Interview with Sergio Cesaratto: Draghi and the Italian Melodrama

15/02/2021

February 10, 2021

Sergio Cesaratto is Professor of Growth and Development Economics and of Monetary and Fiscal Policies in the European Monetary Union, University of Siena. Many of the topics of this conversation are developed in his latest book: Sergio Cesaratto, Heterodox Challenges in Economics – Theoretical Issues and the Crisis of the Eurozone, Springer, 2020, http://www.springer.com/9783030544478 that will be reviewed on BRAVE NEW EUROPE in the near future.

Can we say that the “Vincolo Esterno”, the neo-liberal EU straitjacket Italy’s oligarchy and technocrats imposed on their nation, has failed or has it achieved the success they sought – or has it done both?

Both. It succeeded in the sense that an icy discipline descended on the working classes, trade unions and fiscal policy. It failed in the sense that discipline brought with it the stalling of growth, later aggravated by the 2008 crisis and the pandemic. Many foreign readers do not know that Italy has a record of discipline in public accounts, measured by budget surpluses net of interest expenditure, unbroken from 1991 until the pandemic. This, together with the loss of a competitive exchange rate, has led to stagnating productivity and growth in Italy since 1995. Public debt was reduced from 120 to 100 % of GDP before the 2008 crisis. But at a very high price (cuts make growth less and nullify the budgetary effects of cuts in a Sisyphean effort). No country in Europe has been as frugal as Italy (read https://www.ineteconomics.org/research/research-papers/lost-in-deflation). Moreover, private debt is very low in Italy, Italian households are also frugal, contrary to what is portrayed in Northern European media.

Will Italy have to accustom itself to receiving an EU proconsul every ten years?

It is said that the Bocconian pro-consul Mario Monti was called in 2011 to manage a harsh fiscal austerity (now recognised as useless and harmful), while today pro-consul Mario Draghi is called in to manage the European Recovery Plan funds. In truth, this money is not much, it will be spent over many years, and much of it was already budgeted – i.e. it is not additional expenditure. There will be an advantage if they are spent more quickly in a country where bureaucracy and a thousand anti-mafia controls slow down the speed of public investment. In fact, Draghi means a European commissioner of the Recovery Plan. This might lead to greater efficiency, but the Recovery Fund will not get us out of the crisis.

Italy was once among the most successful industrial nations in the world, and still has the EU’s second highest industrial production after Germany. What did it do right then and what has gone wrong?

The ills of the Italian economy go back a long way. The economic miracle of the 1950s and 1960s did not solve the country’s historical problems: in a spatial sense, since it was concentrated in the north-west, with subsequent extensions to the north-east and, temporarily, to the northern Adriatic strip; in the direction of job creation, as the limited industrialisation did not tackle the pockets of southern, female and youth unemployment, and underemployment in the parasitic tertiary sector; in a technological sense, as the 1970s-1980s failed to make the leap from mechanical to more electronic production; in a social sense, as there was a lack of modern reformism towards the working classes, in favour of clientelistic inclusion. From the end of the 1960s, the lack of social reforms and the hiatus between expectations of consumption and the insufficiency of the cake to be shared exacerbated the conflict between capital, labour, and parasitic tertiary sector (the rats in the cheese as the Italian economist Paolo Sylos-Labini defined sections of this sector), with a fallout of inefficient use of public spending and tolerance of tax evasion by the Christian-Democratic governments.

Since the late 1970s, the search for a stabilisation of this conflict through a fixed exchange rate regime has, on the one hand, led to the end of the search, but on the other hand it has led to the explosion of public debt and the renunciation of a competitive exchange rate. The perennial fiscal austerity since 1991, as well as the hasty dismantling of public industry through privatisation, have completed the work both on the aggregate demand side, depressing investment and productivity growth, and on the supply side, with the renunciation of a pro-active industrial policy (in the face of pressing competition from emerging countries).

The Italian people seem to want change. What they have gotten is Berlusconi and later the 5 Star Movement. There is a saying: Whatever EU citizens vote for, they will receive neo-liberalism. Is this the case in Italy?

