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A Storm is Brewing in Europe: Italy and Its Public Finances Are at the Center of It

Photo Source Giuseppe Milo | CC BY 2.0

Yet the problem with Italy is not the problem that the European Commission or financial markets see.

Rome is planning an expansionary budget – just what Italy needs and just the opposite of what Brussels and the financial speculators in the bond markets are expecting or demanding.
Brussels wants “fiscal consolidation”. That is, for Rome to reduce its deficit – the annual gap between spending and taxation – so it can start paying down its huge public debt, which is 131% of GDP, proportionately the highest in the euro zone after Greece’s.
The government of the League and 5-Star Movement has raised the target for next year’s deficit to 2.4% of gross domestic product. That is comfortably below the EU’s 3% ceiling, but up sharply from a targeted 1.8% this year, flouting EU rules which call on highly-indebted countries like Italy, to narrow the deficit steadily towards a balanced budget.
Rome’s budget includes a reversal of an increase in the retirement age enacted in 2011 by a previous Democratic Party Government. This is a genuinely progressive and an economically sensible move, as it should force employers to high more young people sooner, helping to reduce the 31% youth jobless rate.
The budget also contains a so-called ‘citizen’s wage’, aimed primarily at the young unemployed who currently have to rely on their families for financial support. Five Star leader Luigi Di Maio has said the proposed payment of up to 780 euros a month will “abolish poverty”. That’s hyperbole, but any attempt to cut the numbers, which have tripled in the last 10 years, while those in “absolute poverty” have risen to 5.1 million (or 8.4 percent of the population), has to be welcomed.
The devil will be in the detail and as there is currently precious little of that. Sadly what does seem clear is that it will not be anything like the basic income that is paid by the state, regardless of a citizen’s income, resources or employment status and that is seen by many as an answer to the zero hours generation. Instead, it will be tied to an obligation to work: recipients, with the exception of pensioners, will have to do eight hours of community work per week, prove they are looking for work, and accept one of the first three job offers they receive, Di Maio has said.
Left voters – who switched at the last election to the Five Star from the nominally centre left but in practice neo-liberal Democratic Party – and many first time voters supported the idea of a basic income. But now there are fears that it will turn out to be similar to Chancellor Gerhardt Schroeder’s Hertz IV reforms of the early noughties. Aptly described by the US newspaper The Nation as a “compulsory precarious-employment service”, the reforms massively expanded Germany’s low wage sector and drove down wages as employers took advantage of an abundant supply of labour.
Some 2 billion euros of the 10 billion set aside for the scheme in the Italian budget will be invested in the country’s notoriously inefficient job centres to help implement this plan. Most who will receive the citizens’ wage are expected to be in the mezzogiorno, where poverty and youth unemployment is highest and from where Di Maio’s party drew a large proportion of the votes that saw it emerge as the largest party in May’s general elections.
The problem with this workfare-style approach is not just that it will entrench in-work poverty in the south. It is also that it assumes Italy’s main problem is labour supply. It isn’t. Italy does need more skilled workers but it doesn’t need more Macjobbers, who are becoming an ever increasing part of the labour market thanks to ‘hire and fire’ labour laws passed in 2014 by Matteo Renzi’s Democratic Party.
The key issue is demand – as it has been for two decades due to cuts in public spending and privatisations to join and then stay in the austere Euroclub. This led to a sharp fall in secure and relatively well paid public sector jobs, coupled with a more generalised wage squeeze that has seen ordinary Italians spending less today than they did seven years ago, and yet still spending more than they earn.
Nevertheless putting state money into the pockets of millions for the first time may boost domestic demand, especially if de Maio’s plan to provide it via an ‘electronic card which can be used in Italian shops”. But it will likely be insufficient and short-lived. The big risk is it will eventually reduce wages across the board, further depressing domestic demand, as it did in Germany, helping to extend in Italy a beggar they neighbour export model of growth that is at the heart of Europe’s social and economic woes.
The other measures in the budget include a flat tax and yet another tax amnesty in a country whose treasury loses some 100 billion a year from dodgers, according to some estimates. The winners of such policies will be businesses and the wealthy. They won’t, as claimed, spend the extra money to create jobs but put it under the mattress, buy a Ferrari or hide it in a tax haven.
What Italy needs – and make private businesses invests in jobs – is the kind of state-led development and big public spending abandoned since the early 1980s by successive governments of the centre-left and right. But Salvini and De Maio, joint deputy PMs, are both small state ideologues. There’s little in the budget for state schools and hospitals. The previous government’s privatisation plans are unchanged. As are promises to the US and NATO on upping military spending to 2% of GDP, including the F-35 fighter bomber programme, which, at an astonishing cost of 14 billion euros plus 35 billion in logistical support and other costs over 30 years, will create just 1,500 jobs in Italy. (This is, despite, the Five Star movement pledging, while in opposition and on the campaign trail, it would downscale military expenditure).
In the final analysis, Rome is planning to spend a lot of money that at best a short term boost to its zombie-like economy. So in one sense who can argue with Chancellor Angela Merkel and EU President Jean-Claude Juncker?
And who, frankly, wouldn’t want to see them give a bloody nose to the nasty Salvini. He’s intent on preventing people fleeing war, hunger and misery from arriving on Italian shores, deporting them and otherwise making immigrants already living in Italy a misery, from shutting down their businesses to denying their children basic human rights?
Yet as elsewhere in Europe, racist, bigoted and authoritarian government are at best a secondary consideration to the need to obey loony fiscal rules.
The problem for the Commission is that in the build up to the European Parliament elections in May 2019 it is good politics for Salvini and Di Maio (the first a long-time Eurosceptic, the second leader of party with a strong Euroskeptic vein) to stage a showdown with Brussels. This high stakes game will play out for some time to come.
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Tom Gill edits Revolting Europe.

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