Italy, Greece, and losing whole generations by law


The approach Italy decides to take on the question of Greece is about to become very important.

The issue is not really about tweaking borrowing costs lower for Athens or extending sovereign bond maturities even further out.

The approach Italy decides to take on the question of Greece is about to become very important.

The issue is not really about tweaking borrowing costs lower for Athens or extending sovereign bond maturities even further out.

 

Rome, Italy Italian Prime Minister Matteo Renzi (R) shakes hands with his Greek counterpart Alexis Tsipras during a news conference at Chigi palace in Rome February 3, 2015. REUTERS/Remo Casilli

With Syriza at the helm, the European Union now has – possibly for the first time since the euro was launched – a member state with a government that has strong explicit policy ideas on macroeconomic matters.

Until now, it’s been more or less about muddling along with a bit of Maastricht fiscal rules, a bit of Basel banking regulations, and sporadic forex interventions by the ECB. Sure, there are policy issues at stake, most notably Germany’s ordoliberalism, which critics see as half-baked mercantilism while others see as a good-faith effort to make sure that promises – especially to the country’s pensioners – are kept. But the late nights in Brussels have been about mutualizing Eurobonds or winkingly allowing a fiscal wiggle to a country in need.

That murky rag-bag of rules gave Greece some debt-servicing relief but forced Athens to pledge to run a sizable primary budget surplus more or less forever. Mario Monti may have kept the troika out of Rome but more or less by promising the same.

What’s odd is that Italy has been running primary surpluses for a generation, but its public debt ratio has only risen. One reason is that, with Germanic tenacity, Rome is honouring the payout side of the domestic social contract, which is making sure that certain well-heeled insider constituencies can milk the system.

Assuming that Germany will ignore its 2011 pledge at the G20 conference in Cannes and become Europe’s consumer of last resort, the rules of the euro require countries in a balance-of-payments fix to carry out internal rather than currency devaluation.

This is remarkably explicit. The all-European troika’s Second Economic Adjustment Programme for Greece, for example, required minimum wage levels in the country to be reduced by 22%, but by 32% for youth. That is not a typo: Greek youth – who even before the program were twice as likely to work evening hours and on weekends than the EU average – were singled out to carry a heavier load.

What’s quirky – as noted by Anastasia Poulou, a PhD candidate at Heidelberg University writing in the German Law Journal – is that such a differentiated approach is illegal according to European statutes, which the Commission is supposed to enforce.

As noted, Italy retained its sovereignty but pledged to engage in internal devaluation on its own. It has chosen to do so by worsening the conditions for youth labor – via contract tenure, unemployment risk and most recently higher taxes – rather than engaging in the across-the-board sacrifices Germans made in their own post-unification reforms a decade ago.

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