A Centre-left Government and the Eurozone's constraints

Insight has asked the opinion of economists and political commentators about  the forecast change of the political scenario in Italy. The answers are by  Nicola Acocella, James K. Galbraith, Maurizio Franzini, Dean Baker, Bruno Amoroso, Sergio Cesaratto, Ruggero Paladini, Paola Brianti, John Weeks.

The major political event in the euro area at the beginning of 2012 was a clear victory of François Hollande in France. At the end of the year a similar political outcome is forecast for Italy, where the Democratic Party is supposed to win the general election of February 2013. We are talking about the two major countries in the eurozone after Germany. In a normal world, the fact that two left-wing parties have displaced the Sarkozy centre-right government in France and the Mario Monti's technocratic government in Italy would signal a turning point in European politics. Whether it was a desirable change is out of question. That it can actually change the current grim picture remains a tough challenge.

The recession is the dominant feature of the eurozone, marked by the GDP decline in 2012 (-0.5) and, as expected, in 2013 (-0.2). But the anomaly goes further. In fact, according to the Economist Intelligence Unit the recovery that should start from the middle of next year, will produce an average growth of GDP in the five years 2012-2017 of around 1, 1 percent. If we consider that in the previous five years (2007-2012), we have seen a decrease average close to 1 percent per year, the unavoidable, dismal conclusion is a lost decade.

But was not the euro created to strengthen the position of Europe vis à vis the rest of the world? Some may say that we couldn’t forecast the deep crisis hitting the world. But this is not a good explanation. The United States, where the crisis erupted, showed two years of recession (2008-09) and the last three following years with an average growth of GDP slightly more than 2 percent, and a perspective of consolidation (around 2.3 percent) in next five years. If this is not a clear failure of the policies adopted in the eurozone, we must find out a different and appropriate vocabulary to describe its gloomy outcomes, marked by rising unemployment, new mass poverty and growing social disease.
Having mentioned the political change that took place in France and forecasted in Italy, the question is whether these two countries will resign themselves to the harmful policies imposed by Berlin, or if these two countries will be able to operate in order to change them. The political future of the centre-left in Italy - if the predictions of its success will come true - depends on the change in policy of the eurozone. Without a significant change, the risk of ending up like the previous left-wing governments of Mediterranean Europe may become a reality.

The misunderstanding is in the false alternative agitated by the financial, economic and political establishment, when it asks a basic choice between keeping the euro or its abandonment. The abandoning of the euro by one or more countries in a picture of deepening crisis cannot be excluded. But it is not an option of the announced Italian centre-left government, led by Pier Luigi Bersani, and neither is in the perspective of the French presidency of François Hollande. The choice arises in different terms. That is, to continue with the current failed policies based on the combination of austerity and antisocial structural reforms, whose result threats to be in the end the disintegration of the euro; or impose a radical change of the current eurozone’s policies, in this way also saving the euro from its suicidal tendencies.

A hard task, indeed. But what's the meaning of a democratic government’s changing, if you cannot change the manifestly wrong and self-destructive policies of previous governments?

The answers that a group of economists and Italian collaborators (Acocella, Amoroso,  Brianti, Cesaratto, Franzini, Paladini) and foreign ones (Dean Baker, James Galbraith and John Weeks) gave to questions posed by Insight in the perspective of the new Italian centre-left government, although in different settings, provide a broader basis for discussion. And we would like to emphasize the recommendation that James Galbraith sends from the US to the possible new Italian government to promote an open debate in an international community of specialists, of course not aiming to define the policy choices that clearly belong to the Government and Parliament, but to analyze and develop the basic ideas for a possible as well as needed change at European level.

Antonio Lettieri 


A New Poltical Picture

The leader of the Democratic Party, Pier Luigi Bersani, has  won the “primaries” by 61 %, as candidate Premier and, according to the current forecasts,  and, , he  has a good chance to win the next general elections that will be hold on February 2012, taking the lead of a center-left Government. It would, be important for Italy, and also  for the Eurozone, as two-left wing  governments would be in charge in two major countries – France and Italy.

