Can anything be done for social situation while recovery is awaited?

Is there any light at the end of the economic tunnel?

The interlinked banking and sovereign debt crises, which have played havoc with  economies in the euro area and beyond over the last five years, look set to continue in 2013. Some countries, notably Germany, Sweden and Poland, appear to have overcome their difficulties but that only highlights the contrast with the weaker economies of southern Europe, as well as the UK, where there are fears of a triple dip recession, and Hungary, Bulgaria, Latvia and Lithuania in central-eastern Europe. There are some positive developments. Spain, Portugal and Ireland are now running current account surpluses, which implies that exports of goods and services are now exceeding imports of goods and services to a sufficient extent to allow interest to be paid on external public and private debt with something left over to reduce that debt.  This is largely due to reduced imports but exports were rising despite difficult market conditions in 2012. increased competitiveness and the incentives for companies to search for export markets due to weak domestic markets should lead to increased export growth in 2013. If that occurs there is not just the direct boost to economic growth but also the multiplier effect through the income generated.

Any such benefits still have to offset the adverse economic effects of fiscal tightening in the most troubled economies as well as the paying off of household and company debt. Economic forecasts are a matter of groping in the mist. Still the hope expressed the prime minister of Spain, Mariano Rajoy, that the economy is close to its low point and that the beginnings of economic recovery will occur from the second half of 2013, are not completely unrealistic; and the situation could be the same for Italy. Both countries should continue to be helped by the increased confidence over recent months that they will avoid unaffordable interest rates on their debt provided that policy consistency is maintained after the Italian election on February 24-25th (this in turn requires that opponents of austerity including Berlusconi’s grouping and Grillo’s Five Star Movement are in a minority).

 

Meanwhile how much suffering and longer term damage is occurring?

The questions to which insufficient attention is being paid is whether the stringencies and job losses being imposed on the EU’s weaker economies are not just causing pain but also causing longer term social and economic damage or even weakening the countries’ democratic systems. Long-term unemployment risks leaving its victims without the basic skills and motivation to be employable and thus increasing marginalization and social divisions. Cuts in government spending leave the weakest in society even more vulnerable. Such vulnerability can be exploited by criminals or political extremists, as in the case of the Golden Dawn Party in Greece, which hands out food to Greeks but not to migrants.

The European Commission has tried to address some of this in a recently published document entitled Employment and Social Developments in Europe in 2012. Much of the document is dry and dense in figures but the employment commissioner Laszlo Andor, pulls no punches in his introduction: “2012 has been another very bad year for Europe… Groups already at a heightened risk of poverty such as young adults, children and to some extent migrants, are now experiencing an even worse situation”.  The report indicates that poverty worsened most in Bulgaria, followed by Ireland, Latvia, Spain, Lithuania and Greece in that order, between 2008 and 2011. Interestingly Portugal and Italy avoided deteriorations while Romania and Poland showed significant improvements. However, absolute levels as opposed to changes give somewhat different outcomes. The three countries with the highest incidence in 2010 were the most recent EU members Romania and Bulgaria, together with Greece. Moreover in 2012 harsh austerity measures imply that the situation deteriorated most sharply in Greece. Visitors to Athens can indeed see very visible changes in terms of homeless, begging and other signs of severe poverty over the last 12 months. Other countries in the euro zone, Portugal, Italy and Spain in that order also experienced significant economic declines as a result of unavoidable austerity measures in 2012 and are therefore likely to have seen increased poverty. (In contrast, growth rates in Romania and Bulgaria were mildly positive and Lithuania and Latvia saw stronger recoveries.)

In a situation where recover is awaited while more and more people are having their hopes disappointed, what can be done? Some believe there is some answer in macro-economic policy such as euro bonds or a big fiscal stimulus by Germany. Debates by economic commentators such policy will rightly continue and improvements could most probably be made but no rapid game-changing answer is likely. In that situation what can be done to directly help those most affected, especially young people?

 

Commissioner Andor proposes Youth Guarantee Scheme

On December 5th 2012, Andor proposed a Youth Employment Package, the main element of which is that all member states by February 2013 implement the kind of Youth Guarantee Scheme which had already implemented in some countries, that would guarantee that within four months of leaving education or a job anyone under 25 would be offered a job, a traineeship or further education. However, what may be feasible in Scandinavian countries where youth unemployment is in single figures is going to be far more difficult in southern countries, in some of which youth unemployment exceeds 50% and where government is having to drastically cut expenditure. There is the Commission says still €10bn so far unused from an existing European Social Fund scheme. But spending such money in a manner which is well-audited to ensure that it serves the purpose for which it is designed is far from easy and it will be even more difficult to use it to provide the backing for the proposed universal guarantee rather than individual schemes. But if the money could be spent effectively it would be an example of good use of the EU budget. Other questions that arise are whether unpaid “work experience” would count as a job and how “ training” can be effective. The Commission has only reached the stage of launching a consultation on how to monitor the quality of traineeships.

Italy general election gives chance for political renewal

Most important event in eurozone in early 2013

The Italian election on February 24-25th is the most important event in the euro zone countries in early 2013. It is potentially the most important election in Italy since 1994 since it gives the country the chance to move on from the bipolar political system–with one pole led by Silvio Berlusconi and the left around the former communists–that in 1994 replaced system which had from 1948 until 1992 seen Italy governed by a coalition in which the Christian Democrats were always the largest party. The bipolar system did provide the Italian electorate which a choice of governments which they had effectively been previously denied but suffered from the fact that the right-of-centre pole was led by man whose series of convictions (subject to appeal) for tax evasion, false accounting and bribery, ongoing conflict with much of the judiciary and use of parliament to change the law to further his own interests greatly weakened the principle of the rule of law in which all are equal that is a key principle of a constitutional democracy. The left wing pole was also something of a disappointment since although the former communists allowed themselves for much of the period since 1994 to be led by a former Christian Democrat economics professor, Romano Prodi, its early reforming motivation was weakened by the need to form an alliance with the far left which blocked many reforms as well as by factional politics within the former communist party (now the Partito Democratico, PD).

