Antonio Lettieri – Covid, Italy, and the EU: From Bad to Worse

Instead of building back better, the EU and eurozone are deepening the crisis it has been mired in for over a decade. In Italy both economically and politically.

Antonio Lettieri is Editor of Insight and President of CISS – Center for International Social Studies (Roma). He was National Secretary of CGIL; Member of ILO Governing Body,and Advisor of Labor Minister for European Affairs.(a.lettieri@insightweb.it)(Antoniolettieriinsight.blogspot.it/)

Edited by BRAVE NEW EUROPE

We have entered the new year under the renewed attack of the coronavirus pandemic. The positive development is that several vaccines have been discovered to fight the pandemic. Science has done its job. However, an effective mass inoculation is needed before the virus is brought under control. But coronavirus mutations are already existent, according to the World Health Organisation, in at least 25 countries, apparently originating in Great Britain, South Africa, and Brazil.  The longer it takes to vaccinate a major portion of the world’s population, the more possibility the virus has to multiply in its dangerous variants.

1. The timing of the mass inoculation becomes the determining issue in the fight to reduce the pandemic’s disastrous impact on human beings and its economic and social consequences. This is particularly the case of the eurozone, which is the region most severely impacted by the pandemic at the world level,  and where currently Germany, Italy, Spain, France, Portugal, and Poland are among the most affected nations in the past week.

There are various approaches in reacting to the pandemic. In Britain, there is a commitment to inoculate 15 million people by the end of February. This requires a large mobilisation of doctors and nurses along with a work schedule that last through the night. To accelerate the mass vaccination it has been decided to give one immediate shot and a second dose after three months. It is estimated that at this rate by the spring the majority of the population will have been protected.

In Israel, at the beginning of January, over one million people had already been inoculated and all the population will be inoculated by the March elections when Netanyahu hopes to renew his premiership. But, unfortunately, the inoculation concerns only Israeli citizens, while no vaccination has been provided for the five million Palestinians of the West Bank and Gaza.

The comparison with the measures underway in the European Union under the aegis of the European Commission is staggering in comparison with many other areas in the world.  This is due to the complete incompetence of the EU commission and its president von der Leyen, which took charge of the vaccine procurement programme for the EU.

2. In addition to the human consequences, the pandemic exacerbates the economic and social costs. Are there any remedies governments could put in place? The solution identified so far is the use of public spending in a previously unknown dimension. Approximately three trillion dollars has already been spent in the United States, essentially directed towards extraordinary aid to families, at the end of July 2020 after the first coronavirus attack. An additional $ 900 billion was added in December, thus reaching a total amount of public intervention of around 18 percent of GDP. And, as we know, President Biden has proposed additional spending of further $ 1,900 billion for the current year, largely intended to support families, extend unemployment benefits,  and support schools, state governments, and local communities.

In Japan, public spending intended to counter the economic consequences of the coronavirus is already part of the economic strategy being employed. The government of Shinzo Abe had planned a public intervention for an extraordinary amount equivalent to a trillion dollars immediately after the start of the pandemic. The new government of Yoshihide Suga has decided to add the equivalent of another 300 billion dollars to it for a total amount equal to about 25 percent of the national income. As a comparison, it is like a public intervention in Italy – with a population about half that of Japan – of over 400 billion euros.

In any case, the comparison with the choices made in the European Union is disconcerting. Under mounting pressure within the EU the German austerian Angela Merkel, who held the EU presidency in the second half of the past year, had to relent and an intervention of 750 billion euros was agreed partly as loans and partly as a grant. Italy and Spain, being the worst affected by the pandemic will be the major recipients receiving 209 and 140 billion euro, respectively.

In effect, these are significantly lower amounts than those deployed in the advanced economies that we have mentioned. But this is not the main point. The resources foreseen by the European Union will be available for investments staggered between 2022 and 2027. Thus, for example, for the current year solely 20 billion euros will be released by the Commission for Italy. Whereas initially the grants would be dispersed without conditionalities, the commission is now trying to introduce so called “reforms” for grants as well, which are nothing less the expansion of its neo-liberal diktat .