This might open the possibilities  to change the current eurozone policy. Not an easy task, indeed. Italy is in the middle of a huge recession (2012 GDP - 2.4%) and the unemployment growing from about 7 % in 2008 to 11%  in 2012. At the same time, Italy is obliged ,according to the Fiscal Compact , to reach  the budget parity in 2013 and to keep it in the next years, while progressively reducing the debt from the current 125% to 60%  of  GDP.

The Italian and European political élite is strongly asking Mr. Bersani to respect Monti’s engagement vis à vis European authorities. But, at the same time, he is committed to tackle the economic stagnation and, first of all, the increasing unemployment.

The Questions are:

1-       How a new center-left government in Italy might operate successfully in a contradictory framework marked, on one side, by an internal climate of recession and rising unemployment, and, on the other side, by the strict austerity policies imposed by the eurozone?

2 -     Is it credible, and at what conditions, that German politics would change , under the pressure of the French and Italian left-wing governments?

3 -     Can an Italian center-left government give a new direction to the current technocratic Monti’s politics, or it is going to follow the grim destiny of other leftwing governments, as happened in Greece with the socialist government of Mr. Papandreou and in Spain with Mr. Zapatero?

4 -     What, in practice, should the new government do as a first step

______________ _______________________________________________________

Nicola Acocella *

1. It is a difficult context indeed. However, a number of things can successfully be done, by setting priorities and, mostly, asking for citizen support. I think that this can be earned by accompanying each stiff policy with explicit and, possibly, not-too-much-delayed engagements acting as a compensation or as indicators of the change in the direction of priorities.

2. German policies will not change before the election, even under pressure. They might only change in a significant way after the election, depending on a number of circumstances. Merkel might change her position if put under pressure, which I doubt hollande is inclined to put; obviously things could change if there is a change in the party in charge with the government, but I am not an expert in german politics in order to say to what extent this depends on the and whether the social democrats and the green party are a reliable alternative for a change in the direction of European policies and institutional architecture, including the mission attributed to the ECB. There is something more than the political party in charge in dictating germany’s attitude towards European economic policies and institutions (debt is a sin for them; deflation is not a problem, as they have removed that part of their history more directly tied to Nazism).

3. Monti’s government is not only a govt. formed by technicians, but also a government oriented by a specific (right-wing) political orientation.Much of the outcome depends on: a) The kind of majority the left (left or center-left?) will gain, if any.b) The composition of the alliance and its cohesion. c) The support of polls will very much depend on the existence of a very clear and convincing program.

4. Again this depends on a number of circumstances. Let us suppose the best possible scenario: a large majority; cohesion among the political partners, support from hollande. In this situation the gov should adopt immediately tough measures.

* Professor of Economic Policy at the University of Rome "La Sapienza".



James K. Galbraith *

(1-4) I think as a first step a new Italian government should form an international council for change in Europe, consisting of credible people who can help develop and forcefully articulate a new set of policies
and, as necessary, institutions. The purpose of the council would be:

1) To defeat the so-called "technocrats" who have always captured state financial policy in Europe to date, most recently in France.

2) To develop a new policy program for Italy to advance in European councils.

3) To coordinate with other progressive governments in Europe (and elsewhere).

4) To prepare the ground, with careful study, for the case where Europe fails to change its institutions and policies and more drastic measures are required.

In my view this is a first step.  Europe must change its ideas before it can change anything else.  The grim fate of other left governments in Europe happened, in the first instance, because well-meaning political
leaders were surrounded by unimaginative, conventional people drawn from the same circles as have always dominated economic and financial policy.University of Texas at Austinis, author of 'Inequality and Instability", Oxford University Press.  

Italy has a large reserve of talent and economic knowledge that has never been effectively used by its governments, and it can draw also on an international community of specialists who would be willing to assist. With the backing of on of Europe's most important governments, such a group
could begin the process of changing ideas.

