An Italian job and a Greek tragedy

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.

20121208_LDC603

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 money 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 (DP) party, a coalition of ex-communists, socialists and centrist liberals.  The DP 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 DP leader,  Pier Luigi Bersani, will become prime minister in March.  And what will be his programme?  Sadly, exactly the same as Monti.  The DP 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 not 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 be 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.

ADDENDUM

I have been asked to provide my profit data on Italy.   Here it is below:  ROP= rate of profit  OCC = organic composition of capital  ROSV = rate of surplus value.  How have I got these figures.  Well I have used the data from Extended Penn World Tables 4.0 August 2011 which cover a whole range of data for many countries around the world and are compiled by Adalmir Marquetti.  The data can be found on the website of Duncan Foley, https://sites.google.com/a/newschool.edu/duncan-foley-homepage/home/EPWT

From the data columns, I use a profit rate based on GDP (col X), employee compensation (cols N* w) and capital stock (col K).   My formula for the ARP is (X-N*w)/(K+N-w).  There are other ways of doing it and the EPWT has its own measure of a gross profit rate.  Paul Cockshott from Galsgown university has another way of using this data but I’m not going into that!

ROP

OCC

ROSV

63

25.3

3.76

1.20

64

24.1

3.79

1.15

65

24.4

3.89

1.19

66

25.1

3.86

1.22

67

25.2

3.79

1.21

68

25.3

3.70

1.19

69

25.3

3.69

1.19

70

23.7

3.53

1.07

71

22.0

3.44

0.98

72

21.4

3.39

0.94

73

21.2

3.28

0.91

74

20.9

3.27

0.89

75

18.2

3.19

0.76

76

19.4

3.14

0.80

77

19.2

3.10

0.79

78

19.4

3.07

0.79

79

24.1

3.45

1.07

80

24.6

3.51

1.11

81

23.8

3.51

1.07

82

23.9

3.58

1.09

83

24.2

3.60

1.11

84

25.3

3.63

1.17

85

25.5

3.60

1.17

86

26.4

3.67

1.23

87

26.8

3.66

1.25

88

27.4

3.63

1.27

89

27.4

3.64

1.27

90

26.6

3.61

1.23

91

26.1

3.67

1.22

92

25.6

3.75

1.22

93

26.1

3.90

1.28

94

26.2

3.81

1.26

95

27.4

3.93

1.35

96

27.2

3.98

1.35

97

26.9

3.98

1.34

98

27.9

4.22

1.46

99

28.2

4.37

1.51

00

28.7

4.40

1.55

01

28.3

4.42

1.53

02

27.5

4.49

1.51

03

26.8

4.57

1.49

04

26.7

4.64

1.51

05

25.9

4.62

1.46

06

25.7

4.60

1.44

07

25.5

4.67

1.45

08

24.4

4.74

1.40

09

22.5

4.80

1.30

13 Responses to “An Italian job and a Greek tragedy”

  1. alfonso Says:

    Dear Michael Roberts, thank you for this excellent piece on Italy. Just allow us a very small correction: the DL don’t exist any longer, they now called themselves simply ‘ the Democrats ‘ (after the US party) and the left-wing of the now defunct Chistian Democrats (the party in charge for 45 years following WW2) are a substantial part of this new rassemblement.

  2. marcello Says:

    Michael,
    your description of the Italian situation is very accurate. The fine details are confused, but we can be pretty sure that the new government won’t make any difference in terms of austerity. To add some confusion, while no democrat dares to dream of alternatives to austerity, the clowns in Berlusconi’s circus are fast learning how to use Keynesian arguments against it (and some are good, too!).

    A more serious concern is that, even looking at your data, it is hard to resist the conclusion that the main explanation for Italy’s decline in profitability is the Euro. I agree that the underlying cause is the decrease in investment, but this trend itself needs explanation. You mention the increase in foreign investments by Italian capitalists, which is a very plausible (part of the) explanation. But as far as I know, though large, they do not seem out of proportion when compared to Italy’s main – and better performing – competitors (in Tony Norfield’s “imperial pecking order”).

    While it is hard to calculate the impact of this factor (or any) on profitability, the co-occurrence of the declining trend in profitability and the Euro appears self-evident. And this is unfortunate because — at least in the Italian case — the main argument of the anti-Euro people seems unassailable. I’m afraid that Berlusconi’s gang will soon appropriate and disseminate some of these arguments.

