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Italy needs reforms and restructuring to overcome the current crisis. But attempts to emulate Germany’s success won’t help to solve the country’s problems.

Living between Berlin and Rome, I am growing increasingly skeptical about the prospect of introducing “German style” reforms in Italy, as suggested by more or less all the representatives of the German government. What I am writing here is not the usual lamentation of a debt-bearing Italian – I happen to pay my taxes in Germany– but a mere consideration of a fact: if we want Italy to overcome its current crisis, German-style “competitivity” reforms to foster exports won’t be the way to go.

This is what various established economists told me while commenting on the crisis: Italy should reduce its labor cost, liberalize, and boost its export volume. Austerity is a necessary measure since it helps to keep state budgets in balance; and decreasing costs would help making Italian products more appealing abroad. Yet, I believe that there is something fishy in this story that eventually started to reek after being juggled between universities and government buildings for months, all across the Euro zone. It is called “domestic demand.”

The proponents of austerity recognize too well that it will not be able to foster domestic demand – and he who claims the opposite may be a good candidate to reform economics from scratch, or to enter a mental institution (or even both as it is often the case). Reforms should foster exports that would help reducing state debt. Domestic demand would keep on stagnating, but this may eventually benefit the objective of lowering labor costs to foster exports. So we would have austerity that keeps the budget in order and reduces labour costs, thereby fostering exports, which in turn would help servicing debt (and so on). Plain genius – right?

Billboard Wisdoms

Let’s play it cynical (which – according to my girlfriend – isn’t too hard for me): forget about poverty creeping its way back into Italy; forget about infrastructural investment lagging behind; forget about up-and-coming criminality (did you know? The Mafia has taken Rome!) – Is this strategy going to work? Will this strategy be able to make sure that Italy pays back its debt to the rightful lenders?

No.

I guess that people who lived in Germany before 2004 and experienced both the situation before and after the reforms, may start getting nervous in the light of that answer –after all, if it worked in Germany, why shouldn’t it also boost Italy’s economy? I belong to the German bunch experiencing the crisis (I first came to wild Berlin in 2000 – those were the days) and I cannot avoid mentioning the significant range of differences that distinguish pre-2004 Germany from today’s Italy– and possibly from Southern Europe as a whole. The most notable difference is the “availability of export markets.” China has been largely used up, and it is not yet clear who should absorb the additional exports necessary to keep European economies running.

This is not only affecting Europe: all over the world, the strategy of dirt-cheap labor and exports is faltering. The revolts in Brazil, Turkey, and Egypt not only have the common denominator of Twitter coordination (if any), but are also based on the hardware of a precarious economy, affected by an unsustainable global export strategy. This is to say that if only one country does it, and does it first (Bravo Germany! Bravo Brazil!), they can enjoy the fruits of reforms. But when everybody does it, it simply doesn’t work – blame game theory for that.

Possibly, Germany enjoys the advantage of exporting upscale goods that are unequalled in the world. Italy, Spain, France, and Greece compete neck-and-neck with China. In this context, the best thing I ever read was a protest billboard by a factory worker in Rome some ten years ago saying: “it is not the Italians who shall become Chinese; it is the Chinese who shall become Italians.” Export competition on the basis of the ability to reduce labor costs, is possibly not the right way. It could – nevertheless – make ample sense economically– but please try to explain that to the guy with the billboard.

An Unlikely Solution

Export-led growth has also the pernicious effect of polarizing income, as additional revenue benefits investors and renters first – but the boon benefits salaries only marginally to keep them low and the model running.

It is not by chance then, that the austerity boomerang is returning to Germany. Italy is finally enjoying a trade surplus, but this is mostly due to a collapse in imports (because of stagnating demand) at -11% in comparison to last year. Italy used to import a lot from China, and China in turn imports from Germany. As for the Italian debt – it is increasing! We shall mention here that an Italian deficit was constitutionally forbidden last year. Yet, somehow state accounts do not seem to follow public law – I am now awaiting the mass-arrest of some sixty million Italians.

How to get out of prison – ehm –, I mean crisis? Well, I guess that living in both Berlin and Rome, I cannot but opt for an intermediate solution. Italians deserved their crisis, and Germans deserved their success. Yet, Italians should stop portraying the Germans as the culprits of the Italian sorrows, while Germans should stop complaining about Italians that complain (although a large chunk of the population does engage in self-pity – and then votes for Berlusconi). The austerity and export-hope solution is simply not feasible: it may carry the continent to the German elections in September (and never have two months felt so long!), but will then reveal all of its limitations and flaws, especially due to the deepening impact on the German economy itself.

The German risk is that of overplaying its merits: China has been key to Berlin’s success – and the China-led export growth did not come entirely by chance, since Germany has been ready to increase trade relations when the Asian market expanded. But Germany is not an island, and there is no second China to sustain Germany and the whole euro lot any further. An intermediate solution would call for a mix of reforms in Italy, bundled with the possibility of deficit spending and some more Eurozone inflation – for the sake of revitalizing domestic consumption. Nobody can pretend that Italians could ever become German, as the proposed solution is simply unlikely to work (and, after all, Germans would miss Italian cuisine).

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