As Germany, I consider that the October 2012 statement of the Executive Board of I G Metall is highly significant, as it sets forth principles for a change of course in that country.  A statement by a trade union is a long way from being national policy -- but again, the first step is to change ideas, and this must begin with respected voices in the country itself.

* University of Texas at Austinis, His last book is 'Inequality and IInstability", Oxford University Press.



Maurizio Franzini *

1. Even in a contradictory framework – which,  however,  the center-left government should endeavor  to change – something can be done. A guiding principle could be the old Keynesian idea – recently implicitly reaffirmed by some IMF studies – that an expansion of public expenditures will bring forth an increase in income which is a multiple of that expansion. This makes  it is possible to achieve both a  higher income and an excess of tax revenues on expenditure, as required  by the Fiscal Compact.
In this mildly expansionary context a series of “small” but complementary policies could reinforce the expansion and also correct some of the most unacceptable features of our socio-economic system

Here is an example: introducing on a reasonable scale green (pigouvian) taxes  and using their revenues partly to finance industrial policies and partly to raise net wages in the labour market.  Indeed, industrial policies if properly designed could  go hand in   hand with  a policy directed to raise wages, especially the lowest. . The latter could be accomplished also through other measures:  higher minimum wages or the banning of some of the worst types of flexible contracts.  These three measures together could achieve the objective of  discouraging actions contrary to sustainability, giving a boost to innovation and productivity,  sustaining consumption demand and reducing inequality. All this effects are likely to be of limited magnitude in the given framework, nonetheless they  would be important. Of course,   much more could be done if the  framework were changed, as the new government should endeavor to do  in Europe.

2.  It is difficult to say how effective a pressure from outside could be to produce a radical change in German policies. Maybe that pressure will have  only minor effects. However, if the  political equilibrium in Germany moves leftwards things could be very different.  The chancellor-candidate for SPD, Peer Steinbrueck, has recently declared that he stands for policies aimed at reducing inequality and expressed  his favour for a wealth tax. Steinbrueck is a controversial personality however these statements allow a certain optimism. Should the SPD win the next elections  and should the previous points and other similar to them be part of  its program the outlook in Europe   would improve a lot and also the task of the new Italian government would become easier.

3.  It is certainly possible. The keywords are  equity and the fight to inequality. The latter can be achieved without impairing the forces of growth, but there is no automatic connection between lower inequality and higher growth. The way in which inequality is tackled is not indifferent to its consequences on growth. Also in this case complementarities between various policies are  extremely important. 
A first pre-condition for escaping from the bad fate of Greece and Spain is to be well aware that reducing inequality is important in itself and can be combined with higher growth, but not automatically. This requires an appropriate economic culture. The second pre- condition is to be independent from those  powerful lobbies  that look for more (advantageous to them) inequality, rather than the contrary. I think that the lack of these two pre-conditions is an important part of the explanation of the failure of the left in Greece and Spain.

4. To start thinking in terms of complementarities among policies and raise very high barriers to protect itself from the perverse pressures coming from the would-be losers of a  new deal, the enemies of a truly inclusive society.

* Professor of Economic Policy at the University of Rome "La Sapienza".


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".

Bruno Amoroso *

1. Of course, a new government cannot and it will not the political course. This has been clearly expressed by their leaders. So why waste time about this non existing alternative?

2. German politics will not change and it will receive further support from Italy and France against European people interest.

3.The new Government will do follow the destiny of other leftwing governments, like in Spain and Greece.

4. As a first step, I do not know what it will do, but the problem is to create a parliamentary situation and a popular opposition that it will not make possible its existence already during its first one hundred days. Otherwise the path toward a new authoritarian power in Europe – like the one we have experienced in Italy during the Monti experiment – will be unevitable.

Professor emeritus of Rotskilde University.



