Alternatives to austerity

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

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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Arsène Wenger: how can an intelligent manager preside over such a hollowed-out team?

The Arsenal manager faces a frustrating legacy.

Sport is obviously not all about winning, but it is about justified hope. That ­distinction has provided, until recently, a serious defence of Arsène Wenger’s Act II – the losing part. Arsenal haven’t won anything big for 13 years. But they have been close enough (and this is a personal view) to sustain the experience of investing emotionally in the story. Hope turning to disappointment is fine. It’s when the hope goes, that’s the problem.

Defeat takes many forms. In both 2010 and 2011, Arsenal lost over two legs to Barcelona in the Champions League. Yet these were rich and rewarding sporting experiences. In the two London fixtures of those ties, Arsenal drew 2-2 and won 2-1 against the most dazzling team in the world. Those nights reinvigorated my pride in sport. The Emirates Stadium had the best show in town. Defeat, when it arrived in Barcelona, was softened by gratitude. We’d been entertained, more than entertained.

Arsenal’s 5-1 surrender to Bayern Munich on 15 February was very different. In this capitulation by instalments, the fascination was macabre rather than dramatic. Having long given up on discerning signs of life, we began the post-mortem mid-match. As we pored over the entrails, the curiosity lay in the extent of the malady that had brought down the body. The same question, over and over: how could such an intelligent, deep-thinking manager preside over a hollowed-out team? How could failings so obvious to outsiders, the absence of steel and resilience, evade the judgement of the boss?

There is a saying in rugby union that forwards (the hard men) determine who wins, and the backs (the glamour boys) decide by how much. Here is a footballing equivalent: midfielders define matches, attacking players adorn them and defenders get the blame. Yet Arsenal’s players as good as vacated the midfield. It is hard to judge how well Bayern’s playmakers performed because they were operating in a vacuum; it looked like a morale-boosting training-ground drill, free from the annoying presence of opponents.

I have always been suspicious of the ­default English critique which posits that mentally fragile teams can be turned around by licensed on-field violence – a good kicking, basically. Sporting “character” takes many forms; physical assertiveness is only one dimension.

Still, it remains baffling, Wenger’s blind spot. He indulges artistry, especially the mercurial Mesut Özil, beyond the point where it serves the player. Yet he won’t protect the magicians by surrounding them with effective but down-to-earth talents. It has become a diet of collapsing soufflés.

What held back Wenger from buying the linchpin midfielder he has lacked for many years? Money is only part of the explanation. All added up, Arsenal do spend: their collective wage bill is the fourth-highest in the League. But Wenger has always been reluctant to lavish cash on a single star player, let alone a steely one. Rather two nice players than one great one.

The power of habit has become debilitating. Like a wealthy but conservative shopper who keeps going back to the same clothes shop, Wenger habituates the same strata of the transfer market. When he can’t get what he needs, he’s happy to come back home with something he’s already got, ­usually an elegant midfielder, tidy passer, gets bounced in big games, prone to going missing. Another button-down blue shirt for a drawer that is well stuffed.

It is almost universally accepted that, as a business, Arsenal are England’s leading club. Where their rivals rely on bailouts from oligarchs or highly leveraged debt, Arsenal took tough choices early and now appear financially secure – helped by their manager’s ability to engineer qualification for the Champions League every season while avoiding excessive transfer costs. Does that count for anything?

After the financial crisis, I had a revealing conversation with the owner of a private bank that had sailed through the turmoil. Being cautious and Swiss, he explained, he had always kept more capital reserves than the norm. As a result, the bank had made less money in boom years. “If I’d been a normal chief executive, I’d have been fired by the board,” he said. Instead, when the economic winds turned, he was much better placed than more bullish rivals. As a competitive strategy, his winning hand was only laid bare by the arrival of harder times.

In football, however, the crash never came. We all wrote that football’s insane spending couldn’t go on but the pace has only quickened. Even the Premier League’s bosses confessed to being surprised by the last extravagant round of television deals – the cash that eventually flows into the hands of managers and then the pockets of players and their agents.

By refusing to splash out on the players he needed, whatever the cost, Wenger was hedged for a downturn that never arrived.

What an irony it would be if football’s bust comes after he has departed. Imagine the scenario. The oligarchs move on, finding fresh ways of achieving fame, respectability and the protection achieved by entering the English establishment. The clubs loaded with debt are forced to cut their spending. Arsenal, benefiting from their solid business model, sail into an outright lead, mopping up star talent and trophies all round.

It’s often said that Wenger – early to invest in data analytics and worldwide scouts; a pioneer of player fitness and lifestyle – was overtaken by imitators. There is a second dimension to the question of time and circumstance. He helped to create and build Arsenal’s off-field robustness, even though football’s crazy economics haven’t yet proved its underlying value.

If the wind turns, Arsène Wenger may face a frustrating legacy: yesterday’s man and yet twice ahead of his time. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit