Sheep shearing time for Italy’s various monetary unions
Having abandoned their once skyhigh enthusiasm for the euro, Italians may soon devote their critical eyes to the other monetary systems of which they are a part.
- Monday, 11 May 2015
It will be interesting to see if that reverses due to the all-time low cost of debt for Rome’s Treasury and would-be home buyers in the wake of European Central Bank’s quantitative easing program, which has only just begun.
In the meantime, though, one is prompted to remember that Italy’s historical enthusiasm for “more Europe” reflected citizens’ contempt for their home-grown policy elite. That scorn is now increasingly aimed at the Brussels-Strasbourg-Frankfurt-Berlin axis, which raises the question of whether Italians are shifting to a sovereign nationalist view or simply sliding into the country’s special heritage blend of anarchy and autarchy.
Sometimes lost in the political haze is the fact that Italy is not just a member of the euro zone. The country itself is a monetary union founded in 1862. And thanks to INPS, the pay-as-you-go social security agency that according to its own annual statement handles EUR800 billion of cash each year, it also consists of a substantial intergenerational monetary union.
Regarding the first, it is worth noting that Italy’s southern Mezzogiorno region regularly runs deficits far larger, as a share of GDP, than Greece ever did vis-à-vis the euro zone. The trade deficit alone typically runs at around 18% of GDP - around EUR50 billion a year - a sum that is financed by transfers from the national tax base.
If southern Italians were told by Rome to march to the euro-zone’s “austerity” hymn book, meaning public-spending cuts and internal devaluation to close the local current account gap, enthusiasm for the national union could turn very wobbly – and perhaps especially in the northern regions, which runs the corresponding trade surplus with the Mezzogiorno. It’s curious that there is so little talk of this. That may simply be proof that there is a great deal of social cohesion and consensus around the nation state, or it could be the product of elite manipulation.
The remarkable frequency with which members of Italy’s elite opt for the former of the above two hypotheses is striking.
Rights and misrepresentation
The distinction between solidarity and elite manipulation is now emerging quite strongly in Italy’s intergenerational monetary union, as shown by the reaction to the Constitutional Court’s recent strikedown of a 2011 rule that temporarily stopped inflation adjustments to the top third of public pensions.
While economic pundits have bemoaned the ruling because it implies that the government must rebate up to EUR15 billion in unpaid benefits, trashing any pro-growth budgetary plans, most reactions have positively embraced the court’s alleged defense of acquired rights.
Fascinatingly, Carla Cantone, the head of the pensioners’ chapter of CGIL, the left-wing labor union, has been one of the loudest voices on television cheering the court’s ruling in favour of the plaintiffs who brought the case - Federmanager and ManagerItalia, unions representing high-income executives.
Because the 2011 pension reform, named after former Labor Minister Elsa Fornero, was a painful one, it has been easy to stoke public approval of the court’s decision. But the court did not touch the core Fornero reforms, such as higher retirement ages, and very little public mention has been made of the fact that the class of beneficiaries favoured by the ruling already enjoy pension checks that were not properly funded but merely legislated. Nor has there been much mention of the fact that the fiscal consequences of the court’s ruling means that Italy will almost certainly have to raise its sales tax later this year, a move that will be regressive and also impact younger households more than the retired.
The Constitutional Court presumably has its reasons – even if the judges apparently split on this case – and it will be interesting to see how Italy’s new constitutional law requiring a balanced budget influences future rulings. It would also be fun to see a debate between its judges and the magistrates of Italy’s Audit Court, who have recently begun to warn that pay-as-you go systems cannot rely on gross intergenerational injustices.
There is a strong link between Italy’s national and intergenerational monetary unions. Traditionally, Rome handled unfunded promises made by its politicians by directly devaluing its currency, the lira, as incomes adjusted more quickly than prescribed benefits. But since committing to the euro, that trick is no longer available.
The mean real monthly income of Italian retirees has vastly oustripped that of a manufacturing production worker for 22 years in a row now. Roughly par in the 1980s, the retiree was 25% ahead in 2002 and even more so today. Interestingly, the person who unveiled that in a landmark 2005 study called “The Age of Discontent” is now the new president of INPS.
Tito Boeri’s new job, and the role of Filippo Taddei as economic policy chief for the governing Democratic Party, suggest awareness of the intergenerational monetary union is poised to grow quickly.
The mighty jungle
Italy’s elite regularly cite the 1995 Dini reform as proof that the pension system is sustainable in the long run, a point on which the EU agrees. The problem is the long run is turning out to be very long; the “Copernican” replacement of a final-salary scheme with a lifetime contributions model in 1995 came 40 years after Germany did the same, and assumes a phase-in period lasting four decades.
Eighty years is enough time to wander off “into the jungle,” as noted in an astute study by Mi Ah Schoyen when conducting a doctoral study at the European University Institute near Florence.
One point she makes is to emphasize the distinction between age groups and generations. Each of us tend to cycle through the former but we hold lifetime cluib memberships in one of the latter.
Italy plays generational hardball. The Dini reform even dared to explicitly frame then with its tripartite scheme dividing people between those who had been working for 18 years by 1994, those who had not yet worked so long, and those who hadn’t worked at all – facts determined entirely by birthdays.
The assymetrical treatment of the three groups – Italy’s younger set, meaning those now under 50, will pay 50% more taxes and receive half the pension benefits as their parental generation – is well known. Relative benefits were not distributed between age groups but between generations.
More subtly, the approach perpetuated one of Italy’s darker strategic habits: making things complicated.
Arguing that was necessary to manage the transition to new rules doesn’t hold up as the transition itself has been altered by multiple later pension reforms. Take the 2007 reform, which watered down an earlier tweak in 2005. The EUR10 billion price tag for the bill went to raise the minimum pension level – mostly benefiting people who hadn’t worked much – and softening the move to a higher retirement age, which affected all of 129,000 people. In short, the bill defied the principle of 1995 and handed resources to a select few.
The practice is alive and well. Italy’s parliament is in the process of approving a measure that will strip politicians convicted of various crimes from receiving their lifetime pensions. The public has been told of this heroic stand against corruption. But in fact the politicians in question will simply receive their contributions in an upfront lump-sum manner while forfeiting their annuity. Actually working Italians would welcome such a deal.
But it’s not on offer to them, and so perhaps it is no surprise they harbour growing doubts about whether monetary unions in Italy are just the sheep’s clothing for wolfish elites and their media poohbahs.
Saving the union may be less about cuts and more about using shears.