Sergio Cesaratto *

1.  It is very important that the new government has clear economic ideas about what is wrong about the European current economic policies (all is wrong of course) and has a list of measures that could help Europe to get out from the crisis. The idea that growth is aggregate-demand-led should be at the centre of the alternative policies. To this purpose, Europe should build new economic institutions with at the centre cooperative expansionary fiscal and monetary policies (which include a new ECB statute), sustain to a more fair direct and indirect (through the welfare state) income distribution, and calibrate these policies in order to attenuate the structural infra-Eurozone unbalances that resulted, inter alia, from the Euro. The new government should and could immediately build a consensus of the best European and Italian economists around such a platform. An Extra-European consensus might also be build. But all this should be prepared now, while the centre-left awareness of the gravity of the situation, and how to tackle it, is still limited. The prospective center-left government might present itself as representative of the best economic views around Europe critical of austerity policies. This would provide more credibility to a progressive government than to a pro-austerity Monti coalition.

2. It is a question, for Italy, or life or death. In this term the question must be posed to Angela Merkel. What it is important for the Italian government would be to build a global consensus – of European  and extra-European governments, public opinion, economists - around a different set of policies and, in the long term, around a different institutional set up of Europe (but not on the reactionary lines proposed by Germany, or along the recent empty proposals by the European Commission – a chamomile for a cancer). The problem is not only Germany, but also France. Probably there is a political commitment of Germany to sustain France. This support might be lost if France sides Italy. For instance, the German banks – e.g. the DB that, it is said, controls political life in Germany – begin to withdraw capitals from France and the French spreads begin to rise. So, everything is very difficult. Moreover, the recent sentence against Argentina by an American Judge does not help countries that might decide to go their way – or even international agreements about debt restructuring/reprofiling etc. It is unfortunate that the Italian center-left pays little attention to these events.

3. Likely yes, given the lack of clarity about an alternative economic program for Europe. If you do not even know what you would like, if you sit at the bargaining table with TINA (there is no alternative) in mind, if you just hope that the European socialists will help you, or that we have to wait the next German elections etc., then you are lost. This is the situation. Is the discussion on Europe at the centre of the electoral debate? No. The theme will be likely left to Berlusconi, which is just demagogy. The “Carta d’intenti” that people had to subscribe to participate to the Dempcratic Party's primarie was a disaster: an uncritical commitment to this Europe.

4. A lot of work should be done, as said, before. The centre-left should arrive at the appointment with clear ideas (including emergency plans etc.). Stop austerity should be the clear and open stance of the centre-left before and after the elections.  The first thing to do is to propose a new OMT (the offer by Draghi of an ECB guarantee to public bonds in exchange of strict austerity plans). The new OMT should involve a firm commitment by the ECB to keep the interest rates on the Italian bonds at the pre-crisis level; Italy would then accept a “Keynesian conditionality” committing itself to the stabilization (not to suicidal reductions) of the public debt/GDP ratio at the current levels. This sort of fiscal rule, if accompanied by an aggressive FED-style monetary policy,  is consistent with deficit spending, what we need now to sustain demand (I repeat, this rule is also consistent with the stabilization of the debt/GDP ratios). Of course, we need that this sort of anti-austerity policies is adopted all around Europe. A consensus about the Italian positions should be build at the G20 level arguing that the current policies are unsustainable and suicidal at the global level. A progressive, equilibrated economic plan could collect a lot of sympathy at the international level, even from the financial markets. Why Partito Democratico does not organize a conference before the elections inviting the brightest world economist that might sympathize with it (say Krugman, De Grauwe, Wyplosz and many others)? Without forgetting those Italian economists that have from the very beginning realized how much austerity policies would be not only unfair, but useless, in fact damaging. Unfortunately, many economists associated with PD have been systematically too timid with regard to the European and Monti’s policies. We must be very clear in our thinking. The situation is tragic, a policy of small steps (that are in actual no steps, or backward steps) is just what we do not need.

* Professor of Political economy, Univerity of Siena.