The future expenditure under the supervision of the European Commission has to be dedicated fundamentally to the development of the green economy and technological innovation. Clearly, expenses that, in any case, would have been useful in the course of the next years, but that have nothing to do with the immediate vertical collapse of the economy resulting in wave of mass unemployment and the impoverishment of millions of families.

The fall in national income of Italy, above 10 percent of  GDP, equal to about 1,700 billion euros, is unprecedented in peacetime. If we assume growth in GDP of the order of three percent per year, assuming the optimistic forecasts of the governing bodies are correct (which is seldom the case), we will have to wait until 2025 to return to the national income prior to the coronavirus crisis. One should add that the income of 2019 was still about five points lower than that of 2007, the year before the Great Recession.

3. In the context of the crisis, public spending – along with public debt – will increase everywhere. In Spain, the public debt, which before the Global Financial Crisis of 2007 was the lowest of the major eurozone countries (around 40 percent), has d    already reached 120 percent of GDP in the past year. France, according to the forecasts of the International Monetary Fund, will exceed the level of Spain. Italy, starting from a significantly higher amount already before the pandemic, will reach a debt amount of around 160 percent of GDP in 2020. The increase is an inevitable consequence of the fall in national income. In Japan, the public debt has exceeded a huge 260 percent of national income, but having a sovereign currency, unlike the euro nations, it has been able to manage these massive debts without negative consequences.

How is it possible to cope with the increase in debt?

The inevitable increase in the debt-to-GDP ratio caused by the crisis must be addressed by focusing on the future increase in the gross domestic product. And, in the current scenario of falling consumption and private investment, GDP can grow only with an extraordinary increase in public spending.

In the eurozone, apart from the limited aid from the ECB with specific purposes, countries unable to resort to their own national central bank, have to resort to the issuance of public debt. That is drawing on private savings largely concentrated in bank deposits. Italy and Spain have the largest private savings at the national level in the eurozone – savings that exceed 1,700 billion in Italy, that is, a figure well above the national income of 2020.

What possibilities do they open up? In January, the issuance of government bonds with a duration of 15 years with yields of less than 1 percent was announced in Italy: the demand of savers was around 100 billion, far exceeding the supply of around 10 billion euros. This is not an isolated case. In Spain, a record 130 billion was offered for a 10-year debt issue.

Considering the low-interest rate offered by governments, there couldn’t be more favourable circumstances to tap into these resources and use them for public investments consistent with a broad economic recovery plan. Public debt inevitably grows in times of crisis both due to the reduction of public revenues and the higher public expenses, as it is the case of unemployment benefits and the support to sectors hit by the crisis such as retail, leisure, and hospitality businesses. It offers governments a means to rebuild their economies with a stronger resilience.

In any case, public investment in appropriate and targeted sectors will restore growth and increase employment,  as it classically happened in the 1930s under the leadership of Roosevelt in the United States to deal with the Great Depression. Of course, the public debt will inevitably increase as always happens during a crisis. But the burden of public spending will tend to decrease over the years with the resumption of growth and the increase in national income to a greater extent than the payment of interest on past debt.

This will however be difficult within the eurozone and EU, where the policy of the European Union remains tied to the goal of eliminating the deficit and reducing public debt regardless of the actual trends in the global and national economy. In other words, it doesn’t avoid a ruinous deflationary policy. The leopard has not changed its spots.

The conditions set by the European Union that push investments into a more or less far away future, letting the crisis do its destructive job of the economy and social conditions is ruinous. It will further the neo-liberal goals of the EU, strengthening international corporations while increasing inequality. It will also further the economic predominance of the EU North, especially of the EU hegemon Germany,  at the expense of the EU peripheral South and East.

4. In Italy, one of the countries most severely hit by the pandemic, the current crisis of Giuseppe Conte’s government offers no easy solution. Matteo Renzi’s party. with only 2-3% of the votes, has challenged the government withdrawing its support in the Senate. His main goal is the change of prime minister, Conte. Both politicians have their eyes on the EU billions, which can be utilised to support their political clients. Conte wanted to be the sole distributor of the funds to cement his political power. He enjoys the support of the desperate Five stars movement, which currently has a large relative majority in parliament, but knows a new election would result in a massive loss of voters and see it reduced to political insignificance.