Absolutely. When a country surrenders monetary sovereignty, it loses the ability to conduct its own economic policy – in fact, even budgetary policy is restricted by the government’s lack of central bank support. In the US, at local State level this loss is compensated for by a federal budget policy that redistributes income between regions and combats depressions. In Europe, nothing of the sort. But a federal budget implies a political union, and the latter a national identity, which is present in America but not in Europe. The result is a decline in national democracies. When citizens vote, they do so for two things: to decide on economic policy and to decide on civil rights. In European countries we only vote on civil rights (when they are allowed to do so). In Germany it is a bit different, because the government of that country has a good degree of control over European economic decisions. In France, Italy or Spain left and right end up being the same thing. Normally the left should be for more employment, and the right for price stability. Because the European Union decides these things, the parties tend to resemble each other. The remaining chance is populism. But left-wing populism is easily destroyed by letting the markets massacre the country by making interest rates on public debt skyrocket before the complacent eyes of the ECB (see Greece); while right-wing populism ends up obeying European policies, to which it is more organic, and using the anti-immigration outlet to please its electoral base.

Many people in Europe, and even in Italy, have not understood the causes and dynamics of the recent Italian political crisis that led to the appointment of Draghi.

It is clear that Matteo Renzi wanted to smash the alliance between the Democratic Party (very moderate left) and the Five Star Movement (populism with both left and right-wing components), which incredibly was his creation in late summer 2019. According to a fascinating hypothesis his whole game aimed at the only possible outcome to avoid early elections and the victory of a populist right: the appointment of Draghi, whose name of last resort for Italy has been going around for many months (but not yet in summer 2019). With what gains for Renzi? For now none, he is considered an unreliable traitor by both the left and the right, while his electoral base is irrelevant. But in the meantime he has shuffled all the cards. Now all parties except Fratelli d’Italia (neo-fascists à la Marine Le Pen) support Draghi, and each will pay a price. Probably more the Left and the Five Star Movement; the constituency of Salvini’s League in Italy’s productive north is basically homogeneous with Draghi and pro-European (but Salvini will still have to give up some of his populism). Perhaps Renzi is hoping for some success from Draghi and to present himself as the one who brought him to power.

And does Draghi have a chance of success?

Firstly, everyone here, not just Italy, is in the hands of the pandemic and the effectiveness of vaccines. If lucky, Draghi will be able to take charge of the post-pandemic recovery. As I said the Recovery fund will not change things much, but if well spent and quickly it will be another medal for Draghi. Then it’s a question of what Europe will do: will it impose new austerity to reduce the debt-to-GDP ratio? Will the ECB continue its accommodative monetary policy? Everything depends on Germany’s decisions. Draghi may be clever enough to make Germany understand that for Italy (but also for France and Europe), abandoning accommodative policies could be disastrous for the recovery. Draghi could convince Germany to commit Italy to stabilising its debt-to-GDP ratio with European support, with a slow reduction only in the event of a robust recovery and provided this is not damaged. Draghi would also have to be skilled enough to keep the Italian social distress under control.

Will he be able to do it?

Draghi is a many-headed dragon. He is a Catholic socio-conservative. Somehow a Christian Democrat able to please almost everybody – German friends know what I mean. This is his real skill, which he has shown in running the ECB by skilfully keeping the German representatives’ hardliners at bay. Consensus is important. And he will need a heavy German endorsement (and not all Germans like him). Many in Italy fear his conservative facade. Draghi has been many things: the wretched privatiser of Italian public industry just before he went to work for Goldman Sachs; he declared that the European welfare state had had its day; but in 2014 he made it clear that Europe’s anti-Keynesian economic policy was wrong. There is something for everyone! In his tesi di laurea he even argued that the euro was a bad idea! Let’s remember, however, that in 2023 Italy must hold new elections, and although Renzi (who is a former Christian Democrat) shares Draghi’s Christian social-conservative visions (more CSU than CDU), he is unlikely to have the capacity to create a political background for him. Certainly Renzi might have had something like this in mind (recall that he comes from Tuscany, the land of Machiavelli!).