This a longer version of an article that appeared in the Guardian
reprinted with permission.
23 Sep, 2011
History repeats itself, Marx wrote, first as tragedy, then as farce. If you wonder how it might repeat itself the third time, look at Italy: a country where the most effective opposition to government are – literally – comedians. Lately, however, reality has been much more inventive than the comedians. This has distorted most analysis of the country’s economical and political situation - which sees Italy’s problem as just its prime minister, distracted by sex and trials.
Italy went into the eye of the storm this summer. To understand the true nature of the Italian crisis we need to look at it in the context of the wider European crisis. Both, we are told, are part of a wider sovereign debt crisis. The limits of the eurozone are well known: it has a ‘single currency’ that isn’t backed by political sovereignty, a Central Bank that doesn’t act as lender of last resort or finance government borrowing, and no significant European public budget. The ECB policy errors, its obsessive anti-inflationary stance and its propensity to raise the interest rate whatever the cause of price rises, are also plain to see, though its pragmatism must be recognized. And Germany’s neo-mercantilist dream of profiting from Southern Europe's negative current accounts, while simultaneously imposing balanced state budgets, pertains more to psychiatry than economics.
That said, the European crisis is not an endogenous one, the sovereign debt crisis is not truly a public debt crisis, and Italy’s crisis is not Italian-born. German neo-mercantilism induced stagnation in Europe, which survived thanks to US-driven exports. When “privatized Keynesianism” – mixing institutional funds, capital asset inflation, and consumer debt (a model exported from the US and UK also to Spain and Ireland) – eventually exploded, European growth imploded.
The sovereign debt crisis is thus the private debt crisis in disguise. Deficits are not of the “good” kind (planned to produce use value for the collectivity, and self-dissolving through qualitative development), but of the “bad” kind (induced by real stagnation or saving finance). The problem has been the unwillingness to refinance first Greece, then Ireland, then Portugal. For these sovereign areas default should not be on the agenda. Their share in the euro area public debt to GDP ratio is ridiculously low: canceling the debt would have been less painful.
Spain is next in line (because of the rapid increase in the flow dimension of public debt), and a bigger problem. Italy is a different story altogether. The crisis came because “markets” and rating agencies had fears and smelled stupidity . They saw the stupidity of European leaders, who were ineffective in rapidly providing a financial rescue for indebted countries, and introduced self-defeating austerity programs. Fear became panic, producing a ballooning of the interest rate spread. The sharp decrease in the already very low Italian GDP growth rate (2010: 1.3%; 2011: 0.1%, first quarter) and the dramatic rise in the interest rate paved the way for Italy’s current nightmare, because of the near 120% stock of debt. It is a simple issue of doing the math to see that at some point this can start a liquidity crisis, turning soon into a solvency crisis.
Does this mean that Italy doesn't have deep, serious, failings in its economy? Quite the contrary. But they are structural, long-standing ones. They date from the mid-1960s, and they resulted in a continuous decrease in labor productivity and growth rate. Capitalists answered workers’ struggles with a kind of investment strike - through the intensification of labor rather than innovation. Industrial sectors (and most big firms) disappeared, high-technology was imported, and public enterprises were privatized. Industrial districts prospered, mostly thanks to devaluations, but are now in deep crisis. Lately, the thriving Italian pocket multinationals (mid-sized enterprises) have accounted for a good export record in manufacturing, but they are residual and dependent on outside-generated growth. Public debt was a means to assist a de-industrializing economy.
The fatal blow came with the policies of flexibility (that is, casualization) of labor, leading to a collapse in labor productivity. For a while, until the faltering growth was higher than the self-dissolving productivity, this led to full-underemployment in the center-north. The crisis is revealing the hidden truth, and the drama of Italian unemployment and further casualization is just at the beginning. The recent policy measures to redress the government budget balance according to ECB diktat are the sum of increasing regressive taxes and a savage reduction of the government’s money transfers to local authorities, which means cuts in essential social services.
Italy’s trouble is the same as Europe’s: lack of effective demand, but also a perverse composition of output.
Default plus exit from the euro are not options anymore in a crisis including Italy. In 1992, Italy left the European Monetary System and managed a huge devaluation of the lira: the structural problems deepened, and workers' and popular conditions deteriorated dramatically. This time, moreover, Italy leaving the euro would mean the end of the monetary union, and a dramatic broadening of the European and world crisis. The crisis can be overcome only by stopping the domino effect and opening up hope for the future: by dealing at once with the European financial crisis and the real crisis. One suggestion has come from Yanis Varoufakis and Stuart Holland: Eurobonds – not only as financial rescue but also to finance a wave of investments on a European scale.
However, the crisis is a capitalist crisis: it is part of an attack against labor, private and public, in production and social reproduction. From this point of view – if the problem is not neo-liberalism but capitalism per se - a new New Deal should be part of a wider program of the European left and the trade unions, who should push for a socialization of investment, banks as public utilities, the intervention of the State as direct provider of employment, and capital controls. It is not (yet) Marx. It is Hyman Minsky, 1975. Unfortunately what is really missing in Europe is not the money to finance the public debt; it is internationalism. Only European struggles can resist austerity and deliver decent reform.