Authored by Conor Gallagher via NakedCapitalism.com,
It seems like yesterday that the western media was up in arms that Italian Prime Minister Giorgia Meloni and her Putin-loving Brothers of Italy (Fdl) party were going to march Italy right out of the EU and NATO.
Unfortunately, Italy’s economy and foreign policy are controlled by the EU and NATO, respectively, and Meloni never showed any desire to rock the boat, immediately pledging fealty to both as soon as the Fdl emerged as frontrunners in the September election.
The problem for Meloni and the country is that those two commitments are now working in tandem to destroy Italians’ standard of living – a long-running process that is now being sped up.
NATO’s proxy war against Russia in Ukraine is driving energy prices through the roof. Gas bills for a median Italian household jumped so much (23.3 percent) in December compared to November that the National Consumer Union was warning of “heart attack bills.” The hikes are hitting consumers and industry alike and causing the government to scale back its meager social spending promises in order to shovel money at the energy problem.
Good news. Inflation in the €zone declined by more than expected in December to 9.2%. Energy prices and (energy-intensive) food prices are still the main drivers. pic.twitter.com/8DBU5qyMLj— Philipp Heimberger (@heimbergecon) January 7, 2023
Despite NATO’s Ukraine war being the driver of Eurozone inflation, the European Central Bank is determined to keep hiking interest rates even if that means recessions for bloc countries and another debt crisis for Italy. The ECB raised its benchmark interest rate by 50 basis points In December, but also signaled that more hikes would follow in the coming months, which triggered a sell-off of Italian government bonds.
Italy’s borrowing costs have risen to over four percent and are causing alarm in Rome. Meloni said the ECB should avoid making “choices that make things worse.” Deputy Prime Minister Matteo Salvini called the ECB’s decisions “unbelievable, baffling, worrying.” Italian Defense Minister Guido Crosetto criticized the ECB and its president Christine Lagarde for blindly following economic theory despite the harm it will inflict on businesses and workers.
“You have to justify this politically to your European citizens. You are not a Martian,” he said. Crosetto even resorted to accusing the ECB of aiding Russia with its rate hikes. The situation for Italy could worsen as growth slows and interest rates rise further. According to FT:
The new Italian government had “given little cause for concern for investors for now,” said Veronika Roharova, head of euro area economics at Swiss bank Credit Suisse. “But concerns may resurface if growth slows, interest rates continue to rise and [debt] issuance is picking up again.”
Economists are now widely expecting all three of those to occur. Two-thirds of economists polled by FT predicted the ECB would start cutting rates in 2024 – likely after Italy and other states in the EU are in a recession. Again from FT:
The ECB will start shrinking its €5 trillion bond portfolio by €15 billion per month from March by replacing only partially matured securities, putting further pressure on Italian borrowing costs. Ludovic Subran, chief economist at German insurer Allianz, said the eurozone risked a repeat of the 2012 bond market collapse “as fiscal options differ across countries without the heavy lifting of the ECB”.
Italy’s borrowing costs have already risen sharply since the ECB started raising interest rates over the summer. The 10-year bond yield has climbed above four percent (the level at which investors say panic sets in), nearly quadrupling the level of a year ago, and 2.1 percentage points above the equivalent yield on German bonds.
According to Bloomberg, such conditions “threaten to unlock the same Pandora’s box that fueled the euro crisis of 2010-12, when the currency bloc nearly split apart as more-indebted countries faced a sudden, harsh tightening of financial conditions as investors sold off their bonds.”
Meloni and the Fdl thought they could pursue policies that married Brussels-prescribed neoliberalism and conservative nationalism, but the current situation shows just how difficult such a strategy is. It’s hard to be nationalist when you don’t control your economy or foreign policy.
Meloni did nearly everything the EU wanted. She declared fealty to the EU and NATO, broke campaign promises in order to scale back meager social spending plans, and appointed pro-EU Atlanticists to key positions like economy minister and foreign minister.
She continued the neoliberal economic reforms of her predecessor, the former vice chairman and managing director of Goldman Sachs International and ECB president, Mario Draghi. She promised to implement further reforms so as not to jeopardize 200 billion euros (a sum that looks paltry in the face of the gathering economic storm) from the European recovery plan.
But the EU always wants more. Brussels and Rome are again at loggerheads over reforms to the European Stability Mechanism (ESM), which was set up in 2012 after the sovereign debt crisis and aims to help bail out countries in exchange for strict reforms (think Greece-level austerity and privatization).
Italy may soon require assistance from the ESM, but the reforms include “a stronger role in future economic adjustment programmes and crisis prevention. In addition, the application process for ESM precautionary credit lines will be easier, and the instruments will be more effective.”
Italy is the only eurozone country that is yet to ratify the ESM reform with many in the country fearful that it would increase the risk of a restructuring of Italy’s national debt, the loss of what little economic sovereignty Italy has left, and a further deterioration in standard of living.
A brief background on the makeup of the ESM: it’s comprised of a Board of Governors with a representatives from each of the 19 ESM shareholder countries. After that, it gets a little convoluted. The ESM provides this illustration to clarify things:
The management board of the ESM is composed of the following:
Pierre Gramegna, the former Minister of Finance of the Grand-Duchy of Luxembourg;
Christophe Frankel, the former Head of Financial Markets at Crédit Foncier de France in Paris;
Rolf Strauch, a former European Central Banker in the Directorate General Economics on fiscal, monetary, and structural policies and an economist at the Deutsche Bundesbank;
David Eatough, previously an investment banker at Credit Suisse;
Kalin Anev Janse, a former corporate finance advisor at McKinsey & Company and investment banker at JPMorgan;
Sofie De Beule-Roloff, with a background in hotel and HR management;
and Nicola Giammarioli, formerly an IMF executive board member.
