Economic Policy, Crisis and Innovation: Beyond Austerity in Europe 9780367260293, 9780429291142

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Economic Policy, Crisis and Innovation

This book is a Festschrift to Annamaria Simonazzi and embraces the themes that she has contributed to over the years through her insightful and inspiring works. It brings together contributions from a number of distinguished European economists, which pay tribute to her by engaging in a dialogue with her research, simultaneously reflecting on the process of growing economic disintegration in the European Union, its causes and its possible remedies. The book shows the deep interrelations between macroeconomic issues and the social sphere, and points to the need to rethink the very foundations of European economic policies as an effective antidote to growing imbalances and disintegration. In particular, the effects of austerity are assessed alongside the dimensions of inequality, gender discrimination, poverty, and unemployment, broadening the perspective also beyond the Eurozone. The authors envision a progressive society, in which investments in research and intelligent industrial policies govern the processes of technological change and drive the economy towards a more efficient and more equal model of development characterized by high productivity and high wages. While some chapters deal directly with policy issues, policy suggestions and proposals are scattered throughout the whole book. This volume will appeal to academics, economists, and policy-makers interested in understanding the policy response of European institutions to the challenges posed by both the Great Recession and subsequent developments in the European economies. The book is written in an engaging and accessible way, and the themes are broad enough to generate interest from the international public. Maria Cristina Marcuzzo is Full Professor of Economics at the University of Rome, ‘La Sapienza’, Italy, and Fellow of the Italian Academy of Lincei. Antonella Palumbo is Associate Professor of Economics at Roma Tre University, Italy. Paola Villa is Full Professor of Economics at the University of Trento, Italy.

Routledge Studies in the European Economy 45 Crisis in the European Monetary Union A Core-Periphery Perspective Giuseppe Celi, Andrea Ginzburg, Dario Guarascio and Annamaria Simonazzi 46 Rethinking Economic and Monetary Union in Europe A Post-Keynesian Alternative Philip B. Whyman 47 Central and Eastern Europe in the EU Challenges and Perspectives Under Crisis Conditions Edited by Christian Schweiger and Anna Visvizi 48 Greek Employment Relations in Crisis Problems, Challenges and Prospects Edited by Horen Voskeritsian, Panos Kapotas and Christina Niforou 49 Centrally Planned Economies Theory and Practice in Socialist Czechoslovakia Edited by Libor Žídek 50 SME Finance and the Economic Crisis The Case of Greece Alina Hyz 51 Russian Trade Policy Achievements, Challenges and Prospects Edited by Sergei Sutyrin, Olga Y. Trofimenko and Alexandra Koval 52 Digital Transformation and Public Services Societal Impacts in Sweden and Beyond Edited by Anthony Larsson and Robin Teigland 53 Economic Policy, Crisis and Innovation Beyond Austerity in Europe Edited by Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa For a full list of titles in this series, please visit www.routledge.com/series/ SE0431

Economic Policy, Crisis and Innovation Beyond Austerity in Europe

Edited by Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa; individual chapters, the contributors The right of Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Simonazzi, Annamaria, 1949- honoree. | Marcuzzo, Maria Cristina, 1948- editor. | Palumbo, Antonella, editor. | Villa, Paola, editor. Title: Economic policy, crisis and innovation : beyond austerity in Europe / edited by Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa. Description: 1st Edition. | New York : Routledge, 2020. | Series: Routledge studies in the european economy | Includes bibliographical references and index. Identifiers: LCCN 2019036178 (print) | LCCN 2019036179 (ebook) Subjects: LCSH: Europe--Economic policy--21st century. | Europe–Social policy--21st century. | Global Financial Crisis, 2008-2009. | Economic development--Europe--History--21st century. | Europe–Politics and government--21st century. Classification: LCC HC240 .E2756 2020 (print) | LCC HC240 (ebook) | DDC 338.94–dc23 LC record available at https://lccn.loc.gov/2019036178 LC ebook record available at https://lccn.loc.gov/2019036179 ISBN: 978-0-367-26029-3 (hbk) ISBN: 978-0-429-29114-2 (ebk) Typeset in Times New Roman by Taylor & Francis Books

Contents

List of figures List of tables List of contributors Introduction

vii ix x 1

MARIA CRISTINA MARCUZZO, ANTONELLA PALUMBO AND PAOLA VILLA

PART I

Europe in crisis: the cases of Italy, Spain and Germany 1 The economic consequences of the Maastricht Treaty: why Italy’s permanent crisis is a warning to the Eurozone

11 13

SERVAAS STORM

2 Recovery or stagnation? Spain and Italy after the Great Recession

35

JOSEP BANYULS LLOPIS AND ALBERT RECIO

3 The German “reforms” – no model for the EU

51

GERHARD BOSCH AND STEFFEN LEHNDORFF

PART II

Integration and disintegration in the European Monetary Union 4 Did monetary union make political union less likely?

67 69

GIORGIO FODOR

5 External imbalances and European integration MICHAEL LANDESMANN

84

vi

Contents

6 The Italian economy from WWII to the EMU: structural weaknesses and external constraint

113

GIUSEPPE CELI AND DARIO GUARASCIO

PART III

The social effects of neoliberal macroeconomics 7 Market income inequality and welfare state redistribution in Europe: some facts and policy suggestions

131 133

MAURIZIO FRANZINI

8 Labour market reforms in Europe and young people’s labour market integration in turbulent times

150

MARK SMITH AND PAOLA VILLA

9 Prolonged austerity and gender equality: the cases of Greece and the UK compared

168

MARIA KARAMESSINI AND JILL RUBERY

10 Disseminating expertise on gender and economics: the experience of inGenere.it

185

FRANCESCA BETTIO, ROBERTA CARLINI AND MARCELLA CORSI

PART IV

Technological challenge and policy

201

11 Is automation beneficial for society as a whole? What we can learn re-reading Ricardo and Marx on machinery and labour

203

GIOVANNI BONIFATI

12 Working conditions and quality of work in the digitized factory

219

DARIO FONTANA, SERGIO PABA AND GIOVANNI SOLINAS

13 Digital transformation in the automotive supply chain: a comparative perspective

233

MARGHERITA RUSSO

14 Productive structures and industrial policy in the EU

250

MICHAEL H. BEST

15 Vision vs improvisation: on the industrial future of Italy

268

SALVATORE BIASCO

Index

278

Figures

1.1 1.2 2.1 2.2 2.3 3.1 5.1 5.2 5.3 5.4a 5.4b 5.5 5.6 5.7 5.8

5.9

5.10 5.11

Real wage per hour of work in manufacturing: Italy versus the Euro-4 countries, 1970–2015 (euros, constant 2010 prices) Manufacturing labour productivity per hour of work: Italy versus the Euro-4 countries, 1970–2015 (euros, constant 2010 prices) Evolution of GDP for the Euro area, Spain and Italy (1995 = 100) Evolution of employment in the EU 15, Spain and Italy (1995 = 100) Net lending/borrowing (current and capital account) as a percentage of GDP at current prices Changes in real wages per employee, EMU 2001–2009 (upper graph) and 2010–2018 (lower graph) (in %) Growth of GDP, average annual growth rates (%) Composition of the current account of balance of payments, 2002–2018 (in % of GDP) Private and public debt in % of GDP, 2002, 2008, 2013 and 2017 Private sector debt and subsequent GDP growth trajectories, 2008–2018 Current account balance and subsequent GDP growth trajectories, 2008–2018 Export and import development, 2008–2018 Development of industrial production (September 2008 = 100) Sectoral contributions to GDP growth (from constant price data) Importance of manufacturing in the economy; share of manufacturing in GDP (%), 2005, 2018 and GDP per capita at current PPS (Purchasing Power Standards) (EUR), 2005, 2018 Position of manufacturing and longer-term trade balances; share of manufacturing in GDP in 2005 (%), and exports/imports of goods and services (average over the period 2002–2008) Differential growth manufacturing – total economy, 2008–2018 (per annum) and share of manufacturing in GDP, 2013 Differential growth manufacturing – total economy, 2008–2018 (per annum) and (total) export growth

22 23 37 38 41 58 86 90 91 94 95 97 99 100

102

104 106 107

viii 6.1 6.2 8.1

Figures Number of strikes (LHS), workers participating at strikes and non-worked hours (RHS): Italy, 1950–2007 Employment and unemployment rates: Italy, 1977–2015 (%) Average “policy intensities” and labour market indicators in the EU-27, 2000–2013

119 122 158

Tables

1.1 1.2 1.3 1.4 2.1 2.2 2.3 7.1 7.2 7.3 7.4 8.1

8.2 8.3

9.1 9.2 9.3 14.1

Growth and distribution: the Italian economy versus those of the Euro-4 countries, 1960–2018 A decomposition of the real GDP growth of Italy and the Euro-4, 1960–2018 Shift-share decomposition of the change in aggregate labour productivity growth: Italy: 1970–1992 versus 1999–2015 Manufacturing profitability: Italy versus the Euro-4, Germany and France Some public sector indicators in Spain and Italy Employment change and employment by activity in Spain between 2008 and 2017 Employment change and employment by activity in Italy between 2008 and 2017 Market income inequality, Gini coefficient, 2008 and 2016 (%) Disposable income inequality, Gini coefficient, 2008 and 2016 (%) Intensity of redistribution, 2008 and 2016 (%) Classification of countries based on changes in market income and disposable income inequality Key youth labour market indicators by country in the EU-27: unemployment rate, unemployment ratio and NEET rate, 2013 (%) Average “policy intensities”+ and contextual youth labour market indicators by country group,++ 2010–2013 Flexicurity policy measures: average “policy intensities” and direction of change in security (increasing, decreasing) by country group and sub-period, 2000–2013 Changes in employment and unemployment rates by gender Trends in part-time and temporary employment as a share of overall employment Changes in women’s employment rate by age, education level and motherhood status Indicators on R&D in a sample of EU and non-EU countries around 2008 and 2014

16 21 25 28 43 46 47 135 136 137 139

156 160

162 171 171 172 266

Contributors

Maria Cristina Marcuzzo is Full Professor of Economics at the University of Rome, ‘La Sapienza’, Italy, and Fellow of the Italian Academy of Lincei. She has worked on classical monetary theory, the Cambridge School of Economics, Keynesian economics and, more recently, on Keynes’s investments in financial markets. Antonella Palumbo is Associate Professor of Economics at Roma Tre University, Italy, and Managing Editor of the Centro Sraffa Working Papers (CSWP). She works on the re-appraisal of the classical theory of value and distribution, demand-led growth theory, Kaldor’s growth model, capacity utilization, and theoretical and empirical analysis of potential output. Paola Villa is Full Professor at the University of Trento, Italy. She is the author of numerous studies on labour economics with particular reference to internal labour markets, labour market regulations and deregulations, gender, fertility, labour market performance, and youth. She is Co-founder of the web-magazine in.Genere.it. Josep Banyuls Llopis is Lecturer in Labour Economics and Employment Policy at the University of Valencia, Spain. His current major areas of interest are sectoral change and its impact on employment and international comparative studies on labour management and work organization. He has also been working on several projects related to labour precariousness and the development of policies to reduce it. Michael H. Best is Professor Emeritus at the University of Massachusetts Lowell, United States, and is the recipient of the 2018 Schumpeter Prize with his How Growth Really Happens: The Making of Economic Miracles through Production, Governance, and Skills. An expert in production systems and industrial policies, he has collaborated with the United Nations Industrial Development Organization, the World Bank, various government agencies, and research foundations in more than 20 countries. Francesca Bettio is Full Professor of Economics at the University of Siena, Italy. Her main areas of expertise are labour economics, population studies

Contributors

xi

and gender economics. She has a long record of collaboration with the European Commission as an expert on women’s work and gender equality. She is Co-founder of the web-magazine in.Genere.it. Salvatore Biasco has been Full Professor of International Economics at the University of Rome, ‘La Sapienza’, Italy. Since his time as a Member of Parliament (1996–2001), he has had an important role in shaping the Italian fiscal system. He has worked on international adjustment and the financial system and, more recently, on political theory and Italian economic policy. Giovanni Bonifati is Full Professor of Political Economy at the University of Modena and Reggio Emilia, Italy. His research focuses on international location of production, monetary theory of income distribution, and longterm determinants of investment, economics of complexity and the role of ‘exaptation’ in innovation dynamics. Gerhard Bosch is Professor Emeritus at the Institute for Work, Skills and Training (IAQ) at the University of Duisburg-Essen, Germany. He has worked on working time, wages, industrial relations, training, employment systems and welfare states, and employment and labour market policies. Roberta Carlini is a Researcher at the Robert Schuman Centre for Advanced Studies at the European University Institute, a journalist, and a writer, and specializes in economics, employment, education, and social and gender issues. She contributes regularly to Italian national newspapers, magazines, and radio programs and is Co-founder of the web-magazine inGenere.it. Giuseppe Celi is Associate Professor of Economics at the University of Foggia, Italy, where he was formerly the coordinator of the PhD programme in economic theory. He has worked on the labour market effects of international trade and, more recently, on the migration–trade nexus. Marcella Corsi is Full Professor of Economics at the University of Rome, ‘La Sapienza’, Italy, and a member of the editorial board of the web-magazine inGenere.it. Her research interests include human development, feminist economics, and the history of economic thought. Giorgio Fodor was formerly Full Professor of Economic Policy at the School of International Studies at the University of Trento, Italy. He is now retired. His research focuses on international financial history, economic governance, financial crises and European economic integration. Dario Fontana is a Junior Researcher on Labour Sociology at the University of Modena and Reggio Emilia, Italy. His research interests include labour sociology, industrial relations, digital transformation, occupational health, and working conditions. Maurizio Franzini is Full Professor of Economic Policy at the University of Rome, ‘La Sapienza’, Italy, Director of the Ezio Tarantelli Centre for

xii

Contributors Interuniversity Research and a member of the board of ISTAT, the Italian National Institute of Statistics. His research is about economic and social inequalities, institutional economics and sustainable development.

Dario Guarascio is Senior Researcher of Economic Policy at the University of Rome, ‘La Sapienza’, Italy, and external affiliate of the Sant’Anna School of Advanced Studies in Pisa. His research covers innovation economics, industrial dynamics, international trade, European studies and applied econometrics. Maria Karamessini is Professor of Labour and Welfare State Economics at Panteion University, Athens, Greece. She has published extensively on socioeconomic models and the recent economic crisis, gender, youth and the labour market, economic inequalities and the middle classes, and industrial, labour market and equality policies. She served as Governor of the Greek Public Employment Agency from 2015 to 2019. Michael Landesmann is Professor of Economics at the Johannes Kepler University, Linz, Austria, and Senior Research Associate (and former Scientific Director) of the Vienna Institute for International Economic Studies (wiiw). His research covers international economic integration, growth and structural change, industrial policies, labour markets, and migration. Steffen Lehndorff is Research Fellow at the Institute for Work, Skills and Training (IAQ) at the University of Duisburg-Essen, Germany. He is interested in comparative research into employment models, working time, and industrial relations systems in Europe. Sergio Paba is Full Professor of Economic Policy at the University of Modena and Reggio Emilia. His research focuses on industrial economics, industrial districts, economics of education, technical change and digital transformation and their effects on local labour systems. Albert Recio is Professor Emeritus at the Autonomous University of Barcelona, Spain, and Co-editor of the Revista de Economia Crítica. His research interests include labour economics, job quality, unions, working time, inequalities, jobs and economic structure, and national models of employment. He has most recently worked on attempts to integrate traditional heterodox approaches into feminist and ecological economics. Jill Rubery is Professor of Comparative Employment Systems and Director of the Work and Equalities Institute at the Alliance Manchester Business School, University of Manchester, England. Her research focuses on comparative employment systems, labour market segmentation, gender inequality and issues of pay and working time. She is a Fellow of the British Academy. Margherita Russo is Full Professor of Economic Policy at the University of Modena and Reggio Emilia, Italy, and a member of the University’s

Contributors

xiii

Research Centre for the Analysis of Public Policies. She works on the analysis of the structure of and changes in local production systems, on innovation dynamics and innovation policy, and on the socioeconomic impact of natural disasters. Mark Smith is Professor of Human Resources Management at Grenoble Ecole de Management at the Université Grenoble Alpes, France. His research focuses on labour market outcomes for individuals. He has carried out research work for a range of European and national institutions on employment policy, working conditions, gender equality and youth. Giovanni Solinas is Full Professor of Political Economics at the University of Modena and Reggio Emilia, Italy, and a member of the University’s Research Centre for the Analysis of Public Policies. His research covers industrial economics, labour economics, public policy evaluation, industrial districts, and the effects of the digital transformation on local production systems. Servaas Storm is a Senior Lecturer in Economics at Delft University of Technology, Delft, The Netherlands. He is one of the editors of Development and Change and a member of the Working Group on the Political Economy of Distribution of the Institute for New Economic Thinking. He is a macroeconomist who works on economic growth, technological progress, macroeconomic policy, the political economy of industrialization, employment, structural change, financialization and climate change.

