Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

56 Pages Posted: 15 Jul 2019

See all articles by Servaas Storm

Servaas Storm

Delft University of Technology - Department of Economics

Date Written: April 5, 2019

Abstract

Using macroeconomic data for 1960-2018, this paper analyzes the origins of the crisis of the ‘post-Maastricht Treaty order of Italian capitalism’. After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform and real wage restraint — and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy’s domestic demand and exports — and resulted not just in economic stagnation and a generalized productivity slowdown, but in relative and absolute decline in many major dimensions of economic activity. Italy’s chronic shortage of demand has clear sources: (a) perpetual fiscal austerity; (b) permanent real wage restraint; and (c) a lack of technological competitiveness which, in combination with an overvalued euro, weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization, reduce firm profitability and hurt investment, innovation and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy’s ‘technological competitiveness’ and stop the structural divergence between the Italian economy and France/Germany. The issue is not just to revive demand in the short run (which is easy), but to create a self-reinforcing process of investment-led and innovation-driven process of long-run growth (which is difficult).

Keywords: Italian macroeconomic performance; Eurozone; secular stagnation; demand; real wage restraint; fiscal austerity; export growth

JEL Classification: E20; E60; F60; O10; O40

Suggested Citation

Storm, Servaas, Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone (April 5, 2019). Institute for New Economic Thinking Working Paper Series No. 94. Available at SSRN: https://ssrn.com/abstract=3419284 or http://dx.doi.org/10.2139/ssrn.3419284

Servaas Storm (Contact Author)

Delft University of Technology - Department of Economics ( email )

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