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com
ITALY AND STRUCTURAL REFORMS: MYTH AND REALITY
by Thomas Fazi

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 Italys 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)



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
countrys 150 year-long history (worse than the Great Depression of the 1920s or the
two world wars).

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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, its 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 eurozones
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
(http://revolting-europe.com/2014/08/05/alitalia-indesit-telecom-italia-and-now-our-
banks-the-great-italian-sell-off/).

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

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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 countrys major
cities already in outright deflation
(http://www.repubblica.it/economia/2014/08/12/news/istat_inflazione_vicina_allo_z
ero_calano_i_prezzi_dell_energia-93616445/?ref=HREC1-5).

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 countrys history)
13%.

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 countrys 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
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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, youd 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. Theres 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 its 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.
(http://www.ecb.europa.eu/press/pressconf/2014/html/is140807.en.html).

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. Its 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
countrys 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.

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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.





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Paolo Pini writes:

What happened in the nineties, from Treu Law of 1997, which kicked off the
deregulation of Italys 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 capital The 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 labours share of the national wealth, to the benefit of profits and financial
returns.



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 (http://keynesblog.com/2013/03/20/produttivita-e-regimi-di-
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protezione-del-lavoro/).

5) Renzis labour reform: the final nail in Italys coffin?

And yet, despite the devastating legacy of Italys 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, Italys 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
a 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
(http://www.social-europe.eu/2014/07/dg-ecfin-missing-greek-exports/).

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 theres 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 cant
work if all countries do it at the same time.
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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. Its 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 Europes 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, its time we started
talking of the cost of capital instead of that of labour (http://revolting-
europe.com/2014/06/04/how-much-does-capital-cost-a-new-index-is-in-making/).

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 Europes fourth largest economy, assets have grown 16-fold,
the largest expansion on the continent, after Luxembourg. Then theres 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 its 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,
Italys richest 10% of households have grabbed even more of the nations wealth now
as high as 46.6%, up from 45.7% in 2010. The same goes for other countries as well,
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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 hasnt 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.
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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 (http://blogs.lse.ac.uk/europpblog/2014/05/07/raising-wages-
should-be-a-key-component-of-economic-growth-strategies-across-the-world/).