Introduction Maria Cristina Marcuzzo, Antonella Palumbo and Paola Villa

This volume brings together a number of articles reflecting on the process of growing social, economic and political disintegration in Europe, the causes of this process and the possible means of remedying it. It was conceived of as a tribute to Annamaria Simonazzi, whose contributions to this topic over the years have been nothing short of insightful and inspiring. The different chapters in this volume offer a range of perspectives on the disintegration process, looking at it from different angles, from macroeconomics to industrial policy to socio-cultural and gender issues. The overall interpretation of the process that emerges from the chapters, however, is fairly consistent; one can easily discern therein four common traits. First, the chapters are all highly critical of the way in which the rules of the European Monetary Union (EMU) were designed and of how EMU policies are implemented – and this is true for the period prior to the Great Recession of 2008–2009 and for the period immediately following it. As a product of dubious theoretical premises and specific interests, the design of the policies of the Eurozone has, from the very outset, had a strong austerity bias. Relying on the alleged ability of the economic system to self-adjust in the face of demand shocks, austerity has been envisaged and implemented as the only feasible policy response to the crisis, while its negative consequences on economic activity and growth have been grossly underestimated. Austerity, with its mixture of expenditure cuts, an increasing tax burden and the retrenchment of the welfare state, has produced social distress and increasing socioeconomic inequality; at the same time, it has exacerbated pre-existing macroeconomic imbalances without having reduced public debt, the burden it was supposed to alleviate. Second, the chapters all seem to agree that the relevant macroeconomic, social and political issues are so deeply intertwined that they represent different aspects of the same question. The process of disintegration is unfolding along different dimensions: economically, there is the aggravation of imbalances both between and within national economies (in Germany no less than elsewhere); socially, austerity measures have had a differentiated impact on different groups of society causing the widening of inequalities; and politically, the disruptive consequences of the crisis have resulted in deteriorating

2

Introduction

living conditions for large parts of the population, and this has had a negative impact on the process of political integration. The performance of Europe’s national economies is assessed by all the contributors to this volume in terms of the well-being of the people living in Europe’s nations. Third, in all the chapters lucid criticism goes hand-in-hand with the search for and offering of possible solutions and alternatives. The contributors all envision a progressive society, in which investments in research and intelligent industrial policies govern the process of technological change and drive the economy towards a more efficient and more equitable model of development characterized by high productivity, high wages and minimal inequality. While some chapters deal directly with policy suggestions, the whole book is strewn with proposals. Finally, all the chapters portray the economic system as being ever in need for maintenance and care. With no great faith in the existence of spontaneous equilibrating mechanisms, the contributors regard the market as typically producing highly imperfect and often unfair results, and believe that economic policy has to play a relevant role not only in correcting imperfections but also in shaping the economy according to collective social values and collective social choices. In this Introduction, we aim to give the reader a bird’s-eye view of the content of each chapter and an idea of what we see as their main message(s). Part I includes three chapters that address the divergent experiences of the crisis in Europe with analysis of its impact on three countries: Italy, Spain and Germany. In Chapter 1, Servaas Storm argues that the rise of anti-austerity and anti-euro populism in Italy can only be understood against the background of a long-term decline in growth combined with dualization and increasing inequality experienced in the economy. These structural trends are analysed at their origins, and special attention is paid to the impact that fiscal austerity, on the one hand, and wage restraint, on the other, had on the dynamics of domestic demand and productivity. More precisely, it is argued that Italy’s long-term compliance with the strict rules prescribed first to join and then to be part of the EMU had played a non-negligible part in Italy’s dismal macroeconomic performance and in the impoverishment of its productive structure. Austerity and wage compression, pursued in Italy from the early 1990s onwards, did not result in recovery, growth and closer integration into the European economy. This negative outcome should constitute a warning for the whole of the Eurozone. Josep Banyuls Llopis and Albert Recio in Chapter 2 focus on the evolution of the productive structure and the labour market during the Great Recession in Spain and Italy. The central premises of EU economic policy are based on the idea that markets are efficient and work optimally. The EMU is conceived of as consisting of a set of countries competing amongst themselves, but it is assumed that the “rules of the game,” as it were, would eventually lead to socio-economic convergence amongst countries, reaching an optimal result. But this process of convergence has not taken place: differences between clusters of countries (centre

Introduction

3

vs. periphery, Northern vs. Southern Europe) and between countries within the same cluster (e.g. Italy and Spain) have actually been on the increase. The analysis presented on Italy and Spain shows that the differences between countries have increased and that, without a policy for convergence in social conditions and for economic integration of their productive structures, the existing differences will not be rebalanced. In Chapter 3, Gerhard Bosch and Steffen Lehndorff identify the causal mechanisms linking public policy developments in Germany to the broader political economic environment of the Eurozone. They present a contrasting line of argument to the mainstream view on the German “role model.” While large swaths of the German and European public regard the so-called “structural reforms of the labour market” of the early 2000s as crucial to international cost-based competitiveness, Bosch and Lehndorff argue that “the German export boom is based primarily on process- and product-based competitiveness, which made the add-on of dropping labour costs in the strongest EU economy up until the crisis particularly harmful for other countries.” While the German “success story” has typically been used to justify the dominant austerity approach in the European Union (EU), they suggest that the stabilization of the Eurozone depends on re-orienting Germany’s socio-economic model towards strengthening its domestic market through massive public investment in infrastructure and social services. This process will give more leeway for progressive actors in other countries, such as Italy, to push for alternative approaches seeking to reform the latter’s productive basis and welfare programmes and take them in a more sustainable direction. Part II examines several aspects of the integration and disintegration process from the perspective of the creation of the EMU. Giorgio Fodor, in Chapter 4, looks back at the political circumstances behind the creation of the EMU, providing a detailed and “behind the scenes” account. In 1989 when, after a long and difficult period of negotiations, a date for the launching of the monetary union was eventually agreed upon, the decision was made to establish two intergovernmental committees: one on monetary integration and the other on political integration. The second objective, however, was left in the background, only to disappear subsequently, when it was considered to be totally unrealistic or even unnecessary, given the discipline of austerity forced on the EMU member states. Fodor shows how different national priorities made it impossible to have both monetary and political integration and how some key countries (Germany, France, and the UK) decided that monetary integration was the priority. To achieve it, however, various other objectives, namely political integration, the social dimension of Europe and a common industrial policy, had to be sacrificed. Because of this decision, the Maastricht Treaty of 7 February 1992 created a European Union in name only. In Chapter 5, Michael Landesmann focuses on a major unsolved problem of European integration: the issue of external imbalances. He considers imbalances both between Eurozone (EZ) members and between these and other EU members, and he also takes a look at countries outside the EU but

4

Introduction

closely interconnected with it economically. Landesmann argues that in a regime of liberalized capital movements, unsustainable current account imbalances are going to be persistent features reflecting processes that lead to real exchange rate misalignments. However, real exchange rate misalignments are one side of the coin, and the development of export capacities of sufficient size and quality are the other. Divergences in the development of export capacities of tradeable sectors are bound to occur in any group of interdependent economies. Landesmann discusses the specific factors that might accentuate these problems in the EU/EZ economy and countries closely connected with it and thus confront European integration with an existential problem that can only be counteracted with serious policy-making and institutional structure reform. Giuseppe Celi and Dario Guarascio, in Chapter 6, focus on the peculiarity of the Italian situation by looking at the evolution of Italy’s external constraint from the post-Second World War period, the period of the “Italian economic miracle,” to the creation of the EMU. Rather than concentrating exclusively on static and strictly macroeconomic elements, their contribution analyses Italy’s external constraint vis-à-vis the changing structure of world production and trade relations, also taking into account the role of national institutions and technology. In this light, structural heterogeneities and asymmetric power relations are shown to be the key drivers of the international performance and positioning of nations, industries and firms, producing differences in the nature, extent and effectiveness of national economic policies. Celi and Guarascio argue in favour of a generalized commitment to putting an end to labour devaluations across EU countries and to upgrading the latter’s productive structures. This highlights the need for a proactive industrial policy to be pursued at the national level and coordinated at the EU level, especially on the part of the peripheral countries (including Italy). Part III concentrates on the social effects of neoliberal macroeconomics. In Chapter 7, Maurizio Franzini sheds light on inequality both in individual states and within the EU as a whole, arguing that the latter is also influenced by differences in mean incomes between countries. Observing the trend of inequality in market incomes and in disposable incomes in a large number of European countries over the last few decades, he argues that markets almost everywhere tend to generate growing inequality, and that there is not much hope that disposable income inequality can be reduced through redistributive policies alone. What is needed are national and supranational “pre-distributive policies” in the form of interventions designed to modify the unequal distribution of endowments, both of human capital and of wealth, as well as the functioning of all the markets (product, labour, and financial markets), and to enhance those redistributive policies that can have the greatest predistributive effects. In Chapter 8, Mark Smith and Paola Villa take a look at labour market reforms in Europe and young people’s labour market integration. Their focus is on employment policy-making in Europe (in 2000–2013), and their aim is to

Introduction

5

shed some light on labour market reforms in EU countries. In particular, they consider some key indicators such as the intensity of labour market policy activity and the main areas of intervention and the main directions of change in labour market reforms, as well as the changing share of policies specifically targeting young people. They argue that employment policy-making has become a “dependent variable” shaped by the institutional and economic context in which labour market reforms are enacted. And yet, labour market reforms should take on a structural role, adjusting the rules governing the labour market to emerging needs. Indeed, European labour market institutions should make the functioning of the labour market more equal for all (i.e., it should favour the integration of young people, women and other disadvantaged groups) and more efficient (i.e., it should favour the matching of workers with jobs made available by firms). In contrast, job creation should be one of the goals of macroeconomic policy and industrial policy. In Chapter 9, Maria Karamessini and Jill Rubery complement the analysis presented in the previous chapter by discussing the medium-term impact of austerity policies on gender equality and women’s employment in the UK and Greece. They argue that both countries have gone through a sustained period of austerity policies. These policies, however, were driven by very different forces – in Greece primarily by external forces and in the UK primarily by internal forces – and were implemented by governments of very different political persuasions. They trace out the evolution of austerity policies relevant to gender equality in the two countries. The main questions are whether short-term reductions in gender gaps have been sustained or widened again, whether labour market reforms and the flexibility associated therewith are leading to a greater convergence of men’s and women’s employment conditions, and whether reductions in public sector employment and pay are hampering women’s access to steady, protected and more equal jobs. This exploration of demand-side factors is complemented by an exploration of changes at the household and welfare-state levels. On a related gender topic, in the final chapter of Part III, Chapter 10, Francesca Bettio, Roberta Carlini and Marcella Corsi recount the story of inGenere.it, the first Italian web-magazine to focus on economic, political and social policy issues from a gender perspective. It was created in 2009 by a group of feminist economists and has since represented an authoritative voice in Italian media. In this chapter, they review its foundation, goals and achievements against a backdrop of media communication lacking gender perspective, and go on to consider the specific contribution of this web-magazine to Italian political debate. The main theme broached in this chapter is the publication’s treatment of the gendered impact of the economic crisis along with an analysis of women’s and men’s participation in paid work, their contribution to the care economy, and an innovative menu of policy interventions. The interaction in the publication between feminist economists specialized in different fields (including macroeconomics, Keynesian and labour economics, and gender budgeting) has contributed to the rethinking of macro-policies from

6

Introduction

a gender perspective. One telling example is the package of policies launched by inGenere.it that goes under the label of the “pink new deal.” These policies are based on the potential effects of massive social investment in elderly care – combining high-quality homecare services with technological upgrades – on aggregate demand, productivity and employment growth. Furthering the social and economic integration of women, the web-magazine thus seeks to enhance economic prosperity for all. Part IV is dedicated to one of the major challenges facing Europe, namely, technological innovations. Giovanni Bonifati opens the discussion in Chapter 11 by tracing the theoretical roots of the issue in the work of Karl Marx who, following David Ricardo’s path, argued that the possibility of a (partial) recovery of employment, after the introduction of machines, depends on how net income (i.e., profit) is spent. Moreover, Ricardo argued that, even if new capital is invested in machinery, with the consequence that the accumulation of capital would give rise to an increase in demand for labour, the latter would, however, be in a necessarily decreasing ratio with respect to the newly invested capital. Marx introduced three new elements: the capitalist use of machinery, the direct and indirect effects of the introduction of machinery on employment coefficients, and the cascade effects of the introduction of machinery into the backward and forward sectors. Bonifati analyses the contributions made by Ricardo and Marx as a fruitful prelude to making a critical assessment of the current debate on the issues raised by the specific character of the current digital revolution. The digital revolution and its impact on industrial organization is the topic discussed in Chapters 12 and 13. In Chapter 12, Dario Fontana, Sergio Paba and Giovanni Solinas focus on what many call the “Fourth Industrial Revolution,” and they look in particular at its effect on the quality of work and working conditions within automated factories. While there is some consensus on when and where it started, there is still much debate about how long it will take to deliver all the promised benefits to the economy and to society at large. Digital technology is producing profound transformations in production processes as well as in the nature of labour, the demand for skills, the distribution of job opportunities across sectors/territories, the structure of labour relations, and the levels of wages. These changes have created and continue to create great opportunities for some, but they have also created and continue to create greater inequality and uncertainty for many others. A key question addressed in this chapter concerns what could and should be done to allow everyone to benefit from the fruits of automation, which is still far from improving general labour conditions, and from the well-being promised by the advent of smart machines and artificial intelligence. Margherita Russo, in Chapter 13, addresses the dynamics of the ongoing digital transformation and its unequal diffusion within different supply chains, with a particular focus on the automotive industry in China, Germany, Italy and Japan. This industry is currently playing a leading role in the adoption of digital technologies; moreover, it has crucial importance in the economy for

Introduction

7

its extended network of cross-sector interrelations. Although the automotive supply chain has a higher digitalization level than do other manufacturing industries, there is no alignment of digital transformation along the many specializations within the automotive supply chain and across countries. This chapter highlights the implications of interrelationships in the global value chain in which those countries are located and discusses implications for innovation policy with regard to systemic changes in related systems of transport infrastructures and renewable energy production. Their path of development, it is argued, will be strongly affected by the pace of changes in the production and diffusion of electric vehicles. Chapter 14 addresses one of the issues which crops up repeatedly throughout the book. Why are there so many globally competitive, technologically advanced, mid-sized firms in the economies of Germany, Austria, Denmark, Finland, the Netherlands and Sweden and so few in the peripheral economies? Michael H. Best’s contention is that companies in these countries benefit from operating within productive structures that facilitate product-led competition and continuous innovation. This chapter approaches the concept of “productive structure” from a political economy perspective in which business organization and industrial policy are explanatory variables rather than outcomes. Where conventional economic theory presumes price-led competition, industrial policy within Germany and the Nordic economies is especially about product-led competition. This deeply influences the objectives, implementation and effects of industrial policy. Industrial policy is thus conceived of not merely as correcting market failures, but indeed as a strategic organizer in itself. Its role is precisely to shape productive structure in ways that contribute to business development, industrial innovation, sectoral transitions and socially rational product systems. The final chapter highlights the crucial role played by industrial policy in enhancing the overall economic conditions of Italy. It is a case study of the structural weaknesses of peripheral countries. Salvatore Biasco critically discusses the main issues that could and should be addressed through industrial policies in Italy: research policy, education and training, technological transfer, logistics, and network service. In particular, he stresses that industrial policy is not merely the sum of different measures aimed at either fostering specific sectors or enhancing the public production of strategic goods. Rather, industrial policy should be conceived of as a comprehensive strategy to govern the political and institutional context and to steer it in a direction that is conducive to economic growth in order to build a structure of cooperation amongst the different private and public agents that make up the economy. At the beginning of this Introduction, we mentioned four common traits that can be found in all the chapters in this volume; we will now go on to highlight the variety of approaches favoured by the authors in pursuing their chosen topics. This variety reflects not only their individual expertise and the complexity of themes, which need to be addressed from various angles, but also the choice we have made as editors to broaden rather than restrict the

8

Introduction

scope of discussion. Thus, macroeconomic analysis is complemented by industrial and labour market policy consideration, political history is injected into the narrative of case studies of individual countries, the history of economic analysis is not neglected, and technological and gender issues are given equal weight as important challenges facing Europe today. Last, but not least, we have taken Europe to mean more than just the EU; as an embracing concept, it is not limited by the present political boundaries. As pointed out above, as a whole this volume presents a rich set of policy recommendations ranging from the macroeconomic to the distributive and industrial fields. First and foremost, all the chapters indicate the urgent need to radically rethink the design and working of the EU and the EMU as institutions. Reflecting both on the tortuous process that has led to the current arrangements of European institutions and on the unwanted effects of the complex design of European fiscal rules once they were confronted with the violent crisis of recent years (especially as regards the weakest economies of the European periphery), the contributors to this book favour profound change in the rules and priorities of the European agenda. The trend towards disintegration may be halted, and effective integration achieved, only if the European institutions commit to fostering policies addressing the weaknesses in the productive structure of certain countries and regions. Structural policies are thus seen by the contributors to this book as crucial and also as capable of creating the economic environment in which the coordination of macroeconomic policies may work. But, unlike the general consensus and the prevailing orientation of the EU and the EMU institutions, the structural policies are not to be understood as fostering the flexibilization of labour markets, wage restraint, and labour devaluation. These policies, far from being the solution, have rather been part of the problem, both in the peripheral and in the core economies, as demonstrated by various analyses in this book. What is needed is instead a set of policies designed to raise the level of technology and skills in all European economies, create a new system of incentives therein, and upgrade and diversify their productive structures, with special regard for the weakest amongst them. What is needed, in other words, is industrial policy to be implemented within a framework inspired by a shared social model. As some chapters of this book stress with particular emphasis, however, industrial policy is more a strategic vision than it is a set of policies. The European institutions should and could play an essential part in this vision, but not as a substitute for but as a source of support for the actions of national governments. The need is for a change of perspective and a change in mentality. The main message of this book is that technological excellence and growth are not attained by fostering competition between member states and regions or between the different parts of society, but rather by fostering cooperation between them. The drive towards bettering and upgrading Europe’s industrial and technological structure goes together with the urgent necessity to reverse the trend

Introduction

9

towards increasing inequality and increasing differentiation of incomes and opportunities. Integration and inclusiveness (especially as regards those segments of the population historically affected by inferior employment and pay conditions and lack of services, such as women, or particularly hard hit by the current configuration of the labour market, such as young people) are not only socially desirable but also constitute the necessary condition for the full development of the production potential of the European economy and for achieving sustained growth. Both streams of policies, those aiming at strengthening Europe’s productive structure and those focused on redistribution and inclusion, require substantial investment efforts and are profoundly incompatible with the contractionary bias of the current European fiscal policy framework. This is a cultural as well as a policy issue. It is high time that European economic discourse ditched the idea that sustained growth of domestic demand is synonymous with profligacy and loss of competitiveness. Demand expansion should instead be regarded as a necessary (although by no means sufficient) condition for growth and for the construction of a more efficient and just model of development. To conclude with Anna Simonazzi’s words, we need: a different model in which unions, firms and the state can interact to devise a long-term industrial policy capable of fostering those organisational changes and those patterns of innovation that better respond to a shared social model. This calls for a complete reboot of the European and national approach towards macroeconomic, labour and social policies (Simonazzi 2017, p. 284).

