Italy: From Recession to a new Socio-Economic Identity

The source of the Italian economic crisis is, needless to say, far more global than Italian. An economy so vastly dependent on industrial exports could not possibly remain unaffected by the depressive consequences of the crisis and, even more so, by the stifling results of the austerity measures imposed on all over the EU, including Monti’s technocratic government.

Italy was the fastest growing western nation between 1950-1990. Although this was partly due to its newcomer identity (low wages helped competitiveness), many other factors also played a significant role. A few big enterprises (Fiat, Pirelli, Olivetti and some more) and the big publicly owned companies (Ansaldo-Breda, Fincantieri, Eni, Enel to mention some) provided long-term investment and innovation. Between these two pillars the so-called “third Italy” gave birth to plenty of SMEs.These provided the economy with the much praised “flexible specialisation”, i.e. a mostly formal, but partly “informal”, chain of producers often connected to national or foreign large-scale manufacturers, swiftly adapting to changing global and national demand. 5000 of these SMEs eventually developed into undeniable economic successes, something quite similar to the German Mittelstand.

Today, they’ve assured that the country has managed to achieve a commercial surplus over the last few months – though a manufacturing capacity was also required. Yet, the rest of the SMEs suffered excessively from the novelties of the last thirty years: neoliberalism, financialisation, rigid and inflation obsessed Euro parameters.

Financialisation and to a degree also globalisation convinced big enterprises like Fiat to withdraw long-term and innovative investment from the Italian scene. Neoliberalism added to this process by discrediting the provision of long-term R&D by large public enterprises, despite the evidence that some firms involved (mostly under the umbrella of Finmeccanica and Eni) were indisputable examples of global innovation. Moreover, rigid Euro parameters hampered EU internal demand and prevented the devaluation of the Lira from being used as a temporary means of competitiveness.

Prior to the crisis, Italy remained an industrial country with very little inclination to financialised short-termism and indebtedness (unlike Britain, Spain and to a lesser extent Germany). It had needed more decades like “the glorious” ones after WWII to rid itself of its “newcomer” features but financialisation and neoliberalism triumphed. With it, public long-term investment lessened, as did the nation’s capacity to further the innovation that SMEs struggled to achieve on their own. As a result, many of the SMEs remained small and often incapable of long-term planning. Thus the lower cost of borrowing money that resulted from the post-Euro years could not be strategically put into use.

Therefore, the bulk of Italian manufacturers and service providers shortsightedly resorted back to typical “newcomer” features (informal job market, fiscal tolerance towards unfair taxpayers). Hence, for a large part of the Italian economy, a vicious circle began: the more (especially in the southern Mezzogiorno) these factors were present the less the incentive for long-run innovation. Hence, the general mood connected to these social contradictions: i.e. of being stuck after growing for several decades. These are also the roots of both the enormous public debt and the horrible Berlusconi years. The growth of the welfare state and most likely the fastest ageing population in the world would have required precisely collecting all the tax revenues the economy could afford. But the aforementioned economic structural reasons made it unfeasible. Several Berlusconi governments left millions of SMEs needing reassurances in this era of multiple anxieties, especially after the fall of the Christian Democrats (Italy’s natural moderate party of government 1945-1992) in 1993. Any explanation (first and foremost the myth of a TV brainwashed democracy, or of a public indifferent to corruption and scandals) is as simplistic (and in the long-term as silly) as is possible.

Furthermore, German “mercantilism” worsened the situation. The impressive decrease of German low wages, and the comparatively insufficient increase of high ones, deprived the EU (and an export-led manufacturing country like Italy more than other EU member states) of its most important exporting market.

Hence, when the global crisis arrived, Italy couldn’t avoid being largely unprepared. Though the 1945-1990 democratic and social development still renders Italy a country with great future prospects, not just of undeniable present weaknesses. For instance, the assumption that Italians have lived beyond their means is largely false. The high public debt in Italy is largely balanced by one of the highest savings ratios of the world, unlike most other countries.

Having considered Italy’s lengthy journey to its current situation, at least the list of solutions is fairly short. Italy needs first and foremost three kinds of measures:

1) the resources accumulated in private wealth and partly through disloyal fiscal behaviour must be taxed much more (i.e. more fairly). This, though, must not be (nor sound) punitive, and must be done gradually to prevent the sudden death of too many SMEs. The new revenues must fuel demand (resulting from downward and hence more equal distribution and pre-distribution) and, above all, fund better unemployment benefits and better active labor market policies plus innovation. In sum, such measures shall tend to remove the wrong incentives to low-wage production, while instead enhancing parity between the labor market parties and systematic innovation

2) A new “Golden rule” must be negotiated as part of a new European public budget sustainability compact. Part of the state deficit must be allowed and taken out of the Euro parameters in order to fuel strictly earmarked (and strictly monitored at the EU level) investment in infrastructure, greening innovation etc.

3) German and EU low salaries must grow significantly, for example, through an EU minimum wage like the one Thorsten Schulten proposes. This is will by the way only partly cause inflation in Germany: negative interest rates of  Bunds already  have inflationary consequences. Since more income equality in Germany could drag Italy out of recession, confidence in Italian public debt could return to acceptable levels, which could to a greater extent stop the irrational flow of investment in German Bunds, and thereby non-wage led inflation. As a result, only controllable and “good” German inflation will result from more German wage led demand. Along with a rational management of the debt crisis, these three types of measures could contribute to rebuilding the Italian economy and society. The solution matches Italy’s nature, that of a dual country: mostly developed but partly undeveloped, mostly legal but largely “informal”, democratically advanced and at the same time exposed to political instability and populism.

This column is built on a larger forthcoming paper the author has written together with Ronny Mazzocchi for the Friedrich Ebert Stiftung. It is also part of the European growth strategy expert sourcing jointly organised by Social Europe Journal, the Friedrich-Ebert-Stiftung, the Bertelsmann Stiftung, the IMK of the Hans Boeckler Stiftung and the European Trade Union Institute (ETUI).


  1. Kathleen McMullen says

    ‘the myth of a TV brainwashed democracy’?

    It’s not that people are ‘brainwashed’ as such, on the contrary, they are often convinced of being empowered, of participating as equals in democracy when that is not the case at all. A ‘brainwashed democracy’ is an oxymoron. You cannot be a free democratic subject and brainwashed at the same time. The power of TV to obtain popular consent for reactionary policies shouldn’t be underestimated.