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Lost in deflation: Why Italy`s woes are a warning to the whole Eurozone

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  • Servaas Storm

    (Delft University of Technology, The Netherlands)

Abstract

Using macroeconomic data for 1960-2018, this paper analyzes the origins of the crisis of the `post-Maastricht Treaty order of Italian capitalism`. After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform and real wage restraint and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy`s domestic demand and exports—and resulted not just in economic stagnation and a generalized productivity slowdown, but in relative and absolute decline in many major dimensions of economic activity. Italy`s chronic shortage of demand has clear sources: (a) perpetual fiscal austerity; (b) permanent real wage restraint; and (c) a lack of technological competitiveness which, in combination with an overvalued euro, weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization, reduce firm profitability and hurt investment, innovation and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy`s `technological competitiveness` and stop the structural divergence between the Italian economy and France/Germany. The issue is not just to revive demand in the short run (which is easy), but to create a self-reinforcing process of investment-led and innovation-driven process of long-run growth (which is difficult).

Suggested Citation

  • Servaas Storm, 2019. "Lost in deflation: Why Italy`s woes are a warning to the whole Eurozone," Working Papers Series 94, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:94
    DOI: 10.2139/ssrn.3419284
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    References listed on IDEAS

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    Cited by:

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    2. Emanuele Brancati & Raffaele Brancati & Dario Guarascio & Antonello Zanfei, 2022. "Innovation drivers of external competitiveness in the great recession," Small Business Economics, Springer, vol. 58(3), pages 1497-1516, March.
    3. Herrero, Daniel & Rial, Adrián, 2023. "Labor costs, KIBS, and export performance: A comparative analysis of Germany and Mediterranean economies," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 184-198.
    4. Krahé, Max, 2023. "Italiens Stagnation verstehen," Papers 277907, Dezernat Zukunft - Institute for Macrofinance, Berlin.
    5. Orsola Costantini, 2020. "The Eurozone as a Trap and a Hostage: Obstacles and Prospects of the Debate on European Fiscal Rules," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(5), pages 284-291, September.
    6. Dario Guarascio & Jelena Reljic & Giacomo Cucignatto & Giuseppe Celi & Annamaria Simonazzi, 2023. "Between a rock and a hard place. Long-term drivers of EU structural vulnerability," Working Papers in Public Economics 237, Department of Economics and Law, Sapienza University of Roma.
    7. Alexandra Bykova & Mahdi Ghodsi & Philipp Heimberger & Stefan Jestl, 2019. "Monthly Report No. 12/2019," wiiw Monthly Reports 2019-12, The Vienna Institute for International Economic Studies, wiiw.

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    More about this item

    Keywords

    Italian macroeconomic performance; Eurozone; secular stagnation; demand; real wage restraint; fiscal austerity; export growth.;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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