Acknowledgement We are very grateful to Iolanda Sanfilippo for her excellent editorial assistance in preparing this volume.

Reference Simonazzi, A. (2017). Labour policies in a deflationary environment. In: D. Grimshaw, C. Fagan, G. Hebson and I. Tavora (eds), Making Work More Equal: A New Labour Market Segmentation Approach, Manchester: Manchester University Press, 268–287.

Part I

Europe in crisis The cases of Italy, Spain and Germany

1

The economic consequences of the Maastricht Treaty Why Italy’s permanent crisis is a warning to the Eurozone Servaas Storm

Italy’s permanent crisis – which started in 1992 In the aftermath of the global financial crisis of 2008, the Italian economy went through years of economic stagnation and decline, suffering three “official” recessions in a row. Italy’s third recession in a decade started in the last two quarters of 2018, following a slowdown in Gross Domestic Product (GDP) growth throughout the Eurozone. In response to the third recession, the Organisation for Economic Co-operation and Development (OECD) and the European Central Bank (ECB) lowered their growth forecasts for Italy for the next several years to come to negative numbers, and, in what analysts see as a precautionary move, the ECB is currently reviving its sovereign bond buying programme, which it had started to unwind as recently as December 2018. “Don’t underestimate the impact of the Italian recession,” is what the French Minister of the Economy and Finance Bruno Le Maire recently told Bloomberg News (Horobin, 2019). He goes on to say that “We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France, because it’s one of our most important trading partners.” More importantly than trade, however, and what Le Maire is not stating here, is that the French banks are holding around €385 billion of Italian debt, derivatives, credit commitments and guarantees on their balance sheets, while the German banks are holding €126 billion of Italian debt (as of the third quarter of 2018, according to the Bank for International Settlements (BIS, 2019)). In view of these exposures to Italian debt, it is no wonder that Le Maire, and the European Commission (EC) too, is worried by Italy’s third recession in a decade – as well as by the growing anti-euro rhetoric and posturing of Italy’s coalition government consisting of the Five-Star Movement (M5S) and the Lega. It is therefore vital to understand the true origins of Italy’s economic crisis – and for this, we have to go back in time to the 1980s and early 1990s, when the Italian state committed itself to fiscal consolidation and structural (labour market) reforms in order to be able to join the Economic and Monetary Union (EMU). In this chapter, I provide an evidence-based pathology of Italy’s long-term recession – which, I argue, must be regarded as

14

Servaas Storm

a crisis of the “post-Maastricht Treaty order of Italian capitalism,” as Fazi (2018) calls it. Up until the early 1990s, Italy enjoyed decades of relatively robust economic growth, during which it managed to catch up in per capita income with the other Eurozone nations. But then a very steady decline began, erasing decades of (income) convergence. The per capita income gap between Italy and France is now (in 2018) 18 percentage points, which is more than what it was in 1960; Italian GDP per capita is 76% of per capita GDP in the Euro-4 (Belgium, France, Germany and the Netherlands) economies (see Storm, 2019). Beginning in the early to mid-1990s, the Italian economy began to stumble and then fall behind, as all main indicators – per capita income, labour productivity, investment, export market share, etc. – began a very steady decline. Italy’s deep crisis is perhaps illustrated best by the 15% decline in annual net income (at constant 2010 prices) of the median household – from €27,499 in 1991 to €23,277 in 2016; mean net household income fell by 10% between 1991 and 2016 (Brandolini et al., 2018). Italy is the only major Eurozone country which, in the past 27 years, has suffered not stagnation but decline. All income classes – poor and rich alike – suffered, but the poor suffered more than the rich and hence income inequality, measured by the Gini coefficient, which came down during the 1980s, increased in the 1990s. According to the Bank of Italy Survey on Household Income and Wealth (Table S49), the Gini coefficient rose from 0.288 in 1991 to 0.330 in 2000 and 0.335 in 2016 (Banca d’Italia, 2019). It is not a coincidence that the sudden reversal of Italy’s economic fortunes occurred after Italy’s adoption of the legal and policy superstructure imposed on it by the Maastricht Treaty of 1992, which cleared the road for the establishment of the EMU in 1999 and the introduction of the common currency known as the “euro” in 2002. Italy, as I show below, has been the star pupil in the Eurozone class, the one economy which committed itself most strongly and consistently to the fiscal austerity and structural reforms which form the essence of the EMU macroeconomic rulebook (Costantini, 2017, 2018). Italy kept closer to the rules than both France and Germany and paid heavily for it: permanent fiscal consolidation, persistent wage restraint and an overvalued exchange rate killed Italian aggregate demand – and the ensuing demand shortage asphyxiated the growth of output, productivity, jobs and incomes (Cesaratto and Stirati, 2010; Cesaratto and Zezza, 2018; Storm, 2019). Italy’s stasis is an object lesson for all Eurozone economies, but – paraphrasing G.B. Shaw – as a warning, not as an example. As I argue below, the chronic shortage of demand was created by (a) a policy of perpetual fiscal austerity; (b) permanent real wage restraint; and (c) a lack of technological competitiveness which, in combination with an unfavourable (euro) exchange rate, reduced the ability of Italian firms to maintain their export market share in the face of increasing competition from low-wage countries (China in particular). These three factors are currently depressing demand, reducing capacity utilization and lowering firm profitability; hurting investment, innovation, and productivity growth; and hence locking the country into a state of

Economic consequences of the Maastricht Treaty

15

permanent decline characterized by the impoverishment of the productive matrix of the Italian economy and the quality composition of its trade flows (Simonazzi et al., 2013; Celi et al., 2018). I will now review the three causes of the aggregate demand shortfall in greater detail.

Perpetual fiscal austerity To allay fears that it could not and would not meet the policy conditions for membership in the EMU, specified in the Treaty of Maastricht, the Italian government did more than most other Eurozone member governments in terms of self-imposed austerity and structural reform in order to satisfy the conditions of the EMU (Halevi, 2019). This is clear when comparing Italy’s fiscal policy post-1992 to those of France and Germany. Various Italian governments showed remarkable commitment to fiscal consolidation and ran continuous primary budget surpluses (defined as public expenditure excluding interest payments on public debt, minus public revenue). The primary budget surpluses of the Italian state averaged 3% of GDP per year during 1995–2008 (Storm, 2019; see also Table 1.1). French governments, in contrast, ran primary deficits of 0.1% of GDP each year on average during the same period, while German governments managed to generate a primary surplus of 0.7% on average per year during those same 14 years. Italy’s permanent primary surpluses during 1995–2008 would have reduced its public-debt-to-GDP ratio by around 40 percentage points (Storm, 2019) – from 117% in 1994 to 77% in 2008 (while keeping all other factors constant). But slow (nominal) growth relative to high (nominal) interest rates pushed up the debt ratio by 23 percentage points and washed away more than half of the public-debt-to-GDP reductions of 40 percentage points achieved by austerity. Could it be true that Italy’s permanent austerity, which was intended to lower the debt ratio by running permanent primary surpluses, backfired because it slowed down economic growth? Even during the crisis years of 2008–2018, Italy’s governments (including the left-of-centre Renzi coalition) continued to run significant primary budget surpluses of more than 1.3% of GDP on average per year (Table 1.1). Showing permanent fiscal discipline was top priority, as Prime Minister Mario Monti (2012) admitted in an interview with CNN, even if this meant “destroying domestic demand” and pushing the economy into decline. Italy’s almost “Swabian” commitment to fiscal discipline stands in some contrast to the French (“laissez aller”) attitude: the French government ran primary deficits at an average of 2% of GDP during 2008–2018 and allowed its publicdebt-to-GDP ratio to rise up to almost 100% in 2018. The cumulative fiscal stimulus thus provided by the French state amounted to €461 billion (in constant 2010 prices), whereas the cumulative fiscal drain on Italian domestic demand was €227 billion (Storm, 2019). The Italian budget cuts show up in non-trivial declines in the state’s public per capita social spending, which is now (in 2018) around 70% of public social spending per capita in Germany

Real GDP (average annual growth rate %) Real GDP per capita (average annual growth rate %) Real consumption per capita (average annual growth rate %) Inflation rate (% increase in GDP deflator) Public debt (% of GDP) Real interest rate (implicit) paid on public debt (%)

1.91 1.59 1.54 1.30 59 4.58

3.61 2.70 2.84 4.67 40

0.10 1.72 60.76 39.24

Real wage growth per employee Labour productivity growth per employee Aggregate labour income share (% of GDP at factor cost) Aggregate profit share (% of GDP at factor cost)

Euro-4: Belgium – France – Germany – The Netherlands

22.4

Public interest payments as % of tax revenue 3.23 3.49 66.63 33.37

40.9

Tax revenue (% of GDP)

1.49 1.467 1.40 3.37 112 4.64 5.18

3.79 3.35 3.76 9.61 55

Real GDP (average annual growth rate %) Real GDP per capita (average annual growth rate %) Real consumption per capita (average annual growth rate %) Inflation rate (% increase in GDP deflator) Public debt (% of GDP) Real interest rate (implicit) paid on public debt (%)

1992–1999

Primary surplus of government (% of GDP)

1960–1992

Italy

1.53 64 3.14

1.80 1.50 1.01

0.57 ‒0.10 59.33 40.67

13.0

40.1

2.24

1.20 0.74 0.39 2.52 103 2.55

1999–2008

Table 1.1 Growth and distribution: the Italian economy versus those of the Euro-4 countries, 1960–2018.

1.19 79 1.45

1.34 62 2.65

1.56 1.24 1.01

0.21 0.31 60.37 39.63

‒0.02 ‒0.31 60.94 39.06

1.09 0.71 0.63

13.7

41.2 10.4

42.3

2.17

0.69 0.44 0.39 2.20 107 2.79

‒0.31 ‒0.53 ‒0.32 1.11 123 2.50 1.31

Euro-period 1992–2018

2008–2018

0.83 1.25 65.49 34.51

Real wage growth per employee Labour productivity growth per employee Aggregate labour income share (% of GDP at factor cost) Aggregate profit share (% of GDP at factor cost)

Source: Author’s estimations based on AMECO data. See Storm (2019).

8.8

Public interest payments as % of tax revenue 2.88 2.67 69.48 30.52

0.23 42.1

1992–1999

Tax revenue (% of GDP)

1960–1992

Primary surplus of government (% of GDP)

Italy

0.55 1.04 63.67 36.33

7.2

41.1

0.90

1999–2008

0.82 0.42 64.26 35.74

5.0

42.0

0.03

2008–2018

0.73 0.86 64.46 35.54

6.5

41.7

0.28

Euro-period 1992–2018

18

Servaas Storm

and France. One can only imagine what the Gilets Jaunes protests in France would have looked like had France put through an Italian-style fiscal consolidation post-2008. Italy’s fiscal consolidation saw the growth of Italy’s real per capita public consumption expenditure, which had averaged 3% per year during 1960– 1992, slashed to zero during the period 1992–2018. Real public spending growth had contributed 0.65 percentage points to Italy’s average annual real per capita GDP growth rate of 3.35% during 1960–1992, but contributed absolutely nothing to Italy’s real GDP growth after 1992. Next, we can look at gross public investment by the Italian state, which was growing at 2.5% per year during 1960–1992 and which contributed 0.15 percentage points to Italy’s growth during those years. However, during the period 1992–2018, Italy’s public investment declined by 0.5% on average each year in real terms – which is now showing up, on the supply side, in a decaying stock of public infrastructure (e.g. bridges, roads, railroads and tunnels). On the demand side, it lowered Italy’s average annual real GDP growth rate by 0.05 percentage points post-1992. Taken together, a conservative estimate of the growth impact of Italy’s fiscal consolidation is that the cuts in the growth of public consumption and investment depressed Italy’s per capita real GDP growth during 1992–2018 by 0.85 percentage points (Storm, 2019).

Permanent real wage restraint When Italy signed the Maastricht Treaty, its high rates of inflation and unemployment were regarded as major problems. Inflation was blamed on the “excessive” power of labour unions and an “excessively” centralized wage-bargaining system, which resulted in strong wage-push inflation and a profit squeeze – as wage growth tended to exceed labour productivity growth, which lowered the profit share. Seen this way, the blame for Italy’s high unemployment rate could be shifted to its “rigid” labour markets and too strongly protected “worker aristocracy.” Bringing down inflation and restoring profitability required wage moderation, which in turn was only able to be realized by a combination of wage moderation and labour market flexibility achieved by decentralized bargaining (instituted in 1993 in the so-called “July Agreement”).1 For a start, Italy does not have – at present – a statutory minimum wage (unlike Belgium, France, the Netherlands and Germany), and it did not have – until very recently – an adequate unemployment benefit system (Stovicek and Turrini, 2012). (This system was hitherto characterized by very large inequalities with regard to terms of coverage, replacement rates, duration, and entitlement conditions, especially when compared to the EU average.) Employment protection for regular (full-time) employees in Italy is roughly at the same level as it is in France and Germany (Storm, 2019). Italy’s labour market reforms (especially those enacted in 1997, 2003 and 2014)2 involved a drastic reduction in the number and quality of employment protections for temporary workers (Tridico, 2015), and, as a result, the share

Economic consequences of the Maastricht Treaty

19

of temporary workers in the total Italian workforce increased from 10% during 1991–1993 to 18.5% in 2017. Between 1992 and 2008, total net employment in Italy increased by 2.4 million new jobs, of which almost threequarters (73%) were fixed-term jobs. In France, in comparison, net employment grew by 3.6 million jobs during 1992–2008, of which 84% were regular (permanent) jobs and only 16% were temporary jobs (Storm, 2019). In addition, real wage restraint was achieved by weakening the bargaining power of unions. This was realized by a structural reorientation of fiscal policy away from “full employment” and in favour of public debt reduction (Costantini, 2017), and it was done with the acceptance of a structurally high rate of unemployment. More restrictive (anti-inflation) central bank policy and a policy determination to keep the exchange rate fixed further tightened the screws on workers and unions (Simonazzi and Vianello, 1998; Cesaratto and Zezza, 2018; Halevi, 2019). As a result, real wage growth per employee, which averaged 3.2% per year during 1960–1992, was lowered to a mere 0.1% per year during the period 1992–1999 and to 0.6% per annum during 1999–2008 (see Table 1.1). Within the European Union (EU), Italy’s turnaround was remarkable: during 1992–2008, the growth of Italian real wages per worker (averaging 0.35% per year) was only half the real wage growth in the Euro-4 countries (0.7% per annum) and it was even lower compared to real wage growth in France (0.9% per year). Interestingly, during 1992–2008 Italy’s real wage growth per employee was slightly lower than Germany’s (already stingy) real wage growth (0.4% per year). While the average wage of Italian workers increased from about 85% of that of French workers in 1960 to 92% in 1990– 1991, it started a relative decline after 1992, and now (in 2018) the average Italian employee earns only 75% of the wage earned by their French counterpart (Storm, 2019). The wage gap between Italy and France is bigger today than it was in the 1960s. The same pattern holds when one compares Italian wages to German and/or Euro-4 wages. Italy’s wage moderation proved an effective means of killing not two but three birds with one stone. First, wage restraint helped to bring down inflation – to 3.4% on average per year during 1992–1999 (from 9.6% on average per annum during 1960–1992) and further down to 2.5% per year during 1999–2008 and 1.1% during 2008–2018 (as is shown in Table 1.1). Italy is no longer prone, in a structural sense, to high and accelerating inflation. Second, wage restraint increased the labour intensity of Italy’s GDP growth – and thus reduced unemployment. Italy’s rate of unemployment peaked in the mid1990s at more than 11%, but labour market deregulation and wage restraint successfully brought down unemployment to 6.1% in 2007 and 6.7% in 2008 – which were lower than the unemployment rates of France (which were 8% in 2007 and 7.4% in 2008) and Germany (which were 8.5% in 2007 and 7.4% in 2008). Finally, as intended, wage moderation led to a substantial increase in the profit share of Italy’s GDP – the profit share rose by more than 5.5 percentage points, from 36% in 1991 to about 41.5% during 2000–2002, after which it stabilized around 40% up to 2008 (see Table 1.1). During the 1990s,

20

Servaas Storm

the recovery of the profit share was considerably stronger in Italy than it was in France and was comparable to what happened in Germany, notwithstanding the fact that Italy’s profit share was already relatively high to begin with. In Italy, the new climate in industrial relations in the 1990s (see Brandolini et al., 2007) paid off handsomely in terms of a higher profit share. In other words, Italy’s profit share remained substantially higher than that of France and Germany. With lowered inflation, effective wage restraint, declining unemployment, declining public indebtedness and increased profit share, Italy appeared all set for a long period of strong growth. It did not happen. The operation was carried out successfully, but the patient died. According to the coroner’s post-mortem, the cause of death was a structural lack of aggregate demand.

