and contribute to society.

Mrs Thatcher sold off the Trustee Savings Bank, another genius act, which Luddite applauds.

Sat, 2011-11-12 21:47 — keith batey (not verified)

if you don't honour your debts who is going to lend you the money to stimulate the economy

Sat, 2011-11-12 22:14 — matthew fox (not verified)

Sorry, it should read " Their taxes ".

The political right are offering the same failed policies of the past.

Cameron hasn't been in touch with berlin or paris for the last three days, rank laziness from DC10.

Sat, 2011-11-12 22:29 — Hugh Markey (not verified)

The USA and the EU are the equivalent of 'remittance' men.
However, residing in their own country and being entitled to roam the world is something the ex-pats of the British Empire era could not do. These latter-day corporate types are also funded by foreign investors; not fellow nationals.
The savers of the Developing World and Japan fell hook line and sinker for the American Dream and its EU offshoot. The elites are naturally a different case altogether.
The average living space in a Japanese or Chinese household comes to somewhere near half of the EU or the USA's area of domestic accommodation.
Even if these people had the money there is little room for parking a limousine. Certainly not the 'stretch' model. Except for the lucky few in the Developing World, power boats, luxury yachts and golf links are in pretty short supply.
Not so for the global billionaires living off these Asian capital flows. Yes, NOM-DOM has a decided ring to it.
Of course now the little people in the West have been told the blindly obvious - there is not enough Asian funding to go round.
Global finance is now installing its own place-men in Western governments and introducing the work-force to the 'coolie' wage and conditions of the Developing World. And damned lucky to get it.
Can we sympathise? In the past and up until the present the Western workforce made little complaint about the conditions and wage rates meted out to unfortunate workers in the Asian 'hinterland'.
Italy will no doubt reluctantly have to say goodbye to 'la Dolce Vita'
In fact, so will the USA and the EU
All these years of beefing up on Asian and other capital flows in the same manner as a body-builder bulking up on anabolic steroids are over.
If the West cannot afford to keep its populations in the manner they've become accustomed to what chance have the Chinese, Japanese, Indian and the Developing World of providing rising living standards.

Marked Deck

Sat, 2011-11-12 23:51 — Awake!

' industrial transformation, led by public intervention; and an expansion of democracy against the rule of finance - including, ultimately, a recognition that odious and unpayable sovereign debts need not be honoured.'
well that's a loaded statement. one question though, if Italy does default (which it will cos no sane investor will touch that debt unless the germans go for printing at the ECB), then how is the state going to transform industry led by public intervention i.e. the state pays for it? I mean the problemis that no one wants to lend to the state- unless u mean something else.
These problems have been developing for years. Good to see markey touch on the asian lifestyle and their space- maybe in the fairer world we get a drop in living standards closer to what the rest of the world enjoys, seeingas they won't finace it now.
Now, rmind me what the teachers are about to go on srike for again??
UK has a high end manufacturing and service base- u wanna enjoy a better standard than the rest of the planet? use those bases, it's so easy.
i see Land rover jaguar are having a record year, as are Rolls royce...