The Italian economy is floating among massive unemployment rates, which especially hit the younger generations: an over-all 11.7% unemployment rates, with a 39.2% rate for youth unemployment (Italian National Institute of Statistics).
The Italian bank system constitutes a threat for the whole Euro area. Banks hold more than 300 billion Euros of bad loans, and the negative interest rates enforced by the ECB are slowly but surely eroding the already meagre capital of Italian banks. Meanwhile, the real economy does not show any sign of immediate recovery. Productivity is risible, with industry entrenched in a system of small and medium size enterprises, mostly family-run. Public debt, at a glorious 133% of GdP (Eurostat), looks like an enormous time bomb. Nonetheless, Prime Minister Matteo Renzi seems very confident that things will change. “The Jobs Act has affected reality the most, restarting the ‘labour engine’ again. The plus sign in our GDP figures has come back after the Monti government”, he said during a press conference on the referendum.
Needed: Structural Reforms
The Jobs Act is a bundle of different legislative decrees and laws that reform, abolish or add up to the existing Italian Labour Law. First and foremost, the Act incentivises firms to hire, through “discounts” on social contributions. Whether the Jobs Act has actually improved the conditions of workers is a matter of debate – but unemployment rates clearly suggest that more, much more, has to be done. Despite the chasm that is Italian debt, Renzi is currently challenging the EU’s (and German-backed) austerity policies, by presenting a deficit equal to 2.4 % of GDP in the 2017 budget. This move directly violates EU rules, which calls for bringing budgets into balance and reducing debt each year in overly indebted countries (Italy’s first target was 1.8%). If more direct government intervention is needed in the Italian situation does, at best, elicit some doubts. Rather, the Italian government should implement structural reforms, especially in the industrial sectors. The fact that firms are small, scattered, and dependent on families does no good to a free-market economy: economies of scale become hard to reap and the managerial abilities of old nonni and their grand-children are questionable.
On the other side of the Alps, it seems heaven has materialised. Germany is seeing its lowest unemployment rate after reunification. The figures show a 4.1% unemployment rate, with a 6.8% rate for youth unemployment (German Federal Statistics Office). The difference with respect to Italy’s numbers is quite extreme. The irony lies in the fact that the Great recession was spread in Europe by German banks, most notably Deutsche Bank. However, the fiscal boost implemented by Merkel helped the country to a speedy recovery after the crisis. After managing the exit from recession, Germany fell back to its strict macroeconomic policies, not only domestically. Germany exerts pressure on the European Union and its member States to return to a rigid austerity.
The German economy looks extremely strong: the country is running a current account surplus, the employment rate is stellar, and exports, despite the Volkswagen faux pas, are still high enough to produce a positive trade balance. Nonetheless, from Washington, to Athens, to Rome, almost everybody agrees that German economic policies are, if not on the wrong track, at least distorted. Thanks to negative interest rates, Germans should be pushed to borrow and invest both at home and in the Euro-area, providing a boost for the sluggish sister economies. The reality is, instead, that Germany is investing less and less, especially domestically. By the simplest economic logic, resources should be efficiently allocated: massive amounts of capital kept idle do not appear allocated, never mind efficiently so. However, austerity is the only viable option, because “anything else would lead to a new crisis of confidence” German Finance minister Schäuble said. This leads to a time-honoured question: Is the Euro-area the German playground? In a free-trade area like the EU, where economies are very intertwined and a great degree of political integration has taken place, especially in light of the fact that a weak Italy (or Greece, or Spain, or Portugal) means a weak Europe, shouldn’t the strongest country take responsibility for its weaker counterparts?
It seems as though the EU is a gigantic kindergarten: Italy is the rebel kid swallowing down all the candy, while Germany is the smug, rich kid that nobody can stand, but that manages to bully its peers into doing what he wants. Irrespective of what they are doing, both are undoubtedly being naughty.
In a time of insurgent right-wing populism, amidst an unresolved (unresolvable?) refugee crisis and dire economic conditions, being responsible and considerate of others would be highly advisable – the consequences of the Italian recklessness and the German egocentrism could be disastrous.