The suffocation of Italian aggregate demand after 1992 By keeping close to the EMU rulebook, Italian economic policy created a chronic shortage of (domestic) demand. Domestic demand growth per Italian averaged 0.25% per year during 1992–2018, a sharp decline compared to the domestic demand growth (of 3.3% per year) recorded during 1960–1992 and compared to domestic demand growth (1.1% per capita per year) in the Euro4 countries. Table 1.2 presents a decomposition of per capita aggregate demand growth in Italy and in the Euro-4 economies during 1960–2018. It can be seen that real GDP growth per Italian declined from 3.35% on average per year during the period 1960–1992 to 0.44% per year during 1992–2018 – which is a decline of 2.91 percentage points. I have already noted above that about one-quarter of this growth decline (i.e., 0.85 percentage points) must be attributed to Italy’s post-1992 fiscal consolidation (which meant drastic cuts in public expenditure growth). Another 35% of the growth decline (or 1 percentage point) can be ascribed to the decline in real wage growth (from 3.2% per year during 1960–1992 to 0.2% per year during 1992–2018) and the consequent decline in consumption growth (see Storm, 2019). Accordingly, about 60% of the deterioration in Italy’s growth performance can be directly attributed to Italy’s self-imposed commitment to the EMU norms. The decline in private and public consumption growth must in addition have negatively affected investment, if only because it reduced capacity utilization and hence hurt the profit rate, as I will argue below. (And perhaps surprisingly, the rate of profit has decreased despite the increase in the profit share.) Table 1.2 also shows that Italy experienced a drastic decline in its real export growth (per capita); it went from 6.6% on average per year during 1960–1992 to 3% on average per year during 1992–2018. Average annual export growth (per capita) was 4.4% in the Euro-4 countries during 1992– 2018. Italy recorded by far the smallest expansion of exports among the main euro-area countries, which is a sign of the growing inability of Italian firms to compete in international markets (Bugamelli et al., 2018) – and of the reshuffling of European production networks in a direction that is

0.83 ‒0.08 0.31 1.13 0.73 1.08 56.9

2.16 0.65 0.56 0.78 0.79 3.34 54.7

1.59 0.85 0.27 0.34 1.51 1.38 1.48 166.5

2.70 1.55 0.62 0.54 0.87 0.88 2.75 138.6

Source: Author’s calculations based on AMECO data.

GDP growth (%) per capita (p.c.), due to: – private consumption growth – public consumption growth – gross capital formation growth – export growth – minus import growth Domestic demand growth (p.c.) Population (millions)

1992–1999

1.47

1992–1999

3.35

1960–1992

Euro-4: Belgium – France – Germany – 1960–1992 The Netherlands

GDP growth (%) per capita (p.c.), due to: – private consumption growth – public consumption growth – gross capital formation growth – export growth – minus import growth Domestic demand growth (p.c.) Population (millions)

Italy

0.55 0.27 0.30 1.96 1.58 1.16 170.4

1.50

1999–2008

0.23 0.18 0.36 0.70 0.73 0.76 57.8

0.74

1999–2008

0.34 0.24 0.09 1.19 1.14 0.69 175.1

0.71

0.55 0.26 0.23 1.64 1.44 1.06 172.9

1.24

1992–2018

0.23 0.00 0.02 0.74 0.55 0.25 59.1

‒0.19 ‒0.12 ‒0.42 0.38 0.18 ‒0.77 60.3 2008–2018

0.44

1992–2018

‒0.53

2008–2018

Table 1.2 A decomposition of the real GDP growth of Italy and the Euro-4, 1960–2018.

29.8 36.5 31.6 208.9 189.9 31.6

37.8

Cumulative % increase 1992–2018

10.6 ‒0.4 3.2 115.8 80.9 6.8

12.1

Cumulative % increase 1992–2018

22

Servaas Storm

unfavourable to Italy (Cesaratto and Stirati, 2010). The growing backward (and forward) production linkages between German manufacturing and that of Eastern European countries has weakened existing networks between German and (northern) Italian firms, as has been documented by Celi et al. (2018). Italy’s (exporting) manufacturing sector is not “technology-intensive” and suffers from a crisis of stagnating productivity, which started in the early 1990s. As Figures 1.1 and 1.2 illustrate, the cost competitiveness of Italian manufacturers vis-à-vis those in the Euro-4 countries depends on low wages and not on superior productivity performance. Whereas industrial workers in France and Germany were earning €35 per hour (in constant 2010 prices) in 2015, and their colleagues in Belgium and the Netherlands earned even more, Italian workers in manufacturing were bringing home only €23 per hour – or one-third less (see Figure 1.1). But at the same time, industrial labour productivity per hour of work is considerably higher in France and Germany (at €53 per hour in constant 2010 prices) than in Italy, where it is around €33 per hour (Figure 1.2). Italian manufacturers are thus taking the “low road,” while firms in the Euro-4 countries are taking the “high road” (Storm and Naastepad, 2012). Or, in other words, compared with German and French manufacturers, Italian firms suffer from a lack of “technological” strength, which in Germany is based on high productivity, innovative efforts and high product quality. True, Italian firms do stand out for their high relative quality in more “traditional” lower-tech export products such as footwear, textiles and nonmetallic mineral products, but they have been steadily losing ground in export markets for more dynamic products characterized by higher levels of research 35 30 25 20 15

Belgium-France-Germany-Netherlands

2014

2012

2010

2006

2008

2004

2000

2002

1998

1996

1994

1990

1992

1988

1984

1986

1982

1980

1978

1974

1976

1972

5

1970

10

Italy

Figure 1.1 Real wage per hour of work in manufacturing: Italy versus the Euro-4 countries, 1970–2015 (euros, constant 2010 prices). Source: Author’s calculation based on EU-KLEMS (Jäger, 2017).

Economic consequences of the Maastricht Treaty

23

55 50 45 40 35 30 25 20

2014

2012

2008

2010

2006

2002

2004

1998

Belgium-France-Germany-Netherlands

2000

1996

1994

1990

1992

1988

1986

1984

1982

1980

1978

1976

1972

1974

10

1970

15

Italy

Figure 1.2 Manufacturing labour productivity per hour of work: Italy versus the Euro4 countries, 1970–2015 (euros, constant 2010 prices). Source: Author’s calculation based on EU-KLEMS (Jäger, 2017).

and development, such as chemicals and pharmaceuticals and communication equipment (Bugamelli et al., 2018). For two reasons, this specialization in low- and low-medium technology activities has locked the country into a quasi-permanent position of structural weakness. The first is that the exchange-rate elasticity of export demand is larger for “traditional” exports than for medium- and high-tech exports (Bugamelli et al., 2018; Storm and Naastepad, 2015a, 2015b). As a result, the appreciation of the euro did hurt Italian exporters of “traditional products” harder than it hurt German and French firms exporting more “dynamic” goods and services. Thus, the overvalued euro penalizes Italian export growth more than it damages export growth in the Euro-4 economies. The second factor is that Italian firms are operating in global markets which are more heavily exposed to the growing competition of low-wage countries and China in particular. In 1999, 67% of Italy’s exports consisted of (“traditional”) products exposed to medium to high competition from Chinese firms compared to a similar exposure to Chinese competition of 45% of exports in France and 50% of exports in Germany (Bugamelli et al., 2018). The share of Italy’s exports in world imports declined from 4.5% in 1999 to 2.9% in 2016 – and the market share loss was heavily concentrated in more “traditional” market segments, which were characterized by high exposure to Chinese competition (Bugamelli et al., 2018). As Chinese and other developing economy firms continue to expand their production capabilities and to upscale, competitive pressures will mount in medium- and medium-high tech segments as well. Italian firms have difficulties facing the competition from low-wage countries,

24

Servaas Storm

because they are generally too small to wield any pricing power, too often single-product producers unable to diversify market risks, and too dependent on foreign markets because their “home market” is in the doldrums.

Cumulative causation at work: Italy’s structural demand deficiency feeds into a productivity crisis and a squeezing of the profit rate Italy’s chronic demand deficiency is not just slowing down economic growth, but also hurting vital processes of economic diversification and innovation and depressing labour productivity growth. This is happening because lower investment reduces the pace of technical progress embodied in newly installed capital goods and also because it limits what Adam Smith called “the division of labour” by limiting the “extent of the market” (or demand). Through this relationship between productivity growth and (investment) demand growth, known as the Kaldor–Verdoorn relation (Storm and Naastepad, 2012, 2015a), the decline in Italian demand growth spilled over into considerably lower productivity growth. In fact, Italy’s productivity performance after 1992 has been abysmal (see Table 1.1). It is hard to imagine, but hourly labour productivity in Italy has not grown since the early 1990s (see Storm, 2019). While the productivity of the average Italian worker in 1992 was 62% higher than in 1970, aggregate labour productivity increased by a pitiful 2.5% during 1992–2015. Table 1.3 presents a shift-share decomposition analysis which decomposes the decline in Italy’s aggregate rate of productivity growth from 2.03% on average per year during 1970–1992 to 0.26% per annum during 1999–2015 into (a) an intra-industry productivity growth changes component; and (b) a “structural change” component that captures the productivity impacts of changes in the industry-wise employment structure – from (say) more dynamic industries with above-average productivity growth to industries with below-average productivity growth. About 45% of Italy’s aggregate productivity growth decline must be attributed to declining productivity growth within industries – and mostly within (low-tech and medium-tech) manufacturing, and manufacturing productivity growth declined from 3.25% per year during 1970–1992 to 1.20% per year during 1999– 2015 (Table 1.3). Other industries suffering from a productivity growth slowdown include the primary sector (agriculture and mining), wholesale and retail, and transportation. Productivity growth did increase in Italy’s information and communication industry, but this did not have much of an impact at the aggregate level, because the sector’s share in total hours worked was just 2.5%. The remaining 55% of Italy’s aggregate productivity growth decline is due to a shift in its employment structure toward “non-dynamic” industries, which feature below-average productivity growth. The biggest changes occurred in the primary sector, the employment share of which declined from 15.4% on average during 1970–1992 to 6.1% on average during 1999–2015, and manufacturing (Table 1.3). The share of manufacturing in total hours worked in Italy declined from 25.2% on average during the 1970s and 1980s

1.000 0.154 0.252 0.124 0.060 0.067

–4.037 –2.048 –2.320 –2.196 –1.852

0.076 0.167 0.050

–1.851 –2.543 –1.077 –1.745

1.459

–1.300

–1.030

0.402

0.447

3.403

3.028

3.220

0.060

0.550

1.423

1.479

2.191

Low-Tech

Medium-Low Tech

Medium-High Tech Information & Comm. EG&W

Construction

Wholesale & Retail Transport

0.832

1.083

0.010

0.013

1.399

1.368

3.250

Manufacturing

1.203

1.302

5.339

0.051

0.165

0.075

0.011

0.025

0.050

0.049

0.081

0.180

0.061

1.000

0.001

–0.002

0.000

0.001

0.012

–0.017

–0.011

–0.043

–0.072

–0.093

–

Change

–1.767

0.264

2.031

Total economy (100.0%) Primary Activities

1999–2015

1970–1992

Change

1970–1992

1999–2015

Share in employment (defined as total hours worked)

Average annual labour productivity growth (%)

–0.087

–0.172

–0.179

–0.021

0.034

–0.090

–0.105

–0.182

–0.358

–0.239

–0.785

Intra-industry productivity change

0.002

–0.003

0.000

0.001

0.001

–0.054

–0.033

–0.143

–0.226

–0.479

–0.982

Structural change

–0.718 (40.6%) –0.583 (33.0%) –0.325 (18.4%) –0.137 (7.8%) –0.144 (8.1%) 0.035 (–2.0%) –0.020 (1.1%) –0.179 (10.2%) –0.175 (9.9%) –0.084 (4.8%) (Continued)

–1.767

Total

Contribution to labour productivity change of:

Table 1.3 Shift-share decomposition of the change in aggregate labour productivity growth: Italy: 1970–1992 versus 1999–2015.

–1.050

–1.763

Private Services

0.714

0.077

0.831

0.092

0.133

0.033

0.143

0.151

0.102

0.036

i¼1

0.051

0.018

0.068

0.014

i¼1

0.101

0.004

0.082

0.067

Intra-industry productivity change

–0.090

0.016

–0.185

–0.015

Structural change

0.052 (–3.0%) –0.103 (5.8%) 0.020 (–1.1%) 0.011 (–0.6%)

Total

Contribution to labour productivity change of:

productivity growth in industry i between 1970–1992 and 1999–2015;
i ¼ the change in the employment share of industry i between 1970–1992 and 1999– 2015;
^0i ¼ average labour productivity growth in industry i during 1970–92; and 1i ¼ the employment share of industry i during 1999–2015.

Notes: Primary industries = agriculture and mining; FIRE = finance, insurance and real estate; PBS = professional and business services; Public Services include education and health; Private Services = art, entertainment, recreation and food services and other services. The shift-share analysis is based on the N N P P 1i

^i þ following decomposition of total-economy labour productivity growth:

^total economy ¼
^0i
i , where

^i ¼ the change in average labour

Source: Author’s estimates based on EU-KLEMS data (2017 release, see Jäger, 2017).

0.591

0.514

Public Services

–1.959

–2.790

0.022

PBS

1.931

0.868

–1.063

Change

FIRE

1999–2015

1970–1992

1999–2015

1970–1992

Change

Share in employment (defined as total hours worked)

Average annual labour productivity growth (%)

Table 1.3 (Cont.)

Economic consequences of the Maastricht Treaty

27

to 18% during 1999–2015. These structural changes lowered aggregate productivity growth, because the primary sector and manufacturing are industries featuring above-average productivity growth. It must be noted that Italy’s manufacturing sector has been shedding jobs and work hours ever since the 1970s; specifically, total hours worked in Italian manufacturing came down from around 10 billion hours in the 1970s to 6.6 billion hours in 2015. Hours worked increased in professional and business services, from 0.6 billion hours of work in the early 1970s to 5 billion hours of work in 2015, and in private services, where hours worked increased from 2.6 billion in the early 1970s to 6.8 billion in 2015. Both sectors feature below-average (even negative)3 labour productivity growth, and hence the structural employment change in their favour has lowered Italy’s productivity growth in the aggregate. The picture that emerges from Table 1.3 suggests that Italy is suffering from (premature) deindustrialization, a productivity growth problem in its manufacturing sector, and a dualization of its employment structure – with a rising share of hours worked going to the country’s stagnant (services) industries. Table 1.3 finally highlights the above-mentioned fact that Italy’s manufacturing sector is not “technology-intensive.” Hours worked in low-tech manufacturing make up around half of hours worked in all manufacturing, and the share of medium-high tech manufacturing in hours worked in all manufacturing is less than 30%. All manufacturing sub-sectors have experienced sharp declines in their productivity growth. Italy’s productivity crisis is illustrated in Figure 1.2 by the growing gap between Italian hourly labour productivity in manufacturing relative to that in the Euro-4 countries. Italy’s lower productivity growth almost completely washed away the advantage of Italy’s relatively low wages (as shown in Figure 1.1), and it lowered the profit share (keeping other factors constant) and the profit rate. However, the greatest damage done to the profitability of investment of Italian firms originated from the permanent deficiency of aggregate demand. Italy’s chronic demand shortage reduced capacity utilization (especially in manufacturing), and this, in turn, lowered the profit rate (see Storm, 2019 for the mechanics). According to my estimates, capacity utilization in Italian manufacturing declined by a staggering 30 percentage points relative to capacity utilization in French manufacturing between 1992 and 2015. The utilization rate of Italian manufacturing relative to German manufacturing declined from 110% in 1995 to 76% in 2008 and further down to 63% in 2015 – a stunning decline of 47 percentage points. As is shown in Table 1.4, which presents a decomposition of the profit rate in terms of the real wage, labour productivity and capacity utilization (see Storm, 2019), lower capacity utilization reduced the rate of profit in Italian manufacturing by 3 to 4 percentage points relative to French profit rates during 1992–2015 and by 3 to 5 percentage points relative to German profit rates during 1992–2015. This must have considerably depressed Italian manufacturing investment and growth (relative to France and Germany).

–2.99 –5.33

3.30 2.57 15.96 –13.39 0.73 –3.05 –3.31 –0.33 –2.99 0.27

–0.17 1.78 18.40 –16.68 –1.95 0.96 –2.19 –5.27 –3.08 –3.15

–3.05

–2.27 11.23 –13.51

0.65 21.01 –20.36

–4.15

–1.69 14.15 –15.84

–5.86

–5.32

–0.52 19.67 –20.20

–5.86

–3.55

–1.65

1.93

1.61

–2.34

–1.49 18.02 –19.52

–1.06 17.69 –18.75

–0.04 10.28 –10.32

0.16 9.75 –9.59

–5.05

–2.71

1.89

1999–2015

1999–2008

1.78

1992–1999

Source: Author’s calculations based on EU-KLEMS data (Jäger, 2017). See Storm (2019) for the decomposition methodology.

Italy vs. France: difference in manufacturing profit rate (percentage points)  due to difference in profit share (percentage points) # caused by difference in real wage per hour (percentage points) # caused by difference in labour productivity per hour (percentage points)  due to difference in capacity utilization (percentage points)

Italy vs. Germany: difference in manufacturing profit rate (percentage points)  due to difference in profit share (percentage points) # caused by difference in real wage per hour (percentage points) # caused by difference in labour productivity per hour (percentage points)  due to difference in capacity utilization (percentage points)

Italy vs. the Euro-4: difference in manufacturing profit rate (percentage points)  due to difference in profit share (percentage points) # caused by difference in real wage per hour (percentage points) # caused by difference in labour productivity per hour (percentage points)  due to difference in capacity utilization (percentage points)

1970–1992

Table 1.4 Manufacturing profitability: Italy versus the Euro-4, Germany and France.