    • michael roberts Says:

      Marcello

      You may be right. But remember that nearly all the major capitalist economies experienced a fall in profitability from the late 1990s – as my recent paper, A world rate of profit, seeks to show. So Italy is not an exception. But it is true that the eurozone put Italian capitalism up to the competition of the likes of Germany without the escape valve (temporary) of devaluation. But it is only when there is a crisis of capitalism that the uneven development of capitalism is exposed and the centrifugal forces become very strong. And the crisis of capitalism has led to the crisis of the euro, not vice versa.

      Italy is two countries in a way, as we know – the north and the south. The north can compete with Germany but in the south capitalism was very weak and relatively unproductive. So we got a form of gangster, corrupt capitalism in Sicily, Calabria and Puglia. And the state there became a much more important source of employment and corruption. Of course, Northern capitalists complain and the likes of the Northern League wants ‘separation ‘ from the south, as though that would solve their problems. We get similar arguments in this crisis in the UK. The ex-editor of the right-wing popular tabloid newspaper, the Sun, has called for southern England to separate from the unproductive rest of England. “The rich south produces all the value and pays all the taxes while the likes of the north, Wales, Scotland etc are subsidised”

      But when you take this argument to its extreme, why not have the richest part of Milan separate from the rest of northern Italy, or the London borough of Kensington and Chelsea from the rest of southern England, as they both ‘subsidise’ the rest? But then that raises the point of a nation state – where are the rich citizens of Milan, now paying less tax, to get their army, police force, roads to the rest of Italy or Europe? Will there be customs barriers between Kensington and the rest of London with security checks? That is what Germany was like in the mid-1800s with dozens of petty statelets before a customs union was established.

      It’s possible to have a Monaco inside France which pays no tax to the French state but gets all its facilities. But how many Monacos would the Italian or British state be prepared to suffer? If Italy were to leave the euro, it may gain but only if the rest of the Eurozone allows it to devalue AND Italian capitalism still receives all the benefits of the European free trade area and regional support. Tiny Monaco gets that but could the whole of Italy?

      • marcello Says:

        I agree, the recession around 2000 was not caused by the euro. And even if the premise were true, that the euro is the main cause of Italy’s decline, the conclusion that leaving the euro would restore investments and profitability (and jobs, decent wages,…) doesn’t follow. I don’t accept the premise, but unfortunately the anti-euro arguments have a certain plausibility and are poisoning the debate on what can be done in the interest of the working people.

  3. Eirik Says:

    Hi,

    thank you for all your thoughtful analysis. A couple of typos in this text though (“highlighted” with asterix):

    But now Italy’s own *(*Murdoch-style)

    (partly because those who do earn good mone*y* don’t pay them)

    And yet, it can be seen that austerity does *not* restore growth or jobs

  4. paulc Says:

    I read Evans-Pritchard in the Torygraph this am and to my amazement he has Italy marked down as ‘wealthier’ than Germany [per capita]. Which does seem to suggest that they have been doing something right [in the capitalist sense] over the post war period. So if they have amassed this wealth even whilst under-investing at home and accumulating so much public debt, they surely have a tax evasion/avoidance issue of gargantuan proportions.

    • michael roberts Says:

      I won’t go into all Evans-Pritchard’s arguments, but suffice it to say that it’s true that HOUSEHOLD net wealth per capita is higher on average than in the rest of the G7. But that is because more Italians own property (land etc) and have relatively less debt (although household debt has nearly doubled in the last decade, much faster than other G7 household debt – see the OECD (Econ Outlook Annexe tables http://www.oecd.org/economy/economicoutlookanalysisandforecasts/economicoutlookannextables.htm). And having property and some savings is not the same as the capitalist sector amassing productive capital for economic growth. I also note that E-P says that Italy has a “vibrant export sector”. Well there may be some truth in that for the north of Italy, but overall Italian exports are losing ground. In 1998, Italian exports were 5.9% of all OECD exports. Now the share has fallen to 4.6%, a drop of 23% – only France performed worse.

  5. gfmurphy101 Says:

    Reblogged this on gfmurphy101.

  6. Daniel de França Says:

    Dear Michael,

    can you provide me with the surplus data that you calculated for Italy?

    Thank you!

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