Expansionary Austerity and the Work of the Last Three Italian Governments

Although the European Union (EU) has called for fiscal consolidation since 2009, it was after the Greek crisis in 2011 that the mantra of expansionary austerity started to circulate.

The aberrant cycle generated by maintaining fiscal consolidation measures through expenditure cuts in a recession goes as follows: a decline in the growth rate of GDP increases the government budget deficit, which in turn puts pressure on the government to avoid an increase in the deficit (to comply with the Fiscal Compact), which in turn results in even stricter fiscal policies, which in turn pushes down the GDP growth rate and then the cycle starts again. The result is a permanently recessive/stagnating economy, as is apparent in several Eurozone economies: Italy is one example.

The Italian government’s actions during the last three legislatures fall into this frame­work. All the last three Italian governments—Monti (2011-13), Letta (2013-14) and Renzi (2014)—have followed the EU recommendations (EC, 2014a) in terms of eco­nomic policy, leaving hardly any room for growth strategy but instead implementing recessive interventions in a recession period.

The Monti government followed the last Berlusconi one, not only in chronological terms but also in terms of economic policy: in 2011-12 Mario Monti endorsed the finan­cial measures of Silvio Berlusconi’s government in order to reduce the deficit of 50 billion euros, mainly through cuts to pensions, wages and public services, and he also imple­mented additional financial measures amounting to 24 billion euros. The government pursued rigor in public accounts but virtually no measures to sustain growth. Monti’s actions closely followed the European Central Bank recommendations of the famous let­ter of August 2011 in which structural reforms and fiscal sustainability were demanded for Italy in order to increase potential growth and restore confidence of investors, respectively.

With Monti’s government, a systematic approach for controlling and revising public finances, modeled on the British “spending review,” was adopted.

After the spring 2013 political elections, during his short mandate as prime minister, Enrico Letta proceeded in the same vein: reduction of the public expenditure, regressive taxation and scanty and feeble action for growth. Soon after his assignment, his main claim was less austerity and more growth. However, his actions were limited because of the troubled political existence of the government, which took away substantial energy and attention from the economic crisis: his government of 11 months was marked by political paralysis.

And what has Matteo Renzi’s government been doing since its start in February 2014? With no surprise, substantially nothing new compared to its predecessors. The line of austerity is accompanied by that of labor flexibility and precariousness. Moreover, on the labor market there is no sign of a changing policy: it is still based on nominal wage stagnation and real wage deflation.

To tell the truth, hardly anything has been done up to now, contrary to several dec­larations, despite the fact that Italy’s economy is in long-lasting recession/stagnation, deflation is starting to be apparent, the labor market indicators perform worse year after year and a considerable part (25 percent) of the manufacturing system has been lost since the deep recession of 2009.

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