Economic consequences of the Maastricht Treaty

29

Let me emphasize the fact that Italy’s profit rate declined even when the share of profits in income increased. To understand how this could happen, consider the following definition of the manufacturing rate of profit (ρ) as the real return on invested capital (Storm, 2019):

¼

  X X ¼   ¼u K X X K

where π = (Π/X) = the share of real profits (Π) in real manufacturing income (X), u = (X/X) = capacity utilization, and κ = (X/K) = the “normal” outputcapital ratio in manufacturing. K is the capital stock (at constant prices), and X is “normal” (trend) output. I assume that κ is a long-run constant. As can be seen, the (manufacturing) profit rate has two determinants: the profit share π and capacity utilization u (or demand), assuming that κ is a long-run constant. If the rate of capacity utilization goes down, this must depress the profit rate (keeping π constant). It follows that the manufacturing profit rate must decline, even if the profit share π increases, if the decline in capacity utilization u is big enough. That is, the negative impact on the profit rate of demand deficiency can more than offset the positive impact of a higher profit share. This is exactly what happened to Italian manufacturing – as is shown in Table 1.4. What this means, therefore, is that Italy’s strategy of fiscal austerity and wage restraint was counterproductive, because it failed to improve the profit rate – the drop in demand and capacity utilization had a bigger (negative) impact on firm profitability than the increase in the profit share. This conclusion raises an important political economy question: who in Italy would benefit from the post-Maastricht Treaty order if the consequent chronic austerity and labour market deregulation constitute a negative-sum game? In lieu of a better answer, I would argue that Italy’s permanent economic stagnation was not foreseen by Italy’s “protected class” – the people who make policies but never really have to live with the consequences of these policies, as their jobs, social position and prospects will always be safe.4 The stasis was an unintended consequence of what is essentially a political project, which started in the early 1980s, to curb and undermine the growing political power of and limit the progressive emancipation of the unprotected class of “commoners” (or the plebs). In view of the stubbornness with which the establishment is upholding the EMU rulebook, it looks like the stagnation is a price worth paying (Fazi, 2018; Halevi, 2019) – although the revolt of the “unprotected class” may change this conclusion.

Italy’s permanent crisis is a warning for the Eurozone There are rational ways to get the Italian economy out of its current paralysis, and none of them are easy. They are all founded on a long-term strategy of

30

Servaas Storm

“walking on two legs”: this means (a) reviving domestic (and export) demand; and (b) diversifying and upgrading the economy’s productive structure and innovative capabilities, and strengthening the technological competitiveness of its exports (in order to get away from direct wage-cost competition with China). This means that both austerity and real wage growth suppression must stop5 – instead, the Italian government should gear up for providing unambiguous directional thrust to the economy by means of higher public investment (in public infrastructure and “greening” and decarbonizing energy and transportation systems) and novel industrial policies to promote innovation, entrepreneurship and increased technological competitiveness. There is no dearth of constructive proposals by Italian economists to help their economy out of the current mess, and these include Guarascio and Simonazzi (2016), Lucchese et al. (2016), Pianta et al. (2016), Mazzucato (2013), Dosi (2016), and Celi et al. (2018). These proposals all centre on creating a self-reinforcing process of investment-led and innovation-driven growth that is orchestrated by an “entrepreneurial state” and founded on relatively regulated and co-ordinated firm–worker relationships, rather than on deregulated labour markets and hyper-flexible employment relations. These proposals might work well. The same cannot be said, however, of the “one-leg” fiscal stimulus proposed by the M5S– Lega coalition government, the aim of which is a short-run revival of just domestic demand by means of higher public (consumption) spending. None of the proposed spending will help solving Italy’s structural problems. What is completely lacking is any longer-term directional thrust, or the second leg of a viable strategy – which the (economically) neoliberal Lega is currently unwilling to provide and the “progressive-in-name-only” M5S seems incapable of devising (Fazi, 2018). As the old French adage goes, plus ça change, plus c’est la même chose. More importantly, any rational “two-leg” developmental strategy will be incompatible with any kind of decision to stick to the EMU macroeconomic rulebook and to keep financial markets calm, both of which are supposed to keep Eurozone sovereigns in line (Costantini, 2018; Halevi, 2019). This is clear from what happened when the M5S–Lega government came up with an expansionary Draft Budgetary Plan (DBP) for 2019. The total impact of the one-leg fiscal stimulus initially proposed in the 2019 DBP amounted to an estimated 1.2% of GDP in 2019, 1.4% in 2020 and 1.3% in 2021 – and even this minute budgetary expansion triggered strong negative responses from the EC and increases in Italian bond yields. Blanchard et al. (2018, p. 2) formalize this status quo in a mechanical debt-dynamics model and conclude that the 2019 DBP risks triggering “unmanageable spreads and serious crisis, including involuntary exit from the Eurozone.” Blanchard et al. (2018, p. 16) argue for a fiscally neutral budget, which they think would lead to lower interest rates and “probably” to higher growth and employment. Equations, graphs and

Economic consequences of the Maastricht Treaty

31

technocratic econospeak are competently used to turn what in fact constitutes a very modest transgression of the EMU rulebook into a lowprobability – catastrophic – event which everyone would want to avoid (see Costantini, 2018). What is tragic is that the 2019 DBP does not come close to what would be needed for a rational strategy. All the sound and fury is for nothing. Worse still is the fact that maintaining Italy’s status quo, which is what a fiscally neutral budget would mean, carries a real but unrecognized lowprobability, high-impact risk – namely, a breakdown of political and social stability in the country. Continued stagnation will feed the resentment and anti-establishment, anti-euro forces in Italy. As Simonazzi and Barbieri (2016, p. 380) insightfully observe, “middle-class discontent is certainly related to the increased inequality and loss of absolute income …, but it has equally to do with the perceived reduced opportunities for younger generations and a decreasing intergenerational social mobility.” Growing middle- and lower-class discontent will destabilize not just Italy, but the entire Eurozone as well. Italy’s crisis thus constitutes a warning to the Eurozone as a whole: continued austerity and real wage restraint, in combination with the de-democratization of macroeconomic policymaking, make for a “dangerous game” (Costantini, 2018) – a game which risks further empowering “anti-establishment” forces elsewhere in the Eurozone as well. This is like opening Pandora’s box. No one can tell where this will end. Economists (including Italians) carry an enormous responsibility in all this, both because they are much to blame for the chaos and because they fail to continue to unite behind rational strategic solutions to resolve the Italian crisis. “Perhaps,” Keynes (1919, p. 238) wrote, “it is historically true that no order of society ever perishes save by its own hand.” Rational economists have to prove Keynes’ verdict wrong, starting in Italy.

Acknowledgements This chapter is written in honour of Professor Annamaria Simonazzi, whose research has been an inspiration for my own structural approach to macroeconomics. The chapter draws extensively on Storm (2019), which provides an evidence-based pathology of Italy’s stasis. I would like to thank the editors of this volume for their very helpful comments and suggestions.

Notes 1 The weakening of the bargaining power of workers had already started in the 1980s after Italy decided to join the European Monetary System (EMS) in 1979 and after its monetary policy became highly restrictive in 1980–81 (Halevi, 2019). But the process of labour market deregulation began in earnest with the 1993 July

32

2 3 4 5

Servaas Storm Agreement, which was a pact between government, unions and employers that was officially intended to change Italy’s industrial relations from “conflictual” to “participatory.” The 1997 reform is known as “Pacchetto Treu,” the 2003 reform as “Legge Biagi” and the 2004 reform as the “Jobs Act.” See Brandolini et al. (2007) and Tridico (2015) for more details. The negative productivity growth (or positive growth of labour intensity) in these two sectors reflects the increasing importance of labour-intensive activities (e.g. private security services and tourism) within these industries. The term “protected class” is from Noonan (2016). Importantly, and as Guarascio and Simonazzi (2016) convincingly argue, industrial policy measures to upgrade and transform Italy’s industrial structure are not compatible with labour market policies that foster flexibility, temporary work and decentralized bargaining.

References Banca d’Italia (2019). Survey on Household Income and Wealth. Rome: Banca d’Italia. https://www.bancaditalia.it/pubblicazioni/indagine-famiglie/index.html [accessed 18 June 2019]. BIS (2019). Consolidated banking statistics. Country tables (B4). Consolidated positions on counterparties resident in Italy. Geneva: Bank for International Settlements. N.D.https://www.bis.org/statistics/b4-IT.pdf [accessed 18 June 2019]. Blanchard, O., Leandro Á., Merler, S. and Zettelmeyer, J. (2018). Impact of Italy’s draft budget on growth and fiscal solvency. PIIE Policy Brief, no. 18–24. Washington, DC: Peterson Institute for International Economics. Brandolini, A., Casadio, P., Cipollone, P., Magnani, M., Rosolia, A. and Torrini, R. (2007). Employment growth in Italy in the 1990s: institutional arrangements and market forces. In N. Acocella and R. Leoni (eds), Social Pacts, Employment and Growth: A Reappraisal of Ezio Tarantelli’s Thought. Heidelberg: PhysicaVerlag, 31–68. Brandolini, A., Gambacorta, R. and Rosolia, A. (2018). Inequality amid income stagnation: Italy over the last quarter of a century. Questioni di Economia e Finanza (Occasional Papers), no. 442. Rome: Banca d’Italia. Bugamelli, M., Fabiani, S., Federico, S., Felettigh, A., Giordano, C. and Linarello, A. (2018). Back on track? A micro-macro narrative of Italian exports. Ministry of Economy and Finance Working Paper, no. 1. Rome: Ministry of Economy and Finance. Celi, G., Ginzburg, A., Guarascio, D. and Simonazzi, A. (2018). Crisis in the European Monetary Union: A Core-Periphery Perspective. Abingdon, UK: Routledge. Cesaratto, S. and Stirati, A. (2010). Germany and the European and the global crises. International Journal of Political Economy, 39(4), 56–86. Cesaratto, S. and Zezza, G. (2018). What went wrong with Italy, and what the country should now fight for in Europe. FMM Working Paper, no. 37. Düsseldorf: Hans Böckler Stiftung. Costantini, O. (2017). Political economy of the Stability and Growth Pact. European Journal of Economics and Economic Policy: Intervention, 14(3), 333–350. Costantini, O. (2018). Italy holds a mirror to a broken Europe. Blog post, Institute for New Economic Thinking, 14 June.https://www.ineteconomics.org/perspectives/blog/ italy-holds-a-mirror-to-a-broken-europe [accessed 18 June 2019].

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Dosi, G. (2016). Beyond the “magic” of the market: the slow return of industrial policy (but not yet in Italy). Economia e Politica Industriale, 43(3), 261–264. Fazi, T. (2018). Italy’s organic crisis. American Affairs Journal, 20 May. https://america naffairsjournal.org/2018/05/italys-organic-crisis/. Guarascio, D. and Simonazzi, A. (2016). A polarized country in a polarized Europe: an industrial policy for Italy’s renaissance. Economia e Politica Industriale, 43(3), 315–322. Halevi, J. (2019). From the EMS to the EMU and … to China. INET Working Paper, (forthcoming). New York: Institute of New Economic Thinking. Horobin, W. (2019). Le Maire Says Italian Recession Threatens France’s Economy. Bloomberg.com, 20 February. https://www.bloomberg.com/news/articles/ 2019-02-20/le-maire-says-italian-recession-threatens-france-s-economy [accessed 18 June 2019]. Jäger, K. (2017). EU KLEMS Growth and Productivity Accounts 2017 Release. Description of Methodology and General Notes. New York: The Conference Board. Keynes, J.M. (1919). The Economic Consequences of the Peace. New York: Harcourt, Brace and Howe. Lucchese, M., Nascia, L. and Pianta, M. (2016). Industrial policy and technology in Italy. Economia e Politica Industriale, 43(3), 4–31. Mazzucato, M. (2013). The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Anthem. Monti, M. (2012). Transcript of an interview with Fareed Zakaria of CNN. CNN.com, 20 May. http://transcripts.cnn.com/TRANSCRIPTS/1205/20/fzgps.01.html [accessed 18 June 2019]. Noonan, P. (2016). Trump and the rise of the unprotected: why political professionals are struggling to make sense of the world they created. The Wall Street Journal, 25 February.https://www.wsj.com/articles/trump-and-the-rise-of-the-unp rotected-1456448550. Pianta, M., Lucchese, M. and Nascia, L. (2016). What is to be Produced? The Making of a New Industrial Policy in Europe. Brussels: Rosa-Luxemburg-Stiftung. Simonazzi, A. and Barbieri, T. (2016). The middle class in Italy: reshuffling, erosion, polarization. In D. Vaughan-Whitehead (ed). Europe’s Disappearing Middle Class? Evidence from the World of Work. Cheltenham, UK: Edward Elgar, 360– 395. Simonazzi, A. and Vianello, F. (1998). Italy towards European monetary union (and domestic disunion). In B.H. Moss and J. Michie (eds), The Single European Currency in National Perspective. London: Palgrave Macmillan, 105–124. Simonazzi, A., Ginzburg, A. and Nocella, G. (2013). Economic relations between Germany and Southern Europe. Cambridge Journal of Economics, 37(3), 653– 675. Storm, S. (2019). Lost in deflation: why Italy’s woes are a warning to the whole Eurozone. INET Working Paper, no. 94. New York: Institute for New Economic Thinking. Online: https://www.ineteconomics.org/uploads/papers/WP_94-Storm-Ita ly.pdf [accessed 18 June 2019]. Storm, S. and Naastepad, C.W.M. (2012). Macroeconomics beyond the NAIRU. Cambridge, MA: Harvard University Press. Storm, S. and Naastepad, C.W.M. (2015a). Europe’s Hunger Games: income distribution, cost competitiveness and crisis. Cambridge Journal of Economics, 39(3), 959–986.

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Storm, S. and Naastepad, C.W.M. (2015b). NAIRU economics and the Eurozone crisis. International Review of Applied Economics, 29(6), 843–877. Stovicek, K. and Turrini, A. (2012). Benchmarking unemployment benefits in the EU. IZA Policy Paper, no. 43. Bonn: Forschungsinstitut zur Zukunft der Arbeit. Tridico, P. (2015). From economic decline to the current crisis in Italy. International Review of Applied Economics, 29(2), 164–193.

2

Recovery or stagnation? Spain and Italy after the Great Recession Josep Banyuls Llopis and Albert Recio

Introduction The economic crisis that began in 2008 has been a serious setback for the Southern European countries (Greece, Italy, Spain and Portugal). After years of intense decline in Gross Domestic Product (GDP) and in employment, a break in this trend has finally taken place, but with different results. According to Eurostat figures, from 2013 GDP growth in Spain has been higher than the Euro area average. In Italy, however, we can only talk about a scenario of modest growth (notwithstanding at least two quarters of recession in 2018). Looking to GDP performance, it is hard to say that the crisis is over in Italy. Despite this difference in growth between Italy and Spain, in August 2017 the European Commission (EC) officially declared the crisis to be over for the European Union (EU) as a whole: The global financial crisis began 10 years ago and led to the European Union’s worst recession in its six-decade history. The crisis did not start in Europe but EU institutions and Member States needed to act resolutely to counter its impact and address the shortcomings of the initial set-up of the Economic and Monetary Union. Decisive action has paid off: today, the EU economy is expanding for the fifth year in a row. Unemployment is at its lowest since 2008, banks are stronger, investment is picking up, and public finances are in better shape. Recent economic developments are encouraging but a lot remains to be done to overcome the legacy of the crisis years. The European Commission is fully mobilised to deliver on its agenda for jobs, growth and social fairness.1 The mainstream message emerging from official statements made by the EC and other international organisations seems to indicate that the recovery was the result of the adjustments made by member states based on their own policy proposals, which consist of austerity policies and structural reforms. Although the EC has acknowledged that some problems still persist in some countries, the austerity policies and structural reforms must continue so that the recovery can be consolidated. This narrative of a successful exit from the

36

Josep Banyuls Llopis and Albert Recio

crisis is not shared with equal enthusiasm by all EU countries. In the end, declaring the crisis to be over, or not, is entirely dependent on what is understood by “crisis,” what issues we choose to analyse and what indicators and benchmarks are employed in our analysis. The EC only focuses on a few macroeconomic indicators and ignores others relating to structural and long-term elements that characterise national economies. This is unsurprising given the fact that, since the Maastricht Treaty of 1992, the economic policy of the EU has relied heavily on market competition and the imposition of rigid rules for decision-making by policymakers. The independence of the European Central Bank, the financing mechanism of public debt, and the authority of Stability and Growth Pact (SGP) are clear examples of the imposition of mandatory rules on member states. Obviously, if policy-makers do not have discretion and if their ability to make important economic decisions is curtailed, a large proportion of any adjustment will be made through the markets (including the labour market). The belief that the market is the optimal adjustment mechanism in the face of imbalance(s) also leads to the characterisation of the EU as a set of competing countries, and it is precisely this competitive environment that is supposed to make EU countries converge (Lehndorff, 2015). The implication of this approach is that it is not necessary to design and implement, on the EU level, policies to address imbalances across countries, such as different productive structures, labour supply characteristics (including unemployment, mobility, and skills) or welfare systems. The competitive mechanism will make these different elements converge, and if this process does not deliver the expected outcome, the failure will be blamed on poor management by national governments. This analytical simplification also leads to the construction of stylised models, in which countries are shown as homogeneous when in fact they are quite different. One of these models pertains to Southern European countries. This grouping is not new, but it has traditionally been applied in reference to some specific aspects of the social sphere (e.g., the family model, the welfare state and even the climate) (Hall and Soskice, 2001; Esping-Andersen, 1990). Recently, this category has been extended to include various economic aspects (Wickham, 2016). It is evident that the countries in this group possess some common features, but they clearly also are quite different from one another. All of their differences, however, have been ignored, and the only distinction made between countries in the official European discourse is whether or not they have taken action as dictated by international organisms. Moreover, the dominant approach considers Southern Europe as a region that can be isolated from the rest of Europe, which thus renders the interactions between the North and the South of Europe irrelevant. The objective of this chapter is to outline a series of reflections to show, first of all, that there are very different situations within the southern countries, especially if we consider aspects such as their productive structures, sectoral specialisations and competitiveness. Second, we intend to address,

Spain and Italy after the Great Recession

37

from a structural perspective, how the initiatives proposed by the EC are – and have clearly been – unable to solve structural and long-term economic problems. The analysis will focus on the cases of Spain and Italy in recent periods, starting in 2008. From our perspective, the conventional view, adopted practically unanimously within the EU, is mistaken and does not explain what happened in the years of the crisis. It is not based on an adequate analytical framework and therefore cannot address the differential evolution of the Spanish and Italian economies after the Great Recession.

