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.”  


12 responses to “The Troika Attack Italy for Refusing to Bleed the Economy

  1. Mark Robertson

    Bill Black writes, “Renzi is so popular because he has pushed back against the troika’s austerity demands.”

    Renzi may verbally condemn austerity, but he actually supports austerity if he does not advocate that his nation reclaim its monetary sovereignty. If Renzi does not call for dumping the euro, and for returning to the Italian lira, then Renzi supports austerity, no matter what Renzi says.

    When a nation surrenders its monetary sovereignty, as Italy did on Jan 1, 1999, then that nation had better have a whopping trade surplus (like Germany’s) or else the nation will be forced to borrow most or all its money from the ECB, and via the sale of bonds. This creates a debt-austerity spiral that trashes the nation’s economy, and widens the gap between the rich and the rest. The latter factor is of course the whole point of the euro. It widens the gap between the rich and the rest. Renzi supports this, no matter what he says. He merely pretends to be a populist, like Obama.

    Italy has a trade surplus, but it is nowhere near big enough to avoid having to continually borrow from the Troika. (Germany’s trade surplus is more than 20 times larger than Italy’s.) Thus, Italy’s debt will continue to expand, no matter what the Italian government does. The debt will necessitate more austerity, which will increase the debt, which will necessitate more austerity…and so on. People like Olli Rehn will say that because austerity has put you in extreme debt, you need more austerity and more debt. Forever.

    Bill Black writes, “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.”

    That’s not possible as long as Italy uses the euro. The only exception would be if the ECB in Frankfurt gives (not lends) money to Italy.

    Bill Black says that austerity is “insane.” I disagree. Austerity is fulfilling its purpose, which is to increase the gap between the rich and the rest. In this sense it is not a “failed policy.” Austerity is a spectacular success.

    • Thank you, Mark Robertson. Nowhere is this “insanity” misdirection more pronounced than in Paul Krugman who comes up with convoluted “psychological” theories for why policies “that have been proven wrong” are pursued.

      The benefits to the elite are never discussed.

    • worth noting that US states do not have monetary sovereignty, and do not all run trade surpluses. What matters are the interstate leveling mechanisms in place at the federal level

    • Ok. The Italian gov’t has issued interest-bearing financial products worth 130% of GDP. That means that some group of people, very likely mostly the Italians themselves, have decided they want to own that level of very low interest financial products. They could have decided they’d prefer to recycle their income into buying goods and services and real assets. The buying and selling of so much stuff, which is subject to tax, would have easily generated more than enough tax revenue that such a quantity of financial products would never have had any reason to be issued.

      Clearly, whoever is buying all these Italian bonds would prefer to own bonds rather than consume goods and services or own other assets. British investors seem to have a strong preference for London real estate and the UK budget reflects that. Who are these people? Why do they want to own such a large quantity of financial products? Why does today’s investor class prefer to own financial products while the investor class of the 1950’s was so eager to own plant and equipment?

      I think the main answer to those questions is demographic and those demographics have driven gov’ts to effectively remove taxation from desired investment vehicle of today’s investor class.

  2. Is Ollie Rehn about to meet his match?

    Thank you, Prof. Black, for highlighting what may become the decisive Eurozone austerity battle. Italy’s situation differs in a number ways from that of other Eurozone members suffering from Trioka-imposed austerity and that is especially true of the May 25th EU Parliament election results.

    Unlike the UK, France, Spain, and Greece, Italy voted overwhelmingly on May 25 for an established and explicitly pro-EU, pro-Euro party, the PD (Democratic Party). As an Italian resident, I have come to fear over the last 2-3 years that the PD has sold out to the multinational financial and corporate elite just like its US namesake. Moreover, I feared that Matteo Renzi is an Italian version of Barack Obama: a truly gifted public speaker able to enunciate moving but ambiguous messages that nearly anyone can interpret as favoring their policy views, but whose actions serve the interests of his real constituency: the elite.

    The Sueddeutsche Zeitung (Munich’s leading newspaper) yesterday published two very interesting articles based on a group newspaper interview with Renzi last weekend. One swallow does not make a Spring, but I now hold faint hope that Renzi may be ready to go head-to-head with Rhen, Merkel, & Co. — and that, despite his limited experience, he may have the skill to prevail.

    The SZ front page headline just above the fold read: “Italy demands a turn away from EU austerity.” A longer article, occupying about half of page 6, indirectly quoted Renzi as saying “the pure austerity policy of the last years must be overcome and instead, investment increased – in growth, jobs, and [structural] reforms.” Renzi repeated his earlier statement that he intends to seek agreement on these policy changes as a condition of Italian support for any European Commission presidential candidate. Italy takes over EU chairmanship in July and the PD is the only establishment European party to have gotten a strong popular mandate in the May 25 vote. These factors should give Renzi especially strong influence over EU politics in the near term.

    The Rhen and Troika statements you cite appear to be a knee-jerk attempt to counter Renzi’s position, but after May 25, they’re clearly on the back foot politically. There is one obvious way for them to save face: continue to harp on their primary demand, national debt reduction, but quietly allow the ECB to issue more currency for the reflation projects that Renzi is promoting (or simply ignore such expenditures in debt computations). Even though Renzi and the PD have repeatedly sworn undying fealty to the Euro, perhaps he’s maneuvering his adversaries into a situation in which an MMT-style solution becomes the least unattractive compromise open to them.

    It’s way too early to count chickens, but I’m hoping Olli Rhen is about to meet his match.

    • Mark Robertson

      [1] If Renzi and the PD “have repeatedly sworn undying fealty to the euro,” then the situation for average Italians will continue to grow worse and worse.

