Italy and Germany, Incompatible Varieties of Europe?

Ton Notermans, Simona Piattoni, Ton Notermans, Simona Piattoni

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9781032248950
• eBook ISBN: 9781000585605
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Can Italy and Germany thrive within the confines of the common currency, or do they display two fundamentally incompatible models? This book examines this question by means of detailed comparisons in the fields of labour market policies, welfare provisions and financial and economic management, since the onset of the financial crisis and through the euro and COVID-19 crises.

The rapid succession of the financial crisis, the Eurozone crisis and COVID-19 have again brought to the fore questions that have beset European integration since its inception; does the EU promote convergence or divergence? Have these crises served to reveal pre-existing politico-economic incompatibilities or were these incompatibilities created by the euro and the measures propounded by the Economic and Monetary Union (EMU)? Should EMU recipes be followed, or should they be fundamentally revised in an effort to come good on the convergence promises underpinning the European project? And, lastly, is the COVID-19 crisis likely to mitigate or exacerbate these problems? These questions are addressed in this volume by means of a tight comparison between Germany and Italy, two countries that have displayed strikingly divergent trajectories but also share many more politico-economic traits than the conventional wisdom would allow for. By exploring in detail how the main elements of the euro and EMU management have played out, the volume highlights the externalities that becoming part of a currency union has created and that strengthened the economic success of one while consolidating the decline of the other and analyses the likely impact of the measures introduced to fight the economic consequences of the COVID-19 pandemic.

The chapters in this book were originally published as a special issue of the journal, German Politics.

Italy and Germany: Incompatible Varieties of Europe or Dissimilar Twins?

TON NOTERMANS

and SIMONA PIATTONI

This article critically examines the main assumptions underlying the reforms embedded in EMU and European Semester recommendations. We proceed in three steps. First, we question the notion that Italy and Germany embody two distinctive politico-economic models and challenge the conclusion, drawn from this assumption, that structural rigidities are the primary cause of Italy’s economic woes and that its lackluster performance since the 1990s is due to its insufficient determination to implement structural reforms. Rather we show, second, that both countries have undertaken remarkably similar reforms which, however, have yielded different results both because of the different public debt levels they started with and because the interdependence created by the euro and the hyper-financialised markets rewarded those countries with low, and penalises those with high, sovereign debt. Third, we contest the assumption that the two economies would converge towards a common growth path if only Italy could adapt to the requirements of a globalised economy like Germany has apparently done, which leads us, in conclusion, to question the appropriateness of the EU’s current strategy for both.

INTRODUCTION

Though the euro’s first decade seemed to fulfil the expectations of higher growth, stability and political unity, the self-congratulatory celebrations gave way to widespread concerns during the second decade when the macroeconomic imbalances that had emerged provoked the euro-crisis. It now became common conviction that the Eurozone had in fact split into a northern core and southern periphery, revealing a flaw in its construction that few had noticed (Magone, Laffan, and Schweiger 2016). The southern periphery was diagnosed as suffering multiple institutional deficiencies that hampered its competitiveness and thus its ability to thrive in a globalised economy.

This was seen to apply to Italy in particular. The Italian syndrome, engendering pathologies on multiple fronts, ultimately was seen to derive from the incapacity of the highly fragmented Italian political system to overcome entrenched interests (Brunnermeier, James, and Landau 2016). Decentralised and aggressive trade unions were seen to prevent wages from falling to their market-clearing level. A weak state found itself captured by industrial interests that attempted to compensate for the effects of the dysfunctional wage-setting system by demanding protection through strict product market regulation (PMR), state support and expansion of domestic demand (Hassel 2015; Molina and Rhodes 2007). Employment protection legislation (EPL) was also seen to introduce debilitating rigidities. Similarly, an expensive welfare state implied excessive non-wage labour costs that reduced labour supply and induced unions to bargain for higher wages. To accommodate this plethora of demands, the public sectors had become allegedly oversized and inefficient, constituting a further drain on competitiveness. The joint effects of these deficiencies were current account deficits, low GDP and productivity growth, anaemic labour markets and high public deficits and debt.

Given this diagnosis, it followed that amending these numerous and mutually reinforcing institutional and political conditions would be nigh impossible. So, although the country had undertaken some reforms to qualify for Eurozone membership, since the onset of the crisis the common understanding became that it had implemented them only half-heartedly and relaxing or even reversing them once it had adopted the Euro (Franks et al. 2018, 5).

Accordingly, the EU adjustment strategy focussed on fiscal austerity and structural reforms. This strategy was written into the Fiscal Compact of 2013 and informed the memorandums of understanding imposed on five programme countries as well as the conditionality attached to the ECB’s Outright Monetary Transactions. While Italy never applied for assistance, the informal conditionality imposed on it had the same content. As set out by ECB President Jean-Claude Trichet and Banca d’Italia Governor Mario Draghi in their letter of 5 August 2011 to PM Berlusconi, labour and product market liberalisation and a German-style Schuldenbremse were conditions for ECB support of Italian sovereign debt (Jacoby and Hopkin 2019; Sacchi 2015).