Italy and Spain: similar problems, different paths Italy and Spain are the two largest countries in Southern Europe. Both have been included in the category of Southern countries because of their common characteristics, which include level of industrial development, public sector model and family structure. Their economic trajectory has been largely conditioned by their membership in the EU and, especially, the European Monetary Union (EMU). The requirements for economic integration designed by the Maastricht Treaty and the creation of the Euro determined, to a large extent, their national economic policies. During the Great Recession and austerity years, these two countries experienced a similar situation and were subjected to the same types of policies. However, one only needs to analyse the trend in their respective GDP (Figure 2.1) and employment figures (Figure 2.2) to observe notable differences. The evolution of Spain’s GDP seems very “spasmodic” when compared to the smoother (and rather low) growth of Italy, which is also closer to the

305.0

260.0

215.0

170.0

125.0

Euro area (19 countries)

Spain

2017

Italy

Figure 2.1 Evolution of GDP for the Euro area, Spain and Italy (1995 = 100). Source: Eurostat.

2018

2015

2016

2014

2013

2011

2012

2010

2008

2009

2007

2006

2004

2005

2003

2002

2001

2000

1998

1999

1996

1997

1995

80.0

38

Josep Banyuls Llopis and Albert Recio

170.0

147.5

125.0

102.5

European Union - 15 countries

Spain

2017

2016

2015

2014

2012

2013

2011

2010

2008

2009

2007

2006

2005

2004

2002

2003

2000

2001

1999

1998

1997

1996

1995

80.0

Italy

Figure 2.2 Evolution of employment in the EU 15, Spain and Italy (1995 = 100). Source: Eurostat.

growth of the group of countries of the Euro area. Spain tends to grow more sharply when its economy is in an expansive phase, but its crises are also much more severe. On the contrary, Italy shows much more moderate growth as well as softer periods of recession, where the fall in GDP is much milder. Looking at employment, we can observe a similar situation. In Spain, periods of strong GDP growth are accompanied by strong job creation, and the reverse is true in periods of recession, during which there is a sharp decline in jobs. In Italy, the variation in employment is very moderate, and in the recent crisis it has been practically insignificant, with very slight fluctuations, in line with the trend set by the rest of the EU (15 countries). There are, therefore, two very different economic trends: in the case of Spain, a very strong oscillation corresponding to the phases of the economic cycle, and in the case of Italy, very moderate growth or almost stagnation, especially with regard to its economy’s post-2011 evolution. To explain the differences between the two countries, it is necessary to start with an analytical approach that goes beyond the observation of a few macroeconomic variables. The study of national employment models allows for a better understanding of the reasons behind national differences across countries (Bosch et al., 2009). One of the fundamental elements of this approach is the recognition that, at specific moments, economic, social and political structures are the result of a dynamic historical process, of a trajectory that, although similar in some cases, in others can be divergent. The central elements that make up this structure are, on the one hand, the productive structure of the economy (e.g., sectoral specialisation, hegemonic economic groups, type of participation in the international economy) and, on the other hand, the labour market sphere (e.g. employment standards, organisation of

Spain and Italy after the Great Recession

39

economic agents, collective bargaining model). Finally, we must also consider family structures, public intervention, and social policies (Simonazzi, 2009). Spain and Italy have arrived at their current situations with diverging trajectories that partly explain their current differences (Banyuls et al., 2009; Simonazzi et al., 2009). Spain suffered the effects of the Franco dictatorship, which lasted until 1975, and these detrimental effects have not only conditioned the country’s institutional framework but have also deeply altered its productive structure. The country was configured as a closed economic space, with an industrial structure geared entirely towards serving the domestic market, which featured the presence of important monopolistic groups (especially in the financial sector). Although Spain experienced an opening-up after 1969, this mainly translated into the arrival of foreign companies aiming to exploit the protected local market. This productive structure showed its weakness in the crisis of the 1970s and in the subsequent process of internationalisation that culminated in 1986 with the integration of the country into the EU. The dismantling of the industrial sector began with the crisis of the 1970s and continued throughout the following decades with more intense episodes in two successive recessions (1991–1994, 2008–2014). The local economic elites relinquished their role in this area and chose to divert their attention to other sectors such as finance, construction, tourism and public services management (Banyuls and Recio, 2014). Things have been more complex in the area of politics. The political transition that established a democratic system also resulted in the construction of a new framework for labour relations that granted unions an important institutional presence. At the same time, the entire democratising process was accompanied by an important social movement demanding the establishment of a modern welfare system (Miguélez and Recio, 2010). In fact, all Spanish economic policies in recent years have been a result of the tension between neoliberal economic policies and citizens’ demands for the expansion of social rights, with the ambiguous result of an undeniable growth of the public sector (enlarged by the implementation of a system of largely self-managed regions called comunidades autónomas) and large budget deficits (and insufficient tax collection). Italy followed a different path. It has been a democracy since the end of the Second World War. It had a relatively important national industrial infrastructure in the North and a large industrial sector that, in some cases, managed to manoeuvre into high-end markets, and with high levels of competitiveness (Simonazzi, 2014). In addition, it has always had an important tourism sector. It was also one of the founding members of the EC. For a long time, Italy has been ahead of Spain in terms of GDP per capita, and in terms of industrialisation, and has had a better developed public sector. For many years, Italy was the model that Spain aimed to replicate, both in the economic spheres – by the presence of an industrial structure of vigorous small and medium enterprises, very similar to some areas in Spain – and in the political and cultural spheres.

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Nevertheless, the situation changed in the 1990s, when the Italian economy entered a long period of stagnation. One of the main reasons for this situation is the chronic lack of domestic demand (see Servaas Storm, Chapter 1 in this volume), which is reinforced by the inability of the public sector to become an active agent of development and public welfare. In Italy, external demand, in spite of some competitiveness problems, has performed better than internal demand in comparison with Spain. Just before the crisis, the comparison between the two countries seemed to show a diverging trend. The Spanish economy was more dynamic, the public sector had modernised and was more efficient, and the productive structure had adapted better to the new globalised environment. As it was subsequently proven, this was largely a mirage. The Spanish dynamism was fundamentally dependent on a huge real estate bubble, which was financed through a strong increase in external debt. This bubble had far-reaching consequences when it finally burst. By focusing on the industrial dynamics, Simonazzi and Ginzburg (2015) make an important contribution to the understanding of the economic movements from the second half of twentieth century and the economic differences between countries within Europe. From their point of view, the marked differences in the productive structure of European countries was the result of a historical process of specialisation and positioning in the international economic arena, with important qualitative differences in terms of capitalist models and social organisation. Central European countries were the first to industrialise and therefore dominated the processes driving growth during the “Glorious Thirty,” that is, the 30 years from 1945 to 1975. Those in the South were in a peripheral situation and could be further segmented into those who experienced late (Italy), or very late and marginal (Spain, Greece and Portugal) industrialisation. Their growth was largely dependent on the subsidiary industrialisation of Central Europe businesses in their processes of multinational expansion, on endogenous development in sectors that, at that time, were not dominant in terms of world trade, and on the transfer of rents, mainly through remittances from migrants and tourism. The crisis of the 1970s represents a change in regulatory models. From this moment on, the productive structure of all Southern countries embarks on a path of deindustrialisation with important regional differences within each country. In Spain, an important number of large firms collapsed. Most of them were connected to heavy sectors, and their growth was based on a closed market and public support. On the other hand, small firms were focused on mature products (shoes, clothes, furniture, etc.) and most of them were not able to adapt to the new productive context. The big industrial groups moved from industry to the construction sector and the service sector, entering a new productive specialisation starting around 1994. Looking at these changes now, from a distance, one can say that they resulted in a peripheral tertiarisation and an impoverishment in the country’s productive structure. A massive restructuring also took place in Italy in the 1990s. But the choice made was for a new organisational model, not the “exit” option that was

Spain and Italy after the Great Recession

41

chosen in Spain. In big firms, many functions were externalised and became service activities. Moreover, a non-negligible group of small and medium firms grew during the crisis of the 1990s amidst high levels of competitiveness. The industrial districts in La Terza Italia are a good example of this trend. The new productive paradigm that emerged after the 1970s entailed a new competitive regime based on product differentiation and the permanent reorganisation of production and associated services, moving towards greater financial and organisational complexity (Simonazzi and Ginzburg, 2015, p. 114). Central European countries (including Northern Italy) managed these changes much better; in contrast, the regions outside this trend (Southern Italy and most of the Spanish regions) occupied the marginal spaces left in this context of productive reorganisation, which saw the continued predominance of mature industries and, especially in some Spanish regions, the construction and tourism sectors. Central European countries (i.e., the core of the EU) now enjoy a better competitive position, which is clearly shown in their respective balances of payments (Figure 2.3) all showing surpluses in their current accounts (Denmark, Germany and the Netherlands are good examples). The situation of the Southern countries is quite the opposite. Northern Italy (i.e., the location of various industrial districts) can be considered an exception due to its differentiated industrial dynamics, as we just pointed out. Its export 10 8 6 4 2 2017

2016

2015

2014

2013

2012

2011

2010

2008

2009

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1996

1997

-2

1995

0

-4 -6 -8 -10 -12 Euro area (19 countries)

D-G-N (*)

Spain

Italy

Figure 2.3 Net lending/borrowing (current and capital account) as a percentage of GDP at current prices. Note: (*) D-G-N is the average of net lending/borrowing as a percentage of GDP of Denmark, Germany and the Netherlands. Source: Authors’ own calculations based on Eurostat data.

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Josep Banyuls Llopis and Albert Recio

capacity has been much higher and its relationship with Central European countries in terms of industrial trade is relatively strong. Although Italy experienced a progressive economic decline up to 2010, its situation is not comparable to that of Spain, which has a permanent structural deficit in the trade of goods and services that is hardly counterbalanced by tourism revenues. It is all part of a historical cycle: the economy grows, the imports of goods and the arrival of capital increase significantly, generating a big deficit that is only rebalanced in periods of crisis with the fall of domestic demand and an improvement in exports. The creation of the single currency changed the international position of Italy and especially that of Spain. The unbalanced dynamics among European countries in terms of international trade flows, the competitive model of European integration, and the assumptions underpinning the single currency led to a situation in which Central European countries accumulated capital and enhanced their access to finance. We must also add that, during the period prior to the Great Recession, the increase in value of the Euro visà-vis other currencies negatively affected the competitiveness of these two economies and clearly led to the deterioration of their respective industrial sectors. The greater difficulty to export was reinforced by the adoption of wage-containment policies in countries like Germany. In Spain’s case, the new monetary space facilitated increased indebtedness and fuelled speculative bubbles, generating economic dynamics that, to a certain extent, counteracted the trend towards stagnation and contributed to the impression that the introduction of the Euro had led to a kind of economic bonanza. There are also important differences between Italy and Spain when it comes to their respective labour relations models and to the importance of the public sector in their respective economies in comparison to those of Central European countries. Central European countries based much of their success in terms of economic growth during the “Glorious Thirty” on a model of labour integration that conferred security, in times of employment and unemployment, with an ambitious welfare state that guaranteed social integration. Industrial specialisation and the presence of large businesses responded to a strong union presence and a more inclusive welfare state model. This allowed for more egalitarian wage structures and a more equitable income distribution. Labour relations systems in Italy and Spain have many similarities in their basic aspects. In fact, the 1979 Spanish Workers’ Statute was inspired by the Italian Statuto dei Lavoratori that was enacted in 1970. In both countries, there is a plurality of unions (with three large unions in Italy and two in Spain, along with a variety of smaller ones), and in both countries sectoral collective agreements have traditionally predominated. However, in Italy there is greater articulation between sector collective agreements and second-tier negotiations, at the company and territorial levels, than in Spain. In both countries, the degree of coverage of collective bargaining is high, although the ability to control its application has been made difficult mainly by the high share of workers employed in small firms.

Spain and Italy after the Great Recession

43

The deregulation of labour relations and an increase in workforce flexibility have also occurred in both countries. In Spain, these policies have been applied much more forcefully through a long series of reforms. In other words, the move towards a highly flexible market started earlier (in the 1980s) and at a higher speed than it did in Italy. Since 1984, more than 60 reforms have been implemented in Spain, all of which have aimed at the same target: an increase in labour flexibility. These structural reforms have consolidated a very precarious labour management model (Banyuls and Recio, 2012). Italy has not been left untouched by this trend, but similar changes took place there somewhat later and were less radical in nature (Fana et al., 2017). In the end, in both cases the increase in job insecurity, especially for young people and women, has been quite significant. Regarding welfare state models and the importance of the public sector, Spain and Italy share a number of common features: a high level of tax fraud, low tax-collection capacity, and strongly rooted clientelistic networks in public sector spending. Notwithstanding these common elements, when it comes to the importance and evolution of the public sector in these two countries, and some of its characteristics, there are rather stark differences (Table 2.1). Italy’s public sector has a much higher weight than it does in

Table 2.1 Some public sector indicators in Spain and Italy.

1995 1997 1999 2001 2003 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total government revenue

Total government expenditure

Net lending (+)/net borrowing (–)

Government consolidated gross debt

Spain

Italy

Spain

Italy

Spain

Italy

Spain

Italy

37.3 37.7 38.6 37.9 37.9 39.5 41.0 36.7 34.8 36.2 36.2 37.6 38.6 38.9 38.5 37.7 37.9

44.6 46.6 45.6 44.1 43.9 43.0 45.3 45.2 45.9 45.7 45.7 47.9 48.1 47.9 47.7 46.5 46.4

44.3 41.6 39.9 38.5 38.3 38.3 39.0 41.2 45.8 45.6 45.8 48.1 45.6 44.8 43.7 42.2 41.0

51.8 49.6 47.4 47.5 47.2 47.1 46.8 47.8 51.2 49.9 49.4 50.8 51.1 50.9 50.3 49.1 48.7

–7.3 –3.0 –1.8 –3.4 –3.3 –4.1 –1.5 –2.6 –5.2 –4.2 –3.7 –2.9 –2.9 –3.0 –2.6 –2.5 –2.4

61.7 64.4 60.9 54.2 47.6 42.3 35.6 39.5 52.8 60.1 69.5 85.7 95.5 100.4 99.3 99.0 98.1

116.9 113.8 109.7 104.7 100.5 101.9 99.8 102.4 112.5 115.4 116.5 123.4 129.0 131.8 131.6 131.4 131.2

Source: Eurostat.

–7.0 –3.9 –1.3 –0.5 –0.4 1.2 1.9 –4.4 –11.0 –9.4 –9.6 –10.5 –7.0 –6.0 –5.3 –4.5 –3.1

44

Josep Banyuls Llopis and Albert Recio

Spain, and levels of public expenditure are around the average for Euro area countries.2 In terms of income and expenditure structure, Spain’s tax collection capacity is much lower, while in the case of Italy it is rather similar to that of other European states. The same is true with regard to public spending; again, it is much lower in Spain. The key difference between the two countries is the evolution of their deficits and public debts. The absolute size of the debt as a percentage of GDP has always been greater in Italy than it has in Spain, but Spain has experienced a greater deficit increase during the crisis (largely due to the expansionist measures taken at the beginning of the crisis and the transfer of private bank debt to the public sector). At the same time, public debt has been reduced more rapidly in Spain than it has in Italy. The underlying problem with these scenarios lies mainly in the inability of the two governments to increase public revenues and the need for them to increase expenditure to meet social demands (Karamessini, 2008). Both Spain and Italy increased their public spending in the years prior to the crisis but, while the funding route taken by Italy was largely through debt, Spain followed different guidelines. During the years of economic expansion, the provision of public services in Spain was compatible with low fiscal pressure without excessive financing tensions due to the strong growth of the economy. There were even years with budget surpluses. A modest welfare state and the choice of a blend of public and market services made this balance possible (Miguélez and Recio, 2010), which was accompanied by the informal provision of services, partially through private means, and high levels of job insecurity and precariousness. But the crisis broke this model. Compared with the Eurozone as a whole, the reduction in income in Spain was very sharp, while the increase in expenditure was very intense, which increased the need for financing. In the case of Italy, low economic growth did not allow for an improvement in public funding and the resulting imbalance led a sharp increase in public debt. An additional problem was that weak public sectors are rarely able to manage crisis situations very well, and Italy was no exception to this rule: it was not able to properly manage aggregate demand and deal with the income policies and measures that were aimed at mitigating the negative effects of the crisis.

Crisis and post-crisis When the Great Recession broke out in 2008, Spain and Italy already had serious problems. Their public sectors were clearly limited and, as pointed out above, their productive systems, which were apparently well balanced, had very weak foundations. In fact, Spain had been able to camouflage this dire situation thanks to a huge real estate bubble that had been the main engine of its economy and had pulled many other sectors along (Banyuls and Recio, 2015). Italy, whilst comparatively free from this speculative component, suffered a situation of stagnation (Simonazzi, 2012, 2015). Both countries entered the crisis with a high level of debt, although it was mainly public in

Spain and Italy after the Great Recession

45

Italy and private in Spain. This starting point explains why the Spanish economy suffered a greater slump than did other economies as a consequence of the rapid collapse of property construction and sales and its follow-on impact on the rest of the economy. Far from solving the problems of these two economies, the adoption of austerity policies by the EU in 2010 made things worse. The key assumption on which the austerity policies were based is that public budget adjustments would both reduce debt and restore investor confidence (Blyth, 2013), which would, in turn, enable a recovery in economic activity. In addition, unemployment was considered not so much a macroeconomic problem but, above all, the product of excessively rigid labour market regulation. This is why the basic package of economic policies included both a spending adjustment and a program of structural reforms in the labour market and financial system (Simonazzi, 2017). The latter was, in practice, a rescue plan for private banks based on the transfer of part of their debt to the public sector. These adjustments, far from being effective, deepened the crisis and aggravated the public debt problem. Greece is the most extreme case of this policy, but all the countries of Southern Europe suffered under the weight of restrictive policies that exacerbated the problems generated by the model of national competition imposed on them by the EU. As a result, it was to be expected that a global crisis would have an unequal impact on countries with different productive, employment and welfare models. In fact, the productive models of the different EU countries showed an enormous divergence which, actually, increased as a result of previous productive trajectories taken on the path towards European integration. The success of some economies in the short term was rather the result of adopting strategies that were at the root of their problems. Crisis was more acute in Spain, because the bursting of the housing bubble and the sharp drop in public investment not only affected construction but also other sectors, “deforming” the economy as a whole (Bielsa and Duarte, 2011). Italy was also affected by the crisis, but did not suffer the cataclysm that Spain did. The differences between the two states were, to a large extent, a reflection of their different productive structures (Tables 2.2 and 2.3). The discussion presented in this chapter highlights the reasons that may explain why Spain has experienced a more vigorous recovery since 2013 in the absence of a new housing bubble of the size of the previous one (although, unlike in Italy, there has been a recovery in the construction sector). The orthodox explanation is that the “miracle” occurred thanks to the internal devaluation caused, above all, by the labour reform of 2012, which has facilitated an improvement in the country’s external competitiveness. The problem with this argument is that it is difficult to prove (Álvarez et al., 2019). First, if wage devaluation is not translated into lower final prices, it does not affect competitiveness in terms of price, and there is no evidence to support the notion that prices have been devaluated. Second, the manufacturing sector, which is precisely the one that is most exposed to foreign competition, is the only one that has seen a modest wage increase in real terms.