The hope that Berlusconi would keep to an earlier declaration that he would not return to frontline politics has been disappointed. He presided over a deterioration of prospects for Italy’s finances to the point where he had to resign in November 2011 because investors had lost faith in the ability of Italy under his leadership to put its house in order. Since then he has swung between supporting the replacement government of Mario Monti for implementing measures necessary to restore confidence of investors and condemning the same measures as a capitulation to German demands. Nevertheless, there is according to recent polls nearly 30% of the electorate still sufficiently gullible to vote for Berlusconi’s Partito della Liberta (PdL) and parties associated with it including the Lega Nord, itself hit by a major corruption scandal. This represents a comeback for Berlusconi.

Even so, there is a chance that the election will bring about a significant renewal. Pier Luigi Bersani, the leader of the PD, which is likely to be the leading party in the next government, was subjected to an open process of re-election through a primary election of the PD and associated parties in November following televised debates in which he fought off a strong challenge by the much younger and radically reformist mayor of Florence, Matteo Renzi. Bersani had been a consistent supporter of the Monti government until its resignation in December 2012 and is open minded about reforms although if he were willing to propose reforms that affected the interests of trade unions he would be opposed by left-wingers in the PD and Nichi Vendola. Vendola is a successful president of the southern Apulia region, whose party, Sinistra Ecologia Liberta (SEL), which is allied with the PD, has strongly opposed labour market reform. Nevertheless the PD is taking measures to renew itself including having also run primary elections for many of its parliamentary candidates (albeit with a low turnout) and welcoming in outside personalities such as the anti-Mafia prosecutor Pietro Grassi. It also tried to bring in the well known political and social commentator, Beppe Servignini, as a leader candidate, although he has turned down the offer.

Monti enters political fray

The second potentially important development is the entry into politics at the beginning of this year of the prime minister from November 2011 to December 2012 and current caretaker, Mario Monti, hitherto without political allegiance, as leader of a centrist grouping based on two existing parties and a new movement promoted by business leaders. At present polls suggest that this grouping would win about 15% of votes. Its challenge is to increase this proportion during the campaign by appealing to voters who are undecided or inclined to vote for the Berlusconi camp or Movimento Cinque Stelle (Five Star Movement)  led by the comedian Beppe Grillo, who wants to take Italy out of the euro. Votes from the PD would inevitably be from its reformist wing and would be a poor reward for the support given by the PD to the Monti government and its unpopular austerity measures.

Mr Monti’s decision to enter the political fray–which took time and cannot have been easy–has drawbacks such as putting him in competition with Bersani who had supported him in government. The decision is a brave one. It is too early to say whether the risk will be rewarded, but it is a risk worth taking. In the Italian context Monti had a degree of legitimacy through parliamentary support for 12 months from November 2011 but only for a limited time. After the election, if he can muster a respectable vote he will have continued legitimacy as an influential person although he is very unlikely to again be prime minister and may well not be in government.

The president of the republic, Giorgio Napolitano, strongly urged the political parties to reform the existing voting system but they failed to do so. Under the system, if the PD and allies receive the support indicated in current polls they should win an overall majority in the Chamber of Deputies because the winning party is given a bonus. However, in the Senate, the bonus applies on a regional basis and therefore the PD and electoral allies will probably not have an overall majority. Such an outturn might seem to give Monti’s centrists some leverage but that leverage would have little chance of enabling them to push through any reforms that are opposed by the left. Nevertheless they could at least try to provide a constructive and realistic critique, which is probably not going to come from the PdL or the Five Star Movement. Beppe Grillo. Assuming that, as opinion polls now suggest, the PD and electoral allies emerge from the election with more than twice the representation of the centrists, there is risk that a coalition government between the PD would be too weighted to the PD group to allow the participation of the centrists to be sufficiently influential. Although  Bersani has said that he would be open to an arrangement with Monti, unless Bersani was able to give a Monti a powerful role in such an arrangement, he would be likely to be able to make a better contribution as a constructive and responsible opposition.

 Priorities for the next government: opportunities for the young and legal reform

Apart from the painstaking business of continuing to put Italy’s fiscal affairs in order, there should be two priorities for the next government. The first should be to increase opportunities for young people through education reforms and trying to increase job opportunities. There is however very unlikely to be the necessary political backing for any further overarching labour market legislation following that of the Monti government in June 2012 (see Can labour market reform boost plight of young people without jobs, July 31st, 2012 http://insighteu.com/?cat=7 ). So the challenge will be to try to make the new law work and put pressure on unions and employers to work together rather than antagonistically. The PD economics spokesperson, Stafano Fassina, has also indicated that a left-of-centre government would pursue reforms to increase competition in professions and trades such as law and pharmacies which could reduce the present power of incumbents to make new providers’ entry into the markets very difficult.

A second key priority is reform of the legal system. The slowness of the legal system, including excessive delays during appeals, means that it is often ineffective. An effective legal system is an essential part of a strategy to improve Italy’s currently low ranked business environment and more broadly is a key part of a well-funcitioning democracy.