Options for Europe – Part 43

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

[NEW MATERIAL TODAY]

Italy and the Italians at Maastricht

Italy received particular focus in the lead up to the Maastricht meeting. There was great dispute about its capacity to meet strict convergence criteria demanded by the Germans. The historical political instability in Italy marked by short-lived coalitions, was considered to be a major reason why the Italians had devalued more than the other EMS nations and run consistently larger deficits (Della Sala, 1997). The claim was that the political cycle was so short relative to the economic cycle that there was little incentive to worry about the consequences of imprudent economic policy. The claim doesn’t bear scrutiny because despite a constancy of short-lived coalitions in the two-decade period leading up to the Maastricht meeting, Italy had actually exhibited quite stark changes in the conduct of its economic policy and by the early 1990s was embracing the neo-liberal approach, albeit not as closely as the Bundesbank would have liked (Walsh, 1999).

Within this increasing monetary focus, Italy had halved its inflation rate in the period 1988-91 but it still remained at around 6 per cent, which was high relative to other nations. Its fiscal deficit remained around 10 per cent, a figure that had persisted throughout the 1980s in response to persistently high unemployment. As a member of the EMS, the government was always prepared to devalue the Lira and it frequently did, although the extent of the fluctuations against the Deutsche Mark were reduced towards the end of the decade. But Italian industry enjoyed the fact that the nation’s international competitive was maintained by the exchange rate adjustments, which avoided damaging internal deflationary strategies (wage cuts) being imposed.

Giavazzi and Pagano (1988: 304) posed the question: “why should a high inflation country ever want to belong to an agreement such as the EMS?” in relation to the fact that high-inflation nations such as Denmark and Italy in the first-half of the 1980s had to endure a loss of competitiveness as a result of having to tie their nominal exchange rate to the EMS parities. They could only devalue infrequently and in between such realignments their industries lost out to external competitors? One line of argument was that France and Italy were able to piggy-back on Bundesbank discipline if they stayed in the EMS, albeit at the expense of higher interest rates and persistently high unemployment. These nations knew that if they joined the EMS then their would be a “transfer of responsibility for … monetary policy from … [their central bank] … to Germany’s Bundesbank” (p. 304). The argument thus went that for a nation joining the EMU, its central bankers would have a strong incentive to keep inflation down, given that exchange rate adjustments would be infrequent and result in loss of competitiveness.

Building on this argument, Dyson and Featherstone (1996) argued that by the end of the 1980s, the EMU narrative within Italy was being exploited by officials in the Department of Treasury (Tesoro), the Banca d’Italia, the Foreign Ministry, and the Prime Minister’s Department to prioritise German-style monetary discipline and reduce the discretion of economic policy makers. The so-called ‘vincolo esterno’ (external ties) concept, whereby the introduction of the EMU would restrict domestic policy makers and modernise the structure of the Italian economy, its income support systems and industrial practices, became a major motivation for Italian support of EMU. The major losers would be those who had long benefited from the system of ‘partitocrazia’ in Italy.

‘Partitocrazia’ is a perjorative term to describe the dominance of the political party machines over civil society in decision making in Italy. The parties had long manipulated the proportional representation system in Italy to ensure party favourites were able to retain office despite being unpopular. Party leaders had also occupied powerful and very visible positions in Italian society. Such a system was open to corruption and patronage, especially since the Italian political parties, retained extensive interests in sectors such as the media, health, and education. The ‘vincolo esterno’ that the EMU would bring was seen by a growing number of technocrats in Italy as a way to break the hold that that parties had on Italy policy making. They wanted an independent central bank because it would escape the politicisation of Italy party politics, which they considered promoted the narrow interests of the party elites at the expense of prudent monetary discipline (Dyson and Featherstone, 1996). The external discipline argument was not confined to Italy but was embraced by the new neo-liberal central banking and finance elites as a means of leveraging their own power to advance their own agendas (Dyson and Featherstone, 1996).

Della Sala (1997: 15) argued that Italy had been seen as a ‘weak’ state “lacking the capacity to aggregate demands into coherent policy programmes”, which was exposed once capital controls were eliminated as part of the Single European Act in the late 1980s and economic interdependence between nations increased. He makes the usual neo-liberal claim that this requires a ‘hollowing out’ of the state, which is code for transferring resources into the hands of financial and other elites via privatisation, labour market and financial deregulation combined with the reduction in democratic oversight that arises from reducing the capacity of fiscal policy to act and increasing the ‘independence’ of the monetary authority.

But this agenda was certainly embraced by the technocrats in Italy leading into Maastricht. Della Sala argued that the Italian state had become a “non-state” (p. 19) as a result of being “‘captured’ by … a broad range of societal interests” (p. 19). This was especially the case in relation to economic policy making which he described as “incremental, serving micro-sectional interests, and without any clarity or coherence” (p. 19). The political parties pursued their own interests rather than a ‘national’ interest.

Della Sala argues that a “state with weak economic management capacity should be susceptible to the transforming forces of markets and supranational authority” (p. 19) that the EMU would bring. This would especially be the case given that the Maastricht negotiations had become confined by a “few widely shared assumptions” (p. 20). These assumptions were, of-course, that macroeconomic policy would concentrate largely on price stability with strict rules on deficits (Modell Deutschland) and that the changes to the Treaty would ensure Member States would accomplish a convergence in their economic policies. The lure of the EMU thus brought out a new elite of technocrats with support from both the right and left of Italian politics as the TINA mantra that Margaret Thatcher had used to bulldoze her way through Britain permeated across the Channel.

The EMU gave these new elites a chance to place Italy into a modern Europe and they took this Pro-European approach to the IGCs in 1990. They were small players relative to the might of Germany and France but nevertheless, the Italians played a significant role in the lead up to Maastricht.

[TO BE CONTINUED]

Additional references

This list will be progressively compiled.

Bindi, F. (2011) Italy and the European Union, Washington, Brookings Institution Press.

Carli, G. (1993) Cinquantíanni di vita Italiana, Rome, Editori Laterza.

Della Sala, V. (1997) ‘Hollowing out and hardening the state: European integration and the Italian economy’, West European Politics, 20(1), 14-33.

Dyson, K. and Featherstone, K. (1996) ‘Italy and EMU as vincolo esterno: empowering the technocrats, transforming the state’, South European Society and Politics, 1/2, 272-99.

Dyson, K. and Featherstone, K. (1999) The Road to Maastricht: Negotiating Economic and Monetary Union, Oxford, Oxford University Press.

Giavazzi, F. and M. Pagano (1988) ‘The Advantage of Tying One’s Hands: EMS discipline and Central Bank Credibility’, European Economic Review, 24, 1055-82.

Walsh, J.I. (1999) ‘Political bases of macroeconomic adjustment: evidence from the Italian experience’, Journal of European Public Policy, 6(1), 66-84.

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.