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Table 2.2 Employment change and employment by activity in Spain between 2008 and 2017.

Total Agriculture, forestry and fishing Manufacturing Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Activities of households as employers

Employment change (%)

Employment by activity (%)

2008–2013

2013–2017

2008

2013

2017

–16.3 –10.6

9.7 11.7

100.0 4.0

100.0 4.2

100.0 4.3

–29.1 –58.2 –11.6

12.9 9.4 4.7

14.6 12.1 15.7

12.4 6.0 16.6

12.8 6.0 15.8

–14.3 –8.5

12.8 22.7

4.7 7.1

4.9 7.8

5.0 8.7

–7.2

16.5

4.4

4.9

5.2

–5.9

6.0

4.6

5.2

5.0

–1.7

0.9

6.4

7.5

6.9

0.1 5.7

8.2 14.6

5.7 6.3

6.8 7.9

6.7 8.3

–10.2

–6.3

3.6

3.9

3.3

Source: Authors’ own calculations on Eurostat, employment between 15 to 64 years. The table only shows sectors with a share in total employment of 3% or more.

Speaking now about the recovery in industrial activity, the general recovery of the economy has allowed different sectors to consolidate (such as food production) and companies to modernise: this is similar to what happened in Italy. The automotive industry has played an important role in the recovery, and it is one of the differences between Spain and Italy. While Spain became a platform for large European groups (specialising in the production of medium- to low-end vehicles), Italy has had only one producer (the former FIAT, now FCA) with a relatively low likelihood of growing and therefore being able to take advantage of expansive phases. But the real engine of growth in this recovery has been tourism, and more so in Spain than in Italy, despite the sector growing in importance in Italy as a proportion of total economic activity.

Spain and Italy after the Great Recession

47

Table 2.3 Employment change and employment by activity in Italy between 2008 and 2017.

Total Agriculture, forestry and fishing Manufacturing Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Activities of households as employers

Employment change (%)

Employment by activity (%)

2008–2013

2008

2013

2017

2013–2017

–4.2 –7.1

3.2 9.0

100.0 3.5

100.0 3.4

100.0 3.6

–11.8 –20.9 –4.9

2.9 –8.9 –0.7

20.0 8.5 14.8

18.4 7.0 14.7

18.4 6.2 14.2

–3.4 6.0

7.3 17.8

4.7 5.0

4.7 5.6

4.9 6.3

–6.2

6.8

6.1

6.0

6.2

6.5

7.5

3.7

4.1

4.3

–8.8

–4.4

6.3

6.0

5.5

–6.9 7.8

7.0 4.1

7.0 7.1

6.8 8.0

7.0 8.1

72.0

5.5

1.8

3.2

3.3

Source: Authors’ own calculations based on Eurostat. Employed persons between 15 and 64 years of age. The table only shows sectors with a share in total employment of 3% or more.

The third factor in this recovery, after the auto industry and tourism, and in this case the differences are clear, is the public sector (Cárdenas et al., 2018). After the dramatic budget cuts of 2010–2013, there was a moderate expansion of the public sector in Spain, which can be seen in a clear increase in employment figures associated with public activities (i.e., administration, education, health and social services). In this field, the divergence with Italy is noteworthy. The difference between the recent changes the Spanish public sector and the Italian public sector has to do with the countries’ different macroeconomic frameworks. While Italy has experienced public deficits below 3% throughout the expansionist (recovery) period, Spain has been allowed to follow a looser fiscal policy during this same period, which was justified by the extremely high level of unemployment and the devastating effects of the great fiscal adjustment. This was also due to the fact that the level of Spanish

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public debt was, despite being very high, lower than Italy’s. Beyond this crucial factor, the expansion in spending can be explained by internal institutional factors, especially by the role of the autonomous communities, which have been the main drivers behind the moderate expansion in public employment.

Conclusion: no change ahead As we have shown throughout this chapter, there are structural differences between the economies of EU member states (productive specialisation and international division of labour, external balance of trade, fiscal model, welfare state model) and these became even deeper during the crisis. One of the causes has been the historical trend towards differentiation that has been in place for some time. The other can be found in the policies implemented with zeal in recent years and in the EU’s structure and economic policy framework, as we discussed above in our introduction. Spain and Italy are two Southern EU countries that have further diverged from the rest of Central Europe during the crisis, and the recovery initiated in 2014 is not reversing this trend. The causes of this situation can be found in the responses given to the crisis, which can be classified into two different categories. One is the imposition and/or recommendation of macroeconomic policies and reforms designed by the EU. These have affected each country differently, and, in the case of Spain and Italy, they have limited their respective abilities to use recovery to adopt a more solid productive model. The other has to do with two issues at the national level, the first being the different situation of each country at the beginning of the crisis and the second being the specific positions adopted by the countries’ economic elites (in as much as global EU-mandated policies can be massaged to a certain degree at the national level). There are common elements in the history of both countries. In both, there was a process of deindustrialisation, which was further reinforced by the crisis, although in a much deeper fashion in Spain. Both are increasingly specialising in the tourism sector, which is a risky strategy because of the threat posed by new potential competitors; it also carries substantial social trade-offs: precarious employment, urban speculation and environmental pressures. In both nations, there are important regional fractures seemingly impossible to solve that, in turn, generate dangerous political dynamics. In both nations, the public sector has reached very high levels of indebtedness and the fiscal system requires an in-depth revision. Both nations are plagued by high levels of corruption and the diversion of public funds towards speculative networks, although this problem seems to be more entrenched in Italy than in Spain. And both nations at present are undergoing economic trends that are conducive to higher inequality and poverty, though in this case the situation is worse in Spain. The post-crisis recovery has not stopped negative trends such as deindustrialisation, precarious employment, and financial problems in the public

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sector. The recovery has been partly helped along by various “tail winds” that have allowed problems to be ignored for the time being: they include the fall in the price of crude oil (which affects a basic input for the entire economy) and a looser monetary policy that has allowed high levels of public and private indebtedness to persist. But there has been no serious attempt to review the institutional framework and processes of the EU or to substantially reform the productive structure and public policies. Without these changes, it is difficult to expect a more balanced and sustainable model in the long term. In this situation, a new financial upheaval or recession could push both countries to the brink of economic disaster once again.

Notes 1 European Commission’s Press Release Database at http://europa.eu/rapid/press-re lease_IP-17-2401_en.htm [accessed 13 July 2019]. 2 According to Eurostat, the percentage of public spending as a proportion of GDP in the Euro area countries between 1999 and 2008 was around 47%, which is similar to Italy’s. In Spain’s case, it was around 40%. With the advent of the crisis, this percentage increased in the Euro area as a whole as well as in Italy, reaching 50%, while in Spain it hovered around 45% (with a peak of 48% in 2012). From 2013 onwards, there has been a reduction in this value: in 2017, the Euro area was at 47%, Spain was at 41% and Italy was at 48.8%.

References Álvarez, I., Uxó, J. and Febrero, E. (2019). Internal devaluation in a wage-led economy: the case of Spain. Cambridge Journal of Economics, 43(2), 335–360. Banyuls, J., Miguélez, F., Recio, A., Cano, E. and Lorente, R. (2009). The transformation of the employment system in Spain: Towards a Mediterranean neoliberalism? In G. Bosch, S. Lehndorff and J. Rubery (eds), European Employment Models in Flux (pp. 247–269). London: Palgrave Macmillan. Banyuls, J. and Recio, A. (2012). Spain: the nightmare of Mediterranean neoliberalism. In S. Lehndorff (ed.), A Triumph of Failed Ideas: European Models of Capitalism in the Crisis. Brussels: European Trade Union Institute, 199–218. Banyuls, J. and Recio, A. (2014). Spain: in search of an industrial policy. In F. Gerlach, M. Schietinger and A. Ziegler (eds), A Strong Europe but Only with a Strong Manufacturing Sector Industry. Marburg: Schüren Verlag, 248–275. Banyuls, J. and Recio, A. (2015). A crisis inside the crisis: Spain under a conservative neoliberalism. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 39–68. Bielsa, J. and Duarte, R. (2011). Size and linkages of the Spanish construction industry: key sector or deformation of the economy? Cambridge Journal of Economics, 35(2), 317–334. Blyth, M. (2013). Austerity: The History of a Dangerous Idea. Oxford: Oxford University Press. Bosch, G., Lehndorff, S. and Rubery, J. (eds) (2009). European Employment Models in Flux. London: Palgrave Macmillan.

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Cárdenas, L., Villanueva, P., Álvarez, I. and Uxó, J. (2018). Peripheral Europe beyond the Troika: assessing the “success” of structural reforms in driving the Spanish recovery. FMM Working Paper, no. 40. Düsseldorf: Hans Böckler Stiftung. Esping-Andersen, G. (1990). The Three Worlds of Welfare Capitalism. Cambridge: Polity Press. Fana, M., Guarascio, D. and Cirillo, V. (2017). The crisis and labour market reform in Italy: a regional analysis of the Jobs Act. In A. Piasna and M. Myant (eds), Myths of Employment: How It Neither Creates Jobs Nor Reduces Labour Market Segmentation. Brussels: European Trade Union Institute, 81–102. Hall, P. and Soskice, D. (eds) (2001). Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. New York: Oxford University Press. Karamessini, M. (2008). Still a distinctive Southern European employment model? Industrial Relations Journal, 39(6), 510–531. Lehndorff, S. (2015). Europe’s divisive integration: an overview. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 7–37. Miguélez, F. and Recio, A. (2010). The uncertain path from the Mediterranean welfare model in Spain. In D. Anxo, G. Bosch and J. Rubery (eds), The Welfare State and Life Transitions: A European Perspective. Cheltenham, UK: Edward Elgar, 284–308. Simonazzi, A. (2009). Care regimes and national employment models. Cambridge Journal of Economics, 33(2), 211–232. Simonazzi, A. (2012). Italy: chronicle of a crisis foretold. In S. Lehndorff (ed.), A Triumph of Failed Ideas: European Models of Capitalism in the Crisis. Brussels: European Trade Union Institute, 183–198. Simonazzi, A. (2014). Wanted: an industrial policy for the Southern European countries. The case of Italy. In F. Gerlach, M. Schietinger and A. Ziegler (eds), A Strong Europe but Only with a Strong Manufacturing Sector Industry. Marburg: Schüren Verlag, 146–173. Simonazzi, A. (2015). Italy’s long stagnation. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 69–94. Simonazzi, A. (2017). Labour policies in a deflationary environment. In D. Grimshaw, C. Fagan, G. Hebson and I. Tavora (eds), Making Work More Equal: A New Labour Market Segmentation Approach. Manchester: Manchester University Press, 268–287. Simonazzi, A. and Ginzburg, A. (2015). The interruption of industrialization in Southern Europe: a center–periphery perspective. In M. Baumeister and R. Sala (eds), Southern Europe? Italy, Spain, Portugal and Greece from the 1950s until the Present Day. Frankfurt: Campus Verlag, 103–137. Simonazzi, A., Villa, P., Lucidi, F. and Naticchioni, P. (2009). Continuity and change in the Italian model. In G. Bosch, S. Lehndorff and J. Rubery (eds), European Employment Models in Flux. London: Palgrave Macmillan, 201–222. Wickham, J. (2016). Where is Southern Europe? Economia & Lavoro, 50(1), 39–45.

3

The German “reforms” – no model for the EU Gerhard Bosch and Steffen Lehndorff

Introduction Economic convergence between the member states was one of the fundamental objectives of the European Community from its inception. Nevertheless, the Maastricht Treaty of 1992, which laid the foundations for the European Monetary Union (EMU), and the “quantum leap in economic surveillance in Europe” announced by then European Commission (EC) President José Manuel Barroso during the Eurozone crisis (Phillips, 2011) contributed substantially to a development in the opposite direction. Simonazzi et al. (2019, p. 205) noted that the EMU’s institutional architecture was based on the assumption that countries that met the so-called “Maastricht criteria” for accession were all on a level playing field. The criteria referred to financial rather than real indicators, with no consideration for its members’ different levels of development. It was believed that monetary union would increase symmetry. … As a result, the EMU institutions left the currency disembedded from the fiscal, social and political institutions required to make a currency union viable. The institutional incompleteness underlying the economic design is at the heart of the growing divide between core and periphery countries in Europe and lies behind the European leaders’ (political) inability to prevent the international financial crisis from developing into a full-blown sovereign and economic crisis. Many of the proposals for solving the Euro crisis commit the same error as was committed in establishing the currency union on the basis of the Maastricht criteria. Again, the austerity rules were established and are enforced primarily by means of financial indicators. German governments, which played a crucial role in establishing these rules, were able to take advantage of the comparatively positive economic and labour market developments in Germany since the Great Recession and present the German model as the best solution for all the other countries. However, it soon became evident that the German export model cannot simply be generalized. Germany’s current account surpluses stand in contrast to deficits in other countries. As Krugman

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(2012) rightly noted, “Germany’s experience can only be generalized if we find some space aliens to trade with.” What is more, the convergence debate cannot be conducted on a countryby-country basis. It must be regarded as part of the interactions between core and periphery within the EU single market and its monetary union. Within the EMU, a policy adopted in one country – in particular the largest one – can have both negative and positive effects on the convergence processes in other countries. In the present chapter, we present a contrasting line of argument to the mainstream view on the German “role model.” While large swaths of the German and European public regard the so-called “structural reforms of the labour market” of the early 2000s as crucial to international cost-based competitiveness (Dustmann et al., 2014), we will argue that the German export boom is based primarily on process- and product-based competitiveness, which made the add-on of dropping labour costs in the strongest EU economy up until the crisis particularly harmful for other countries. The pertinence of process- and product-based competitiveness has been underscored by the (albeit modest) pay rises in Germany since the Great Recession, which have impacted German current accounts only marginally. If this argument is correct, then it has far-reaching implications for all deliberations on how to resolve the Euro crisis. Above-average wage increases in Germany will not by themselves eliminate the imbalances in current accounts. The fundamental reforms in Germany that we consider to be necessary and that we outline by way of conclusion are, it is true, indispensable for a shift towards greater convergence within the EU’s single market and for the survival of the Eurozone. They would create more room for manoeuvre, but governments in other countries – particularly those on the “periphery” – would have to use that extra leeway in order to develop and implement the necessary reform programmes themselves that would contribute to convergence between the various national economies in the EU single market. The fixation on low labour costs and reduced public expenditure is the opposite of what is urgently required.

The innovation of the production model Germany’s international trade has specialized in high-value manufactured goods. After the Second World War, it developed into an economy with chronic current account surpluses that had to be repeatedly reduced by revaluations of the Deutsche Mark. However, when the euro was introduced, this adjustment mechanism could no longer be used. Since then, the export surpluses – which had been contained temporarily during the 1990s by the increase in domestic demand following German unification – have begun to soar. The weakness of the euro – a consequence of the crisis in many EU member states and of the EU’s austerity policy – has given an additional boost to Germany’s exports to countries beyond the Eurozone. Thus, the current account surplus reached a new record high of 8.7% of Gross Domestic Product (GDP) in 2016,

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dramatically exceeding the upper limit of 6% set by the EU, but without sanctions being imposed. When it comes to understanding the importance of this development for the deepening divide between core and periphery in the EU, and the lessons to be drawn for the future, we need to distinguish between the two factors driving this process: the product-based competitiveness of German manufacturing, on the one hand, and internal devaluation, on the other. In contrast to the rest of the EU, the latter was adopted by German governments before the crisis. The combination of these two drivers disrupted the “German model” with negative effects for the whole of the EMU. The core of what was long described as the German variant of “coordinated” or “Rhenish capitalism” was a combination of economic dynamism and relatively low social inequality. Germany’s main economic base has been the persistent strength of its export-oriented manufacturing industry. The latter’s performance and success were based primarily on a high degree of specialization and product quality, especially of capital goods, a strong orientation towards customer service, and the flexibility and qualifications of its workforce as a basis of product as well as process innovation. What happened in the two decades before the Great Recession was a renewal of this production model. Drawing on Japanese models, a distinctively German variant of lean production was developed. The traditionally very rigid hierarchies were replaced by flexible, process-oriented forms of work organization. The pace of innovation was increased by simultaneous engineering, which is the establishment, at an early stage, of links between research and development and experiences from the production floor. The outsourcing of many activities and the introduction of just-in-time systems occurred at the same time as the fall of the Iron Curtain. This gave German companies, and particularly those in the automotive and machine tool industries, an opportunity to reorganize their supply chains on an international basis. Hungary, Slovakia, the Czech Republic and Poland have become part of the German automotive cluster, much to the disadvantage, incidentally, of the Southern European countries, which lost contracts in this reorganization: “Differently from the French and Italian strategies, which have offshored the entire production, including final assembly and exporting, to foreign countries, the German automotive companies have tended to implement a vertical specialization strategy, keeping high-value/high-tech production stages at home” (Celi et al., 2018, p. 183). The other key elements of this reorganization, finally, are the flexible working-time arrangements negotiated with the trade unions and the modernization of vocational training. When stocks were reduced following the introduction of just-in-time production, the only temporal buffer available for dealing with fluctuations in orders was working time. In large and mediumsized firms with strong trade unions and works councils, flexible annualized working-time systems were negotiated that enjoyed a high level of acceptance. In smaller suppliers, this tended to lead to a form of flexibility prescribed by management. In vocational training, specialist occupations were combined to

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form broadly based occupations and trainees were taught to work independently as part of a team. In 1987, there were still 34 separate metal-working occupations; these were merged into two stages to form 5 basic occupations, which facilitated a rapid adaptation to new technologies as well as inter-firm mobility and advanced training (Lehndorff et al., 2009). Agile procedures have now been put in place so that these occupations can be checked every year to ensure that they remain up to date. Virtually all workers in the core sectors of the German manufacturing industry now have vocational or university-level qualifications. The state supported this modernization policy by expanding basic and applied research. In 2017, 3% of GDP was spent on such research, the highest figure in all the large EU member states. This transformation of the German production model, without which the evolution of Germany’s exports cannot be understood, has taken place in small steps over the past 30 years almost unnoticed by the public as well as by many economists. It has been a “silent revolution” that stands in sharp contrast to the labour market reforms of 2003, which Chancellor Gerhard Schröder heralded with much publicity, and the massive tax reductions introduced at the beginning of the new millennium. However, this revitalization of a high-performance export industry took place in a domestic environment characterized by social and institutional disintegration and fragmentation as a result of internal devaluation. It was this linkage of innovation with internal devaluation that paved the way for the Eurozone crisis.

