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Italy, Labour market reform, unemployment

From expansionary austerity to expansionary precariousness: the latest doctrine is another European illusion

Interview with economist Emiliano Brancaccio / Micromega

The deregulatory labour reforms of Italy’s new PM Matteo Renzi will fail because it is proven that “more casualisation does not mean more jobs”, argues economist Emiliano Brancaccio. Indeed, ‘the wager on the race to the bottom could bring the wage deflation to the whole of the EU, and deflation is likely to aggravate the debt crisis.” Brancaccio, however, is confident that Renzi will fulfil his promises, despite the assurances given to Angela Merkel on capping the deficit, starting with a tax cut worth eighty euros a month to the lower paid and costing the Treasury 10 billion euros. Italy’s young premier will breach the deficit goals by a few decimal points, however, despite a public pledge to respect them, because what ‘is looming is the exchange between a little less austerity and a little more labor reforms.”

The reforms planned by Renzi, starting with labour, have convinced Germany. Is this the heart of the summit, rather than the long talked about softening of austerity policies?

“It seems to me that in reality what is looming is… that the doctrine of “expansionary austerity” , that austerity should ensure growth, is at least temporarily being pushed to one side. It is no coincidence that Merkel has not focused so much on budget constraints. Rather, she insisted on a new doctrine, which we might call the “expansionary precariousness” : the idea is that further doses of labour casualisation can generate employment and income growth. ”

You don’t sound very convinced …

“The risk is that you replace an old with a new illusion. Even the theory of expansionary austerity had no empirical evidence. In fact, instead of promoting recovery, austerity has only fuelled economic depression. But even the new doctrine is not supported by the data: the empirical evidence, from the OECD and the International Monetary Fund for example, tell us that labour flexibility is not linked to an increase in employment. Precarious contracts may encourage employers to hire, but it also promotes the destruction of jobs in the early stages of economic crisis. The net effect is close to zero.”

At this week’s Renzi – Merkel summit in addition to praise for Italy’s reforms, there was the confirmation of the fateful limit of 3 percent of the budget deficit in relation to GDP. Respecting that constraint, can Renzi will keep his promises?

“In late May, Italian’s will receive their promised eighty euro paycheck. That’s not the point. The point at this moment is that Italy is already over that 3 percent limit, as Merkel noted herself.’

Renzi says, however, that he will close 2014 with a deficit of 2.8 per cent. Do you consider this likely?

” Renzi’s challenge – respect of deficit constraints while lowering taxes – is evidently based on the possibility that GDP increases, ie which automatically lowering the GDP/deficit ratio.”

You are skeptical once again.

“It seems a daring bet. The expansionary effect that Renzi has planned to achieve through this reduction of taxes will be really small, and will be partially offset by the decrease in public spending. The closely followed spending review may have the opposite effect to the eighty euro paycheck, especially when cutting sensitive expenditures, such as public transport . ”

On the spending review, Renzi has confirmed his desire seven billion euros of cuts already in 2014, although the minister in charge of the review previously quoted spending cuts of not more than 3 billion. Which is the right figure?

“In 2014, the spending cuts will certainly be less than that predicted by Renzi. It’s clear that we are facing a budget hole. Indeed, in a certain sense, we hope this is the case. Because a spending review carried out in three months. History teaches us that the spending reviews conducted in haste are transformed into brutal linear cuts that always hit the weakest and do not help the growth of GDP. ”

Are you saying that, in your opinion, Renzi has already planned to increase the deficit?

“Beyond the typical phrases of a European summit, it may be that he is thinking of a slippage of a few decimal points. In Europe we can see the first moves in a trade off between a little less austerity and a ‘little more’ labour reforms. The problem is that the new doctrine of “expansionary precariousness” is likely to be another failure.

If this is the case, what would be the implications for the eurozone?

“Behind the new doctrine is the idea that the entire eurozone can only be saved if the peripheral countries, by steadily increasing job insecurity, are able to slash wages, costs and prices. In this way, you should be able to close the gap in competitiveness with Germany and should therefore balance the relationship of credit and debt in the EU. But history teaches us that in general, this mechanism does not work. It puts all the weight of rebalancing on the debtor countries. In this way the entire EU is dragged into a wage deflation race to the bottom that may result in a generalized and a new debt crisis. This is an old lesson of Keynes, but [earlier this week] in Berlin they seemed to have forgotten it.”

Translated / edit by Revolting Europe

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope

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