Monday, December 10, 2012

Eurozone: An Italian job and a Greek tragedy

by Michael Roberts

So Italy’s ‘technocrat’ prime minister Mario Monti has decided to resign.  Once former right-wing billionaire premier Silvio Berlusconi announced that he was withdrawing the support of his weirdly entitled “People of Liberty” (PDL) party, Monti called Berlosconi’s bluff and Italy’s president Napolitano will probably announce an election in the next few days for late February or early March, just a couple of months earlier than planned.

It is just over a year since Monti took over after the EU leaders, Merkel and Sarkozy, organised a coup to remove Berlusconi by demanding that the Italian government impose austerity to meet fiscal targets or face financial penalties.  Under that threat, members of Berlusconi’s own party buckled and forced him to step down.  But now Italy’s own Murdoch-style) media mogul has decided that the political mood has changed enough in Italy for him to challenge Monti.  Also, there is a growing likelihood that he could soon end up in jail from a myriad of tax evasion, sex and corruption charges now under way.  So he needs to try and gain power again.

Monti has been the darling of finance capital and the financial markets.  In his year of office, he has imposed stinging fiscal austerity and attempted to ‘deregulate’ labour markets and dismantle Italy’s already rickety welfare state.   The Italian government is now running a surplus of tax revenues over spending (before interest payments on debt) and next year plans to balance the overall budget.  The hope is that this will lead to a stabilisation of the public sector debt ratio, which was the highest in the Eurozone before the global financial crisis and will still be the second highest after Greece in 2013, at 128% of GDP.  Monti slashed spending, introduced a wave of privatisations, reduced the value of public sector pensions, raised the retirement age and contributions on all pensions and has tried to get rid of employment protection rights and lower wages.

Financial markets have been very pleased with Monti and the cost for the Italian government to borrow money has dropped substantially.  But Italy’s people have been less pleased and Monti’s electoral popularity, which was sky high to begin with, has now plummeted as fast as it has risen with finance capital.
Although austerity may have worked for financial markets, it has not worked in reviving the Italian economy after the global slump.  This year, the economy will have declined by 2.5% in real terms and next year the forecast is for another 1.0-1.5% fall.
Itay real GDP
Indeed, real GDP has barely risen since the European single currency came into operation, making Italy the worst-performing country in the Eurozone.   The overall unemployment rate has jumped from 8.8% a year ago to 11.1% (although still below the euro-zone average); and for young people, it is a desperate 36.5% (well above it).  Italy’s track record is abysmal.  In the last decade or so, euro area average labour productivity has risen about 8%, not much.  But Italy’s has fallen 3% from 1999.
And Italian capitalism is losing hand over fist compared to Germany.  Italy’s cost of production per unit of output is up 35% since 1999 compared to a rise in Germany of 10%.
Mainstream economics blames Italy’s ‘top heavy’ state bureaucracy, ‘trade union power’ and corruption for this failure.  Recently published rankings from the World Bank for the ease of doing business in 2012 put Italy among the worst in Europe. Among 185 countries, it came 73rd; on civil justice (ie, enforcing contracts) it ranked 160th.  Italy’s failure to exploit its labour resources is apparent in an employment rate among 15- to 64-year-olds of just 57% in 2011, the second-lowest in the euro area and far below Germany’s 73%.  Corruption is the second-worst in Europe after Greece, while paying tax is only ‘for the little people’ i.e employees in public services and large companies.  It’s not for the rich owners, executives, or doctors and dentists and other private sector professions and small businesses.

But this explanation for the failure of Italian capitalism hides the real story.  Italy’s public debt has only got so large because the private sector has failed to grow sufficiently to deliver decently paid jobs.  So tax revenues (partly because those who do earn good mone don’t pay them) have been inadequate to meet necessary public services.  Welfare benefits, pitiful as they are, have mushroomed as employment has stagnated.

Italian workers are not paid too much, do not receive bloated pensions or are blocking higher productivity.  On the contrary, according to my calculations (sources provided on request) the rate of surplus value that Italian employers extract from their workforce has been way higher than that achieved in Germany or the US.   I have calculated that the rate of exploitation in Italy has averaged 120% since 1963 compared to 70% in the US.   The problem is a lack of growth in productivity, not the share going to capital.

