Dean Baker *   


If the new government will not contemplate leaving the euro, then it will have little policy leeway. Basically, it will have to go along with the continued push for austerity by Germany. At best it may hope for some minimal leeway in terms of deficit targets.

The obsession with inflation runs deep in Germany and crosses political parties. It is like the belief in creationism among fundamentalists Christians in the United States. It is not going to change regardless of who wins the next election there. This means that the best an Italian government can do is to adjust to a path of weak growth or even contraction, which is imposed as an external policy by the Troika.

There are steps that can be taken to make the experience less painful. At the top of the list is the promotion of work sharing to try to ensure that as many people are employed as possible given the limited amount of work available. This has actually been the secret of Germany’s low unemployment rate. Its growth since the downturn has not been especially robust. Yet, its unemployment rate has fallen from 7.8 percent at the start of the downturn to 5.4 percent at present.

Italy can try to give similar incentives to its employers to keep people on the job working shorter hours as an alternative to laying them off. It’s unlikely that it will be as successful as Germany in this respect, but this is probably its best route to lowering unemployment in a context where more rapid growth is an impossibility due to the austerity being imposed.

There are some other measures that can be done to try to facilitate the adjustment process within the given constraints. The most important would be a vacant property tax. Rent typically accounts for between a quarter and a third of workers’ consumption spending. If a tax can put downward pressure on rents by giving landlords more incentive to put housing on the market, then it would effectively lead to an increase in real wages.

A 10 percent decline in rents (a high target) would imply a rise in real wages in the range of 2.5-3.5 percent. Given the constraints under which Italy is operating, there are few other policies that could have a comparable effect. This could facilitate the adjustment to lower nominal wages which is the path being demanded by the troika.

Italy should also seek to push as far as possible, within treaty constraints, to reduce its protections for patents and copyrights. These forms of protectionism hugely increase the price of prescription drugs, software, recorded music and video material and other items. If Italy can take maximum advantage of flexibilities allowed under TRIPs and other international agreements, it can lower the price of protected products thereby also increasing real wages.

These might not sound like very adventurous policies, but if Italy refuses to leave the euro, then it must look in this direction for ways to boost its economy. There is no alternative path.

* Co-director of the Center for Economic and Policy Research - CEPR - Washington His latest book is" The End of Loser Liberalism: Making Markets Progressive".

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