The Troika Attack Italy for Refusing to Bleed the Economy

By William K. Black

The title to the latest Wall Street Journal article on Italy is “EU Tells Italy to Adopt More Austerity Measures.”  It’s an old, stupid remedy.  If you hit your carburetor with a hammer and it doesn’t fix it – hit it harder and more often.  Italy is the troika’s carburetor and austerity is its hammer.

The Troika’s Response to Renzi’s Electoral Success: Crush Him

The general context of the troika’s latest act of depravity is particularly interesting.  The troika consists of the European Commission, the IMF, and the ECB.  The troika’s insistence that the periphery inflict austerity caused not simply a gratuitous second recession through much of the EU but a Second Great Depression in Italy, Spain, and Greece.  One-third of the eurozone’s population – 100 million people – was kicked into a Great Depression due to the troika’s long-falsified economic dogmas.

Last week, the troika suffered its latest embarrassment, a political nightmare in the European Commission elections.  Most of the publicity has concentrated on the rise of the extreme right.  As I explained in a recent article, however, the radicalized left scored impressive gains in Spain and was the leading vote recipient in Greece.

Spain’s conservative party did poorly in the election, but Prime Minister Rajoy is getting praise from the troika.  His fauxstimulus” plan, which is simply austerity rebranded, is exactly what the troika loves.

Italy’s centrist Prime Minister Matteo Renzi’s party, by contrast, was the leading party in the EC elections in Italy.  Renzi is so popular because he has pushed back against the troika’s austerity demands.  Naturally, the EC has decided that the nation it should hammer with austerity is Italy.     

“Italy, the EU’s fourth-largest economy, is coming under particularly heavy pressure from Brussels to put its government finances in order and adopt ‘structural reforms’ that the EU believes will help boost the country’s anemic growth rate. Mr. Renzi’s toughest challenge may be abiding by an EU rule that will require the government to start reducing its debt, now above 130% of gross domestic product, at a time when unemployment is hovering at a record high.”

Olli’s Folly

Yes, the troika’s answer to greatly inadequate demand in Italy that has caused its near Great Depression levels of unemployment is to bring “particularly heavy pressure” on Renzi to force him to inflict austerity and make demand even more inadequate.  This is significantly insane, but the troika trotted out its apologist-in-chief for austerity, Olli Rehn, to explain its logic.

“‘Given Italy’s very high public debt, it is important to maintain a consistent rhythm of fiscal consolidation,’ Olli Rehn, the EU’s economics commissioner, said at a news conference.

‘Should Italy fall back into recession, our fiscal rules would allow for automatic reconsideration of the requirements,’ Mr. Rehn added.”

As I have noted in several columns, Rehn admitted that the troika’s austerity demands would so cripple growth in Spain that it would take a decade – until 2024 – for Spain to escape the “crisis” stage – sixteen years from the onset of the crisis-stage.  Reaching full employment would take Spain many years past 2024.

With this background we can now evaluate Rehn’s “rhythm” rationale for inflicting austerity on Italy.  Olli’s “rhythm” theory is a new one (or an old variant on avoiding pregnancy).  There’s no sense trying to guess what he means by the term because Rehn doesn’t know, any more than he knew anything about the fictional “confidence fairy” he used to worship.  If the troika wants to bring down Italy’s debt it should end austerity and greatly increase Italy’s growth rate – as even the IMF admits.

But it is Rehn’s next sentence that reveals how crazy the troika is.  Italians are supposed to be reassured that “should Italy fall back into [a third] recession, our fiscal rules would allow for automatic reconsideration of the requirements.”  This is supposed to reassure Italians.  Let’s back up and review Italy’s situation, how “recessions” are defined, and Rehn’s internal logical consistency.

First, unemployment in Italy is at catastrophic rates.

“The national statistics agency, ISTAT says Italy’s unemployment rate will rise to 12.7 percent in 2014. This is while the EU predicts that Italy’s unemployment rate at 12.8 percent in 2014, which is 0.2 percent up compared to February, and is an all time high. Some economists believe that the situation would be much worse. Young Italians are among those who are bearing the brunt for lack of investments and the current spending cuts. More than four out of ten people aged between 15 to 24 are out of work.”

Youth unemployment is so high that it is the norm for Italian university graduates to emigrate.  Italy is exporting its future.

A recession has a technical definition that does not track how regular humans use the term.  If GDP falls for two consecutive quarters a recession begins for official tracking purposes.  As soon as the GDP grows during a quarter the recession is officially over.  Unemployment may be at Great Depression levels and the GDP growth rate may be so weak that unemployment increases – but the recession is officially over.  GDP could fall two percent in the first quarter, rise 0.2% in the second quarter, fall 2.5% in the third quarter, and rise 0.1% in the fourth quarter.  Net, the GDP would fall 4.2%, but the economy would never be in recession. A milder version of this has been happening in Italy.

“Italian GDP fell by 0.1% in the first quarter of the [2014], dashing hopes of 0.2% growth.

That’s an alarming development. Italy had only just clawed its way out of recession three months ago.

Today’s data means it has contracted by 0.5% over the last year. For all the talk of European recovery, Italy is still in a mess.”

Rehn’s reassurance that the troika will “reconsider” how much it further damages Italy’s economy through further austerity demands should it fall back into a Great Depression as a result of the troika damaging Italy’s economy through austerity is less than cold comfort.  Rehn will wait until his austerity insanity forces youth unemployment in Italy above 50% and forces the economy officially back into a third recession.  Once the troika has forced that catastrophe on Italy he will “reconsider” whether to take a different approach. Even under Rehn’s telling of the tale we are witnessing a delusional psychotic break posturing as a policy.

Rehn’s Internal Logical Inconsistency

Once one considers the logic buried deep in Olli’s folly the troika’s infliction of austerity becomes even more incoherent.  Rehn is admitting that even the troika knows that austerity is a self-defeating policy to inflict on a nation in recession because it reduces demand when demand is already grossly inadequate.  But as I have explained in the context of how the term “recession” is defined, demand is grossly inadequate when a nation is no longer officially in recession but has substantial levels of unemployment.  Italy does not have “substantial” levels of unemployment – it has record levels (“all time high”) of unemployment.  So, if austerity is insane when Italy is officially in recession, it is equally insane under the troika’s own (not very close) approximation of logic.

The Troika Ignores Effective Fiscal Stimulus in Favor of Failed Monetary Stimulus

To complete the troika’s logical incoherence, it is now planning to embrace ultra-aggressive monetary policies while ignoring fiscal policies it knows are effective.  Indeed, even the IMF now concedes the point.  The title of Wall Street Journal article describing Olli’s latest folly is: “Europe Weighs Risks of Negative Interest Rates.”  


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