      The purpose of austerity is to widen the gap between the rich and the rest. The purpose of the euro is to make austerity obligatory. The euro is the greatest scam ever invented for the purpose of increasing inequality.

      [2] Any politician who supports the euro supports the rich at the expense of the masses, no matter what else he may say.

      [3] To condemn austerity while supporting the euro is like saying, “I hate blood-letting, but I support the use of leeches.”

      [4] Yes, Renzi is an Obama. Someone who pretends to be a populist, but who serves only the rich elites.

      • Well, you sure harshed my mellow, Mark! Your response is the most succinct but powerful argument against the Euro I’ve seen — and I’ve been working with anti-Euro activists for a while. We should know before the year’s out whether your all-too-realistic analysis or my starry-eyed glimmer of hope will be realized.

  3. ” If the troika wants to bring down Italy’s debt it should end austerity and greatly increase Italy’s growth rate.” There is really no way to increase growth anymore.
    Since globalization moved millions of jobs, here in the U.S. to Asia, that class of workers has little chance of having a middle class lifestyle. Middle class jobs are in shorter supply and require higher value skills.
    In Socialist Europe they had a Lake Webegon lifestyle, where everyone was an above average consumer. Everyone was taken care of by the government, one way or another. That doesn’t work anymore, because the value of labor has been extremely diminished by the migration of jobs to Asia. Europe can’t have the lifestyle it previously had. Neither can the U.S.
    There is little evidence that this can be turned around very soon. Technology is now creating nearly workerless factories. For decades it was said no one could start a car factory, but Tesla has done it with very robotic factories. We now have robots that can pick strawberries and others that milk cows.
    Driverless vehicles are being developed. Goodbye truck driver. It won’t be easy to grow economies when workers are not required.

    • Time to revisit the work of Louis O. Kelso, not for its answers but for the issue it raises: the ownership of capital (which Kelso defines as the non-human factors of production). See, for instance, _The Capitalist Manifesto_ (1958), co-authored by Mortimer J. Adler, or _Two-Factor Theory_ (1967), co-authored by Patricia Hetter.

    • Dennis Roubal:Everyone was taken care of by the government, one way or another. That doesn’t work anymore, because the value of labor has been extremely diminished by the migration of jobs to Asia. Europe can’t have the lifestyle it previously had. Neither can the U.S.

      Quite untrue. What happened was that in the 70s the “advanced countries” went from one definition of “taking care of” their populations (looking after), to another (permanently dispose of). Particularly so in Europe, which went from lower unemployment and higher growth than the USA to higher unemployment and lower growth. “Jobs” can’t migrate to Asia that way. The unemployment rate is always a decision of the state – and the only sensible and moral decision is 0%. Foreign trade, “globalization” can only increase the value of labor in a state that simply decides to take care of its people in the first sense, by having full employment at good wages. Europe & the USA can easily have superior lifestyles to the ones they had.

      It has been a tremendous achievement to convince people that up is down, that 2 + 2 = -5 – that there are mystical reasons diminishing the value of labor, that technological progress & robots should make the average person poorer – that there is any reason for declining lifestyles other than the decision of the wealthy and powerful who want it that way.

  4. I’ll guess NEP will have article on the ILO report that condemn austerity.
    “Austerity measures meant to pull Europe out of the crisis have put some 800,000 children into poverty.”
    “The achievements of the European social model, which dramatically reduced poverty and promoted prosperity in the period following the Second World War, have been eroded by short-term adjustment reforms,”
    And on it goes.
    But there is one part that seems to be foreseen by most media:

    “Box 6.3 Iceland: A socially responsive recovery from the crisis
    Iceland repudiated private debt to foreign banks and did not bail out its financial sector, pushing losses on to bondholders instead of taxpayers. This was not a sovereign debt issue; according to the IMF, this debt was a result of privatization and deregulation of the banking sector, facilitated by easy access to foreign funding; the growing imbalances were not detected by Iceland’s financial sector supervision. Two national referendums, held in 2010 and 2011, allowed citizens to vote on whether and how the country should repay a nationalized private debt;

    Icelandic voters delivered a resounding “no” to the orthodox policies that would have accompanied such a debt repayment plan.

    Despite the pressures and threats elicited by Iceland’s heterodox policies – debt repudiation, capital controls and currency depreciation – the country is recovering well from the crisis (Krugman, 2012). It has regained access to international capital markets while preserving the welfare of its citizens, with support from the IMF. In 2012, Iceland’s credit rating was much higher than Greece’s.

    As Iceland’s IMF Article IV Consultation stated:
    A key post crisis objective of the Icelandic authorities was to preserve the social welfare system in the face of the fiscal consolidation needed. Wage increases, agreed among the social partners in May 2011, led to a rise in nominal wages of 6 per cent and the unemployment rate fell to about 7 per cent in 2012. …

    … In designing fiscal adjustment, the authorities introduced a more progressive income tax and created fiscal space to preserve social benefits. Consequently, when expenditure compression began in 2010, social protection spending continued to rise as a per cent of GDP, and the number of households receiving income support from the public sector increased. These policies led to a sharp reduction in inequality. Iceland’s Gini coefficient – which had risen during the boom – fell in 2010 to levels consistent with its Nordic peers. (IMF, 2012, pp. 5–6)”

    But they seems to forget one thing, Iceland have its own currency that have depreciated and boosted competiveness. EU austerity hvent even come close despite massive so calle internal devaluation.
    BIS Change in Real Effective Exchange Rate:

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