In fact, lacking a solution and calling elections for a new Parliament, the outcome would most likely be the victory of the right-wing coalition formed by Matteo Salvini’s Lega and Fratelli d’Italia led by Giorgia Meloni. A right-wing coalition could also have the support of Forza Italia, Berlusconi’s old party. It would be a traumatic political change for a founding country of the European Community and the third largest economic power among the 27 members of the European Union.

In this framework the small party of Renzi becomes determinant. So it is not clear, if a government could be reconstructed with the same old majority. It is a question of how much Renzi is demanding to be bought off with. If a deal cannot be reached,  an election would be the only recourse. But this would block the country for months in the middle if the pandemic with its grave economic and social consequences.

In the last resort, the president of the Republic, Mattarella, could propose a government on his own initiative trying for a larger majority that possibly would include some right-wing parties . In any case the political crisis is going to make the present fragile framework that was already compromised worse. It is in any case an aspect of the more general economic and political crisis that the pandemic has aggravated in a large part of the Eurozone.

As long as the EU does not abandon its neo-liberal course and return to creating a European economy that serves all its nations, citizens, and environment, it will continue to create the sustained crises we are living through.

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5 Comments

  1. I totally agree. The analysis of Antonio Lettieri goes deep to the heart of the question. The EU Politics seems to be changed, but it remains always connected with the German Politics. The problem is: how can we transform the actual and inescapable power of Germany in a form of political hegemony? Why Germany still gets to hide behind EU Institutions, that babble, between incompetence (see the unfair contract for the vaccines) and powerlessness?

  2. I have paid constant attention to Antonio Lettieri’s analyses for over half a century, because I trust both his competence and political motivations.
    In this case I have three comments to make:
    1. In discussing EU policies we should all keep in mind that further integration of political integration, currency and fiscal policies, territory is the only alternative to remaining the fighting ground of large, already integrated bullies: China, United States, Russia, Turkey., a the expense of the democratic sovreignty of half a billion people, deprived of any representation at a global level.
    2. I am strategically not too worried by a dominating role of Germany because any nationalistic eccess on its part in the long run will be balanced by the reaction of all other partners.
    3. The neoliberal slant of EU policies, rightly underlined by Tonino’s analysis, should not overshadow the importance of the Next Generation EU policy because it is a first example of eurobond fiscal solidarity, stimulated by mostly Italian needs due to the pandemics and Frau Merkel’ savvy steps in the right direction.

    • I too was convinced, together with my friend Gian Giacomo, at the end of the last century, when the euro was decided, that a common currency could favor growth and full employment. Experience twenty years later undoubtedly shows that this was not the case. The euro zone is the area with the lowest growth and highest unemployment worldwide. Italy and Spain, the most important euro countries after Germany and France, have had the worst economic and social outcomes in their history in the last decade. It is not accidental, but the result of a continuing deflationary policy of the euro zone. Germany has performed better, precisely because its economy is largely based on exports. The euro zone was considered the most advanced economic area after the United States at the end of the last century. Today it is the area among developed countries with lower growth and higher average unemployment. If people could cast their vote, I suspect that in the majority of the countries the outcome would be strongly against the Eurozone.

  3. A strong push to public investment may stop the rise of public debt ratio to GNP, and this is particularly true when, as in Italy, the ratio has reached 160%. It is sufficient to get a multiplier greater than 0,63 to put the ratio on a descendent path. Public investments surely have a multiplier around 1, or even more, while this is not sure, by and large, for tax lowering of subsidies. If not now, when?

  4. Antonio’s wide-ranging remarks are such to be broadly shared: the spiral of austerity is deadly and the decline of the national public health service is one of the most evident demonstrations. It was considered as an example of excellence, life expectancy in Italy was at the highest in the world: since the first counter-reform in 1992, instead, the mortality rate on the population has started to rise and in the last ten years it has accelerated its growth. The pandemic has led to one of the three highest figures in terms of mortality in the world (overcome by the UK, not by accident). Precisely for this reason, I would therefore suggest an additional remark about this subject we must absolutely confront: not only what interest rate Italy will pay on the resources necessary to relaunch healthcare or to what extent it will be bearable to get into debt, but whether the allocation of resources will respond to the need to restore and revive a system which has been placed in conditions of serious difficulty by the political orientation that has been predominant in the last twenty years.

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