And that is because Italy’s capitalists have failed to invest sufficiently.   Net investment growth has averaged 3% a  year (in nominal terms) since 1963 and that growth has been steadily slowing, going negative in 2009.  That compares with average net investment growth by US capitalists of over 4% a year.  A difference of 1% pt a year for 50 years can make a huge difference.
Italy- net investment
Why have Italian capitalists failed to invest?  First, overseas investment has provided much better potential profitability (globalisation).   Overall profitability was the same in 2007 as in 1963 – but not in a straight line.  Since 2000 with Italy joining the Eurozone, the ROP has fallen over 20%, double the decline in the  US and the UK.
Italy - ROP
Berlusconi is not going to win the election.  His PDL party is trailing well behind the Democratic Left party, a coalition of ex-communists, socialists and centrist liberals.  The DL is polling between 30-38% compared to the PDL’s 15-20% and a new anti-euro protest party, Five Star, which is getting about 20%.  So most likely the newly elected DL leader,  Pier Luigi Bersani, will become prime minister in March.  And what will be his programme?  Sadly, exactly the same as Monti.  The DL has supported Monti with his austerity programme and anti-labour measures all the way.   So what the Italian people will get after March is more of the same, this time promoted by the left.

Mainstream politicians and economists do not have any alternative.  And yet, it can be seen that austerity does restore growth or jobs – indeed its objective is to do the opposite in order to improve ‘competitiveness’. The problem is that this ‘cleansing process’ could take a decade or more and is at the expense of the majority in order to help the elite.  And every major capitalist economy is applying various degrees of austerity (cutting public services, welfare benefits, lowering real wages) in order to improve profitability.  It is a race to the bottom.

Look what is happening in Greece.  The Greeks are now on their third ‘bailout package’, where austerity will be applied up to 2022 and then beyond!   Last year’s package aimed to reduce Greek public sector debt as a percentage of GDP to 120% by 2020.   And for the first time, the Euro leaders and the IMF were forced to accept that Europe’s banks should take a loss on their holdings of Greek government debt.  In other words, Greece defaulted.  This ‘organised default’ was supposed to put Greece back on track to meet its obligations on debt and deficits.

Instead, it was a Greek tragedy.  Even a default on €200bn of privately held government debt could not do the trick when the Greek economy has contracted by up to 30% from 2008 and is still contracting.  So, once the right-wing coalition had narrowly won the June elections (which had to held twice!), another package of measures had to worked out.  The Greek coalition has forced through yet another round of austerity measures to raise €13bn and, in return, the EU and the IMF will provide funds to recapitalise the Greek banks so that do not have to be nationalised along with money to reduce the burden of debt repayments.   But the dreaded Troika admitted yet again that Greece would have to default on its debt by arranging for the Greek government to buy back some remaining debt held by the banks at 30-35c in the euro, in order to cut €20bn off the debt.  Even so, the debt target of 120% of GDP for 2020 has been revised out further to 2022.  So in ten years time, Greece’s debt ratio will still be higher than it was in 2008!  And all this assumes that Greece can grow at about an average 4% a year in nominal terms throughout the rest of this decade.
Indeed, in billions of euros, the Greek people’s public debt will have hardly fallen.
Greek public sector debt
It’s just that Greeks will owe 75% of this debt to other European governments and the IMF and no longer to the banks or the hedge funds.  They have been paid back, albeit with some ‘haircuts, by the European taxpayer.  So the Greeks will have endured up 15 years of hell in order that the banks and finance capital did not lose too much money.   Even then, it is not over.  The Greek government must go on applying austerity to the tune of 4.5% of GDP every year through the next decade to 2030!   Of course, this cannot happen – Greece will be forced to default again or the EU leaders will have to write off the loans they have made.  The package is just a way of delaying that to some time in the future.

The Italian economy teeters on the edge of a precipice like that bus in the final scene of that very bad British movie, The Italian job; the Greek economy has already gone over.

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