Much of this programme was inspired by the German experience, a country that managed to morph from the ‘sick man of Europe’ to its star performer by implementing exactly such a programme (Tables 1 and 2 in the Introduction to the special issue). Since the start of the millennium German real GDP increased by about a third, output per hour by roughly 20 per cent while unemployment fell to full employment levels. All the while the German budget turned from deficit to surplus and the debt to GDP ratio fell below the 60 per cent limit of the Stability and Growth Pact (SGP). During the same period, instead, Italy’s real GDP grew by a paltry 3.8 per cent, productivity was stagnant, and unemployment kept hovering around the 10 per cent mark. The Italian budget improved somewhat though remaining in deficit, while the debt to GDP ratio continued its upward trend to exceed 140 per cent by 2019. By the end of the second decade of EMU, income convergence had given way to divergence. While Italy’s per capita GDP at the beginning of the millennium stood at about the same level as Germany at around 120 per cent of the EU28 average, it had dropped to 93 per cent by 2019 while Germany largely managed to maintain its position.¹

TABLE 1
PRODUCT MARKET REGULATION AND EMPLOYMENT PROTECTION

				Strictness of Employment Protection
	Restrictiveness of Product Market Regulation			Individual and collective dismissals, regular contracts			Temporary contracts			Collective dismissals (additional restrictions)
	1998	2008	2018	1999	2009	2019	1999	2009	2019	2000	2009	2019
	Selected EU(28) Countries
Austria	2.12	1.37	1.44	2.67	2.29	2.29	1.31	1.31	1.31	3.25	3.25	3.25
Belgium	2.30	1.52	1.69	1.64	1.69	2.07	2.25	2.25	2.06	4.88	4.88	4.88
Denmark	1.66	1.34	1.02	1.47	1.47	1.53	1.38	1.38	1.63	3.63	2.88	2.88
Finland	1.94	1.34	1.37	2.23	2.08	2.00	1.56	1.56	1.56	1.88	1.63	1.63
France	2.38	1.52	1.57	2.58	2.50	2.56	3.13	3.13	3.00	3.13	3.13	3.13
Germany	2.23	1.40	1.08	2.60	2.60	2.60	2.00	1.00	1.38	3.63	3.63	3.63
Ireland	1.86	1.35	1.38	1.27	1.10	1.23	0.25	0.63	0.63	2.75	3.50	3.50
Italy	2.36	1.51	1.32	3.02	3.02	2.56	3.63	2.00	3.13	4.13	4.13	3.00
Netherlands	1.82	0.96	1.10	3.30	3.24	3.61	0.94	0.94	1.19	3.00	3.00	3.19
Portugal	2.59	1.69	1.34	4.58	4.42	3.14	2.81	1.94	1.94	2.88	1.88	1.88
Spain	2.39	1.59	1.03	2.36	2.36	2.05	3.25	3.00	2.47	3.37	3.37	3.00
Sweden	1.89	1.61	1.11	2.49	2.45	2.45	1.44	0.81	0.81	3.00	3.00	3.00
United Kingdom	1.32	1.21	0.78	1.35	1.51	1.35	0.25	0.38	0.38	2.38	2.38	2.13
	Other Industrialised Countries
Australia	1.72	1.44	1.16	1.42	1.17	1.67	0.88	0.88	0.88	2.88	2.88	2.88
Canada	1.91	1.53	1.76	0.59	0.59	0.59	0.25	0.25	0.25	3.13	3.13	3.13
Japan	2.11	1.43	1.44	1.70	1.37	1.37	1.50	0.88	1.00	3.25	3.25	3.25
Korea	2.56	1.94	1.71	2.42	2.42	2.42	2.13	2.13	2.13	1.88	1.88	1.88
New Zealand	1.45	1.23	1.24	1.49	1.81	1.64	0.38	1.00	1.00	0.00	0.00	0.00
Switzerland	2.49	1.55	1.53	1.43...

Table of contents

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Contents
• Citation Information
• Notes on Contributors
• Preface
• Introduction: Italy and Germany – Incompatible Varieties of Europe?
• 1 Italy and Germany: Incompatible Varieties of Europe or Dissimilar Twins?
• 2 Competitiveness Revisited: Labour Costs, Financial Flows and the Case of Italy
• 3 German Labour Market Resilience in Times of Crisis: Revealing Coordination Mechanisms in the Social Market Economy
• 4 Varieties of Private Household Debt in Europe: Incompatibility of Culturally Diverse Lending Regimes Between Germany and Italy?
• 5 German and Italian Pensions: Similar Roots, Different Reform Paths, Comparable Trajectories?
• 6 The Financial Consequences of Export-led Growth in Germany and Italy
• 7 Safe and Risky Sovereigns in the Euro Area Capital Market: Financial Drivers of Fiscal Policies in Germany and Italy
• Index