Ruggero Paladini *

1.The new government will operate in a situation in which Europe as a whole is in recession, and Germany is approaching the November elections. This framework is indeed contradictory, because from one hand it generates pushes towards initiatives to sustain growth (at European level), but from the other hand Merkel and company will stiffen on the “homework” policy for curbing sovereign debts of Mediterranean countries.  The center-left government has a card to play: a five years program with some more capital expenditures at the beginning, but with a downward trajectory of the debt/Gdp ratio.
 2. It is very difficult that pressures may produce strong changes in German policies, not before the elections. Something could change with a victory of Spd-Green coalitions. The chancellor-candidate for Spd, Peer Steinbrueck, expressed anti-keynesian ideas during the financial crisis. It is true that recently has produced some more leftist statements, including the idea of a pooling of that part of debt in excess of 60% in a redemption fund.  A Spd-Green victory would create a framework where a European financing of investments is easier, and, perhaps, some concessions for deficit financing of some capital expenditures, like financing public researches.

3. The government should formulate a five years program, with two aims: stimulate investments in applied research for the industrial sector, even allowing for a (limited) greater deficit, and redistribute the fiscal revenue in order to reduce the level of inequality distribution. Reforming the personal income tax eliminating the so-called fiscal incentives to productivity agreement, that are the worst way to deal with the problem.

*Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight. 



          John Weeks *

1. One of the few true statements Silvio Berlusconi ever made was in the closing days of his premiership, when he denied that Italy suffered from a deficit or debt crisis.  Throughout the last ten years, Italian governments could boast of the largest primary budget surplus in the euro zone (total deficit minus interest payments on debt).  High interest payments accounted for the deficit, a legacy of the 1990s when the Italian government borrowed at double-digit interest rates to hold the Lira in line with the Deutsch mark.  Over the last two years when the public bond rate reached "crisis level" it was less than half what it had been in the mid-1990s. Further, the value of the public debt in constant prices is below what it was ten years ago.  Statistics show that there is no Italian fiscal crisis, either of the debt or the deficit.  Therefore, there is no technical reason that a progressive government need continue with austerity policies.  For two decades the Italian economic problem has been slow growth, which before the Global Crisis was the direct result of restrictive monetary and fiscal policies with the objective of joining the euro at its creation.  Never has there been a better example of the old saying, "be careful of what you want, because you might get it".
But with bond rates high, how would a progressive government fund the fiscal stimulus that is necessary to achieve even modest growth?  The answer is quite simple: the government could sell it bonds to the Bank of Italy.  Both the European Commission and the German government would object, but neither would have any effective sanction to stop this borrowing.      To further stimulate aggregate demand, the new government should raise public sector salaries, especially for the lowest paid.

2. In my opinion, there is no possibility that the current German government will change its policies.  German big business has gained enormously from the creation of the euro zone under its present rules.  Some critics of German economic policy argue that German government policy might change when it becomes obvious that the euro zone crisis is harming the German economy.  This is wrong for two reasons.  First, it is obvious now that the crisis has harmed the German economy.  German politicians and big business ignore this, or do not believe it.  Second, the large German exporters are shifting their export focus to Asia, especially China, abandoning the rest of the euro zone to its (German created) disaster.
Changing German economic policy is beyond the power of any progressive coalition of other governments.  The only hope lies in each country pursuing its own expansionary policies in defiance of German policy.

3. Whether a left-wing government in Italy will disgrace itself as the social democrats did in Greece in Spain depends on the pressure coming from the progressive forces inside Italy.  Any new, left-wing government will be urged by financiers and their ideologues to "be realistic and responsible", and continue with the dysfunctional policies of Mr Monti.  A mass movement prepared to continue street protests is necessary to generate progressive policies out of any government in Europe.

4.The first step of a left-wing government should be to announce that it is not bound by the Fiscal Pact.  Second, the government should announce the immediate end of Monti's labor market "reforms".  The first active step should be to implement a fiscal expansion, funded by borrowing.  Therefore, now and in the coming months, politicians of the left should prepare the concrete plan for the fiscal expansion, who central element would be public sector investment to generate employment.

*Professor Emeritus & Senior Researcher Centre for Development Policy and Research,University of London. 

Lettieri - Acocella - Galbraith - Franzini - Baker - Amoroso - Cesaratto - Paladini - Brianti - Weeks