Should Italy need assistance from the ESM, it is hesitant to hand over even more of its economic sovereignty to such a group. The Meloni government instead wants the ESM to become a fund to boost investment across the EU and help soften the impact of sky-high energy prices. The suggestion has gained little traction with the rest of the bloc, and the standoff over the ESM reforms could get quite ugly if/when Italy requires assistance.
There are few tragedies that leap to mind in this mess for Italy. The first is that for the past quarter century Italy has followed Brussels’ neoliberal economic playbook, which has only made its situation worse. According to economist Philipp Heimberger:
The mistakes that were made 40 years ago took place in an environment of rising interest rates. Since then, the Italian state has been carrying a heavy interest-rate backpack. If we exclude the burden of interest rates, however, the Italian state consistently ran budget surpluses from 1992 up to the Covid-19 crisis. Even Germany, Austria and the Netherlands recorded a comparable ‘primary’ budget surplus less frequently than Italy. The Italian state has not been as ‘profligate’ as is often claimed: it has consistently collected more in taxes than it has spent. IMF data show that Italy implemented the most severe fiscal consolidation packages of all advanced economies between 1992 and 2009, especially when it comes to spending cuts.
A flexibilisation of the labour market since the 1990s brought a sharp increase in fixed-term contracts, a pushback against trade unions and a decline in real wages compared to Germany and France. These measures not only reduced inflation in the 1990s. Cheap labour has increased the labour-intensity of production, thereby reducing the incentives for labour-saving investment by companies. Private investment, however, is key to rising productivity and is particularly crucial in high-tech sectors. Productivity growth is in turn the basis for growth and rising incomes. Market-liberal labour market reforms have thus arguably done more harm than good to Italy’s productivity growth.
The second tragedy is that Italian workers continue to get hosed, which has also been happening for the past quarter century. In 2000 the standard of living in Italy was comparable to that of Germany. Today, Italy’s per capita income levels are 20 percent below Germany’s. During that same time Italy has become one of the most unequal societies in Europe.
While wealthier Italians (what economist Stefano Palombarini calls the country’s “bourgeois bloc”) support the country’s neoliberal transition and find a voice in every Italian government, the working class has been abandoned by every Italian political party for 30 years.
Ever since the Italian Communist Party – long one of the most powerful in Europe – finally capitulated to CIA efforts to destroy it in the 1990s, Italy’s working class have lacked a political home, and the neoliberal project continues no matter who is in government. That fact has taken a toll as the turnout in Italy’s September election was the lowest since World War Two. Many of those who didn’t bother to go to the polls were working class voters.
Meloni and the Fdl were able to emerge victorious because they were able to, at least momentarily, deflect attention away from the neoliberal policies. Stefano Palombarini writes in Jacobin:
It claims the living conditions of the working classes are not being undermined as a result of neoliberal policies and reforms, but because of threats to national identity, the wave of migration, the explosion of crime, the model of the traditional family being called into question, etc. It goes without saying that the promise of protection against artfully created and largely imaginary enemies is bound to severely disappoint the socially weaker fraction of the right-wing bloc; even so, it has allowed them to reach power.
The problem remains that since Brussels calls the shots in Italy’s economy, workers are stuck in the only major European country where wages have lost value in real terms since the 1990s. One party that appeared to truly want to do something for Italy’s workers was the Five Star movement, which took power in 2018. Its draft budget plan called for an increase in the public deficit, a tax amnesty for lower incomes, pension reform allowing early retirement, and a basic income for citizens.
The EU, to put it mildly, was not a fan and threatened Italy with the dreaded excessive deficit procedure. Therein lies the rub: how do you appeal to a wide swath of the Italian electorate by reversing the decline in their living standards while remaining inside the straitjacket of EU rules?
One route for the Fdl was to try to emulate Poland’s Law and Justice Party (PiS), which took power in 2015 and has remained there ever since by combining neoliberalism and nationalism. But that still requires offering workers at least a little something – something that the Fdl is unable to do or unwilling to try. Instead, Meloni’s government is getting rid of one of Five Stars few achievements (a measly citizens’ wage that provides the unemployed an average of 567 euros a month).
Despite criticism of its conservative social policies, the Law and Justice Party enjoys widespread support from the working class due to its popular programs, including an increase in pension payments, subsidizing children’s school supplies and monthly payments to families per child, from the second child onward.
But even the PiS’ combination of neoliberalism and conservative nationalism has its limits, as Poland is also locked in a battle with Brussels over the release of EU funds. Recall that Meloni and the Fdl were the recipient of not-so-subtle threats from EU officials ahead of the Italian election.
NEW - EU Commission President on the upcoming elections in Italy, where a right-wing victory is expected:— Disclose.tv (@disclosetv) September 23, 2022
"We will see. If things go in a 'difficult direction' - I have spoken about Hungary and Poland - we have tools." pic.twitter.com/PxtvpXyCua
The aristocratic Ursula Von der Leyen was presumably referring to the problems facing Hungary and Poland’s access to EU funds because of their refusals to toe the bloc’s line and/or the ECB’s ability to engineer a debt crisis in Italy.
Despite campaigning as a nationalist, Meloni backed down when she first formed her government. We’ll see how she proceeds now in her standoff with the EU that wants more control over the Italian economy.