In Berlin and Brussels the main care is about the reform of the labour market, to be achieved through the creation of an adequate industrial reserve army .An involuntary tribute to Karl Marx?
Everyone knows - except in Berlin and Brussels - that the financial sector caused the economic crisis, and the economic crisis caused the blow up of public deficits. In Italy the deficit in 2009 rose from 2.7 to 5.5 and the GDP decreased by 5.5 percentage points (already in 2008 Italy was the European country to have the worst recession, apart from Estonia : -12). No wonder that the debt-to-GDP ratio rose from 106.1 to 116.4.
But in early 2010, when Papandreou announces that the Karamanlis government has heavily make up the budget, the German government reverses the causal link, charging the public debt crisis and the fiscal irresponsibility of the southern countries. The Irish case is made to fit into this framework, given that the government had assumed all the debts of the banks. As Angela Merkel said "any German housewife knows that you can not spend more than what you earn."
Fiscal tightening , over the limits of sadism in the Greek case, are imposed in all countries of the euro , but also the British Conservative government follows the same philosophy. After four years, we can summarize the results in Italy: the deficit fell from 5.5 to 3.2 in 2013, the GDP growth is 2.2 points in 2010-2011 , but the fall is 4.2 points in 2012-2013 . No wonder that the debt-to -GDP ratio has risen to 133%.
Now even the ECB does not believe in the theory of "expansionary austerity" (Look at Nuti's article and paper in this issue); it is recognized that in the short term the effect of fiscal tightening is negative. However, they continue to think that the multiplier ( on average) is still in the order of -0.5 . That is a point deficit reduces by half a point the GDP. But if the effect is underestimated , not even that much, then cutting the deficit have a perverse result. In fact with a debt like the Italian one, if the multiplier is equal to or greater than -0.75, we are in a vicious cycle: cutting the deficit imply a decline in GDP; so the deficit rises, there is a new cut , with the result that the debt to GDP ratio continues to rise. In fact it is what happened in Italy in the four years 2010-2013 : fifteen points higher .
But the fall in GDP in all Eurosud countries has had an important effect on the trade balance; the countries have imported less (for the fall in consumption) and exported more, as businesses have turned to foreign demand. In particular, Spain has had a very strong improvement in the trade balance (+10 percentage points of GDP in six years), also due to an improvement in the cost of labour per unit of product, obtained through a process of massive layoffs. Italy has had a more limited improvement (+ 3 points), so in Berlin and Brussels they think that Rome should mimic Madrid.
In this regard it should be remembered, however, that the procedure on macroeconomic imbalances gives top priority to the current account balance, but also to the net position of foreign debt, where the passive position of Spain at the end of 2011 was equal to 93.5% of GDP, while the Italian was 49.5%.
Speaking of the two countries, the OECD Economic Outlook (May 2013, n. 93) has calculated the positive effect on GDP, around 2025, of structural reforms; these are divided into reforms of the labour market , the product market and the pension system. Both for Italy and for Spain GDP will be seven points higher; the difference is that in Italy the most important component is the product market , then the pension reform , and finally the labour market . But in Spain the result is obtained almost entirely by the reform of the labour market. For the period 2010-2013 the Spanish GDP fell by 7.1 points, such as the Italian one, but employment fell in Spain by 18.3%, while in Italy by 5.9%.
There is no need to go into details of these data; enough to say that in Italy the phenomenon of discouraged workers, often women, who no longer seek work, is significantly greater than that in Spain. The point I want to emphasize is different: in Berlin and Brussels the main care is about the reform of the labour market , to be achieved through the creation of an adequate industrial reserve army . They might not know, but their teacher is Marx.
After the German elections and the formation, likely, of the coalition government, the vision of Europe's future will be the same: the Mediterranean countries must break even the current account, and of course Germany will continue its policy export-led. In this perspective the scenario for the Mediterranean countries is that of a prolonged semi-stagnation, with a situation in terms of debt made more difficult by low levels of inflation and interest rates higher. The Spanish are in the middle of their term: for Italy the maximum length of the government is a year or so, not more. Perhaps who Frau Merkel will face at the next elections, will be Grillo or Berlusconi.