Proposed Italian austerity measures too little, too late, expert says

The Italian government on July 14 passed an austerity package designed to balance the budget by 2014 and protect Italy from a debt crisis. Will it work? Most likely not, says an economist at Washington University in St. Louis.

“The budget law submitted by the Senate a few days ago is somewhat of a joke,” says Michele Boldrin, PhD, chair of the Department of Economics in Arts & Sciences and the Joseph Gibson Hoyt Distinguished Professor.

“It promises huge, if random, expenditure cuts but delays them until the 2013-2014 budget cycle — the next elections would be in May 2013 — no structural reform whatsoever and a hidden and regressive wealth tax,” Boldrin says. “The future cuts are poorly designed, and even harmful, as they affect strategic services that would need improvement instead, like education, health and research and development.

“Expensive and populist pension privileges, together with the thousands of inefficiencies that define the Italian public sector, are instead left untouched. No wonder, then, that international and Italian investors likewise have responded to the prospect of ‘more of the same’ by selling Italian public debt and Italian shares.”

How did Italy wind up in this situation? A combination of playground politics and stagnant growth in its gross domestic product (GDP), says Boldrin, a native of Italy who earned his undergraduate degree from Universitá di Venezia.

“In such a dramatic situation, the behavior of the Italian government, led by Silvio Berlusconi since May 2008, has been, if possible, worse than that of Spain, Portugal and Greece,” he says.

“Since the beginning of the crisis until a few weeks ago, Berlusconi and his finance minister —Giulio Tremonti, an expert on fiscal matters with a socialist past, little knowledge of economic affairs and a huge power drive — have forcefully denied that the crisis was affecting Italy at all,” Boldrin says.

“The typical statement would point to an Italian special condition: no real estate bubble, no easy credit, public finances under control, high saving rate and high private wealth relative to GDP,” he says. “On the ground of such diagnosis, no reforming action was taken and no spending cut was adopted. Taxes were nevertheless increased and sold to the electorate as a ‘federalist reform’ to appease the cries of the Northern League, a secessionist party with fascist and racist overtones.”

Boldrin says the Italian GDP has not grown for nearly 10 years, while public expenditure has, and the tax burden on the private sector with it.

“The per-capita income of Italians today is the same as in 1997, while their disposable income is the same as in 1994,” Boldrin says. “Italy spends more than 14 percent of GDP on pensions and only a little less on the wages and salaries of its public employees. At the same time, Italy has among the worst public services in Europe and 12 million of its nearly 20 million pensioners earn less than 1,000 euros a month.”

The 2008 financial crisis affected Italy in a severe but asymmetric form, Boldrin says.

“While, due to the absence of growth in previous years, Italy was not directly involved in the financial real-estate bubble, its exporting firms were hit very hard by the falling world demand and its banks, which were heavily exposed abroad, suffered huge capital losses,” he says.

“Employment has fallen in Italy less than in Spain, nevertheless the Italian employment rate is still three points below the Spanish one. Italian GDP has fallen by nearly 7 percent, two points more than Spain’s, and shows no signs of recovery. Its exports are not recovering while its imports are back to the pre-crisis levels, putting it in the same leagues as Greece and Portugal. This implies, among other things, that tax revenues have not recovered and do not show any intention of doing so in the next two years.”