Internal devaluation The first key element of internal devaluation was the impoverishment of the state through privatization and tax reforms that benefitted large companies and capital owners, which had to be matched by continuous and exacerbating underinvestment in public infrastructure and social services (Rietzler, 2014). As a result, public investment, particularly in Germany’s municipalities, has declined sharply since 2000 because of this restrictive budgetary policy. Between 2003 and 2009, net public investment was actually negative (Gornig et al., 2015, p. 1028). The stock of public capital declined, and the country’s infrastructure was literally being used until it “wore out,” as economists at the German Institute for Economic Research put it (Gornig et al., 2015, p. 1023). It is obvious that in the long run this erosion of public infrastructure may become harmful for the manufacturing industry, but in the short run the associated lower taxes have helped to increase the profits of the German export industry. The collateral damage caused by the impoverishment of the state included the fragmentation of and the putting of enormous pressure on collective bargaining in the public sector, which played a part in the second key element of internal devaluation – namely, the weakening of the collective bargaining system as a whole (for details, see Bosch, 2019; Dribbusch et al., 2018; and Haipeter and Lehndorff, 2014). Workforce coverage by collective agreements

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fell from 81% in 1995 to 56% in 2016 (OECD, 2019). While this decline was aided initially by the outsourcing of activities to companies not bound by collective agreements, it was further accelerated by the government’s decision, under pressure from employers, to abolish the practice of extending sector-level collective agreements to all companies in a given sector. This trend, in turn, contributed to a substantial weakening in pattern bargaining by unions across sectors, which led to an overall negative wage drift and increasing dispersion in the evolution of both collectively agreed upon and actual wages, in particular between manufacturing, on the one hand, and major private, including recently privatized, service industries, on the other. These developments were further compounded by local divergences from collective agreements, which had been gaining momentum since the 1990s. The third key element of internal devaluation consisted of the so-called “Hartz Reforms” of the early 2000s (Bosch, 2015a; Knuth, 2014). They brought about changes in the architecture of labour market regulation that included the partial replacement of unemployment insurance by a meanstested benefit system with intimidating ripple effects in broader segments of the labour market, the abolition of many restrictions on temporary employment and marginal part-time jobs (mini-jobs), as well as several pension reforms which lowered pension levels, abolished previously existing pathways into early retirement and increased the statutory retirement age from 65 to 67 (to be done gradually by 2029). Given the widely shared belief that internal devaluation in general and the “Agenda 2010” in particular were the reasons for this recent job growth, it is important to note that these “labour market reforms” had no discernible effect on the employment intensity of GDP growth (Herzog-Stein et al., 2013). Their only effect that is not controversial in the current political and academic debates is their importance for the evolution of wages. Despite a (belated) economic upturn, nominal wages per hour worked stagnated between 2004 and 2008, thus becoming detached from the general Eurozone trend. Average real wages per employee actually dropped until the crisis. And given Germany’s (comparatively) favourable track record in labour productivity, the gap between developments in Europe as a whole and in Germany was even more pronounced when it came to unit labour costs. Between 2004 and 2008, unit labour costs in Germany fell, while they rose sharply in the rest of the Eurozone, particularly in the Southern European countries subsequently hit by the economic and financial crisis. In the German case, and in contrast to some other EU countries, internal devaluation meant in practice that from the early 2000s the product- and process-based strengths of the manufacturing industry were combined with, and supplemented by, a decline in unit labour costs relative to competing economies. As a more detailed analysis of the structure and evolution of labour costs per hour by industry in 2016 shows (Albu et al., 2017), this has been a complex process with important social implications:

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At 39 euros per hour worked in the manufacturing sector, Germany is in fourth place in the EU and far above the average for the Eurozone (32.4 euros). In no other EU member state are the differences in labour costs between the manufacturing industry and private services as pronounced as in Germany. In the Eurozone as a whole, the gap was 3.6 euros; in Germany, on the other hand, it was 8.4 euros and has increased yet further since the introduction of the euro. Input–output analyses of sales and deliveries between industries show that the share of services in pre-deliveries to German export industries was 31% in 2012, which equates to a reduction in industrial labour costs of around 4 euros. Overall, the differences between labour costs in various industries in the German labour market have increased considerably, particularly in private services: “The differences of labour costs by industries (difference of 34.3 euros) is almost as great as that between Denmark and Poland (difference of 35.4 euros), which occupy first and twenty-fourth position, respectively, in the country rankings for labour costs in the private sector” (Albu et al., 2017, p. 10).







Thus, the data show that labour and unit labour costs have evolved unequally, not only within the EU but also within Germany itself. Large swaths of German society became victims of internal devaluation before this policy approach hit other countries. This development had two effects. The first and most obvious one was virtual stagnation in the domestic market. Up until the crisis, the largest EU economy suffered from an import deficit which hampered, if only to a certain extent, the trading opportunities for other economies within the EMU. The second effect is related to the widely shared observation that the price elasticity of demand for many German export products is relatively low. Thus, while dropping nominal unit labour costs allowed average export prices to rise at a slower pace than in other Eurozone countries, they did continue to rise from 2003 to 2008. As Deutsche Bundesbank (2011, p. 33) pointed out, part of the relevant cost benefits “were apparently used to increase profit margins.” Under these circumstances, trade surpluses went hand in hand with soaring capital exports. Due to weak economic growth at home, only a small part of the rising profits of German firms was used for domestic investment (Ma and McCauley, 2013). Thus, German profits actively participated in the booming global financial market bubble and, in particular, in the financing of strong growth driven by mostly private debt in Europe’s deficit countries. German investors were among the largest foreign creditors of the indebted US private sector, and German banks were the largest creditors of partly public but primarily private debtors in Greece, Ireland, Portugal and Spain (Bofinger, 2010; Lindner, 2013). It was thus only a minor journalistic exaggeration, when a commentator in the British Guardian newspaper declared: “Germany blew the bubbles that popped up in the rest of Europe” (Chakrabortty, 2011).

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To sum up, up until the crisis the German economy was driven into a process of internal devaluation within the EMU, while the economic policy approaches in other countries did not follow the same logic. The outcome up until the crisis was a growing rift between Germany along with a few other ‘core’ countries with high current account surpluses and low GDP growth rates, on the one hand, and a ‘peripheral’ group of deficit countries with high growth rates, on the other. After this house of cards had collapsed in 2008, German governments played a decisive role in the implementation of the “austeritarian regime” (Dufresne and Pernot, 2013, p. 4), that is, austerity imposed in an authoritarian manner. To a large extent, they were able to play this role because they benefitted from a powerful economic and political tailwind due to the fact that, after the bursting of the bubble, the German economy turned out to be an island of (relative) stability. This stability is frequently advanced as proof of the benefits of the painful “structural reforms” of the early 2000s that serve as the main justification for austerity and labour cost reductions implemented in the name of economic growth and international competitiveness. But what lies behind this alleged proof ?

A misattributed success story Developments in the German labour market over the past decade can be regarded as a success story, at least by comparison with those of other European labour markets. But their roots have nothing to do with the so-called “reforms” of the labour market in the early 2000s. They began with the truly astonishing stability in the German labour market during the financial crisis, which was the main reason for the rapid economic recovery from the third quarter of 2009 and the ensuing growth in employment. Contrary to the relentless mantras that had previously prevailed, extensive economic stimulus programmes were implemented in 2008 and 2009, together with a radical shift from external to internal flexibility at the company level. Key to the revival of internal flexibility were short-time working schedules and other working-time measures aimed at reducing the volume of hours worked (Kümmerling and Lehndorff, 2014). The generally positive experience of safeguarding employment by reactivating precisely those elements of the German social model that had survived the neoliberal zeal for demolition triggered a fresh political dynamic that could not easily be dismantled again as economic recovery set in from the second half of 2009. Internal devaluation could not be pursued as easily as in the pre-crisis years. This gave rise to a paradoxical situation that continues to dominate the European scene. This paradox is reflected in the new trends in the evolution of wages in Europe since 2010 as compared with the period before the Great Recession (Figure 3.1). The contrast is striking, due not only to the dramatic wage cuts in most of the crisis-ridden countries but also to the generally more favourable evolution of wages in Germany. Apart from the Baltic states, Malta and

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Slovakia, Germany has seen the highest wage increases of all Eurozone countries since 2010. This shift is attributable largely to the experience of 2008–2009 and the widespread public criticism of the consequent increase in social inequality. This encouraged the trade unions to adopt a more active wage policy and to be more willing to engage in disputes. Furthermore, the public debate inside Germany has triggered new labour market regulations (most importantly the introduction of a statutory minimum wage) that have served more recently to reinforce these positive wage trends. This constitutes a trend reversal that Horn and Watzka (2018) describe as a “secret paradigm shift.” It is true that, if balanced economic development is to be achieved in Germany and Europe, this shift is still much too weak and the import deficit remains too high. Nevertheless, the stabilizing influence of consumer demand on the domestic market should not be underestimated. In most years after 2009, domestic demand contributed much more to growth than did export surplus (Herzog-Stein et al., 2017). As a consequence, the wage rise in Germany after the crisis led to a higher GDP growth rate than in the first decade of EMU, while the German export sector continues to benefit from both the drop in unit labour costs before the crisis and the low euro exchange rate since the crisis (Horn and Watzka, 2018). Moreover, public sector demand has further boosted the domestic market. Because of increasing employment and rising wages, tax revenues are also increasing. This positive sum game has produced a kind of crisis dividend, namely the interest rate benefits for the German budget arising from the Euro crisis. The so-called “safe haven effect” made German government bonds such a desirable form of investment that their average overall interest rates dropped substantially, which has led to important savings on German government interest payments despite a higher public debt. Irrespective of these more favourable economic dynamics, the damage caused by the impoverishment of the state and the weakening of labour market institutions since the 1990s continue to undermine social cohesion in Germany. The proportion of employees and households on low incomes and, more generally, income inequality continue to hover around their high pre-crisis levels (Bosch and Kalina, 2018). The significance of temporary and agency employment has not diminished, but the number and share of full-time workers with open ended contracts has recently gone up for the first time this century. The recent introduction of the statutory minimum wage has contributed to this more positive tendency, as it has triggered a certain shift from mini jobs to regular employment (Bosch, 2016). And the underinvestment in public infrastructure and social services has become one of the most urgent problems in the German public debate. Nevertheless, the rising awareness of these problems and the tentative shifts in emphasis in social policies away from pre-crisis deregulation approaches, as well as the stronger evolution of wages, are still too weak to enable the German economy to give the powerful impetus needed to help overcome the Eurozone crisis. However, even if that impetus were to strengthen, it would be

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a necessary but not a sufficient contribution to the survival of the ill-constructed European “competition union” (Lehndorff, 2015). It is to this interaction that we now turn in our conclusion.

Conclusion and outlook As Annamaria Simonazzi and her colleagues noted, “what began as a community of equals is now a deeply divided Europe, with debtor countries resenting the conditionality and costs imposed by the creditor countries, and the latter feeling constantly threatened by the debtors’ free-riding behaviour” (quoted in Celi et al., 2018, p. 275). Germany’s unsustainable current account surplus is one major driver of this drift apart. We have demonstrated in this chapter how internal devaluation in Germany before the crisis had contributed actively to the emergence of European economic imbalances. What has happened since the financial crisis, however, has been a paradoxical turn of events. On the one hand, the “new economic governance” in the EU (enshrined in the Six-Pack, the Fiscal Compact, etc.) has declared, under considerable pressure from a group of governments led by Germany, that internal devaluation has to be the definitive and binding guideline for EU member states. And whenever deficit countries such as Greece, Portugal and Spain have had to ask for financial support, they have been forced by the Troika or the EC to impose painful internal devaluations through large-scale interventions in national wage systems, labour market regulations and government budgets. On the other hand, however, internal devaluation has been curbed in Germany and some initial attempts have been made to limit the damage caused by the neoliberal “reforms” put in place before the crisis. As stated above, wages in Germany have been rising more sharply since the financial crisis than in most other Eurozone countries. This has turned, for the first time since the establishment of the monetary union, the domestic market into the strongest driver of economic growth in Germany. At the same time, the current account surplus with the Eurozone countries has been reduced somewhat due to internal devaluation in those countries, which has led to a decline in imports. While Germany’s trade surplus with the rest of the world is supported by the low euro exchange rate, it depends in particular on growth rates in China and the US and on future developments in the current conflicts over international trade. Nevertheless, the current account surplus, at 7.4% of GDP in 2018, was still above the level of 6.0% that is officially regarded by the EC as endangering stability. These experiences confirm that the hopes of many neighbouring European countries that the German current accounts could be brought into equilibrium solely through rising unit wage costs in Germany are unrealistic. On average, the price elasticity of the demand for German export goods is relatively low, and more and more countries outside the Eurozone are taking advantage of the German demand for imported goods (Simonazzi, 2015, p. 90). In the past, German exports always recovered quickly despite significant revaluations of the

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Deutsche Mark. The German Council of Economic Experts has calculated the net exposure to exports from China and Eastern Europe for the Western European regions in the period from 1991 to 2011. This value measures the difference in the increase in exports and imports in the sectors present in the various regions. The results show that most regions of Germany, in contrast to the UK, France, Spain and Italy, benefitted from trade relations (SVR, 2017, p. 337). The ability of most German regions to withstand competition from price-sensitive imports from countries with lower wages can be explained by their specialization in quality products of higher value with lower price elasticity. Thus, it cannot simply be assumed that in the future German current account surpluses can be balanced out primarily through significantly higher wage increases in Germany. Interestingly, the EC has come to similar conclusions in several studies of current account surpluses in the EU. In two large-scale studies of the surpluses, it concludes the following: “Overall there is no evidence that wage developments are at the root of the development” (European Commission, 2012, p. 91) and “[n]otably, the impact of non-price factors has turned positive and its relative importance has grown since the beginning of the last decade and in some recent years has dominated price factors” (European Commission, 2014, p. 90). Unfortunately, so far this analysis has not called into question the focus on austerity, wage restraint and labour market deregulation as the key to international competitiveness in the overall EU economic policy approach. In Germany, the complex interrelationships between the above-mentioned economic factors have recently been modelled by Horn et al. (2017). They examined the effects on current accounts of an alternative wage policy between 2001 and 2015 that would have taken advantage of the scope for distribution opened up by productivity increases and the European Central Bank’s target inflation rate. According to their calculations, the surplus would have fallen by only €16.4 billion in 2015, a relatively modest reduction given that the total surplus for that year was €220 billion. Real net exports would, it is true, have fallen by €55 billion, but nominal exports would actually have risen as a result of price increases. However, it is important to note that government revenues would have increased significantly because of higher wages and prices. Had these budget surpluses been spent, imports would have increased and the current account surplus would have been reduced by €36.2 billion. Thus, for these authors the key to reducing Germany’s current account surplus lies not solely in wage policy but also in an expansive national fiscal policy, which should be reflected above all in an increase in public investment. Somewhat resignedly, they conclude their article with the following observation: “However, Germany is not yet ready to take its financial policy in this direction” (Horn et al., 2017, p. 20). Thus, wage policies can be only one element in a more comprehensive strategy for fostering the convergence of economic development in the Eurozone that must include public investment, and particularly investment in

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innovation, which would make exports less price-sensitive. This would imply a radical turn away from the EU’s predominant fixation with cost reductions – as imposed by the Troika on Southern Europe – which has mainly aggravated social inequalities and thus contributed to the devaluation of what is ultimately the most crucial productive resource of any national economy, namely human labour. The internal devaluation approach completely disregards these economies’ real shortcomings regarding specialization in price-sensitive products and its implication for vocational training: “No amount of labour flexibility can turn the industry-specific skills of laid-off workers into the new skills now in demand; and no amount of domestic deflation can stimulate the growth of innovative industries” (Simonazzi and Ginzburg, 2015, p. 131). The main challenge for these economies is to regain competitiveness by shifting production towards high-quality/high-value-added products for export to international market segments in order to break the vicious circle of low innovation – low productivity – low competitiveness (Komninos et al., 2014). Consequently, a realistic reform agenda for Europe should not be reliant on internal devaluation but rather should attempt to narrow the gap between a strong core and weak periphery in the EU by adopting an active innovation and industrial policy (Simonazzi et al., 2019, p. 205). German governments must shoulder a particularly high share of the responsibility for such a policy shift, at both the EU and the domestic levels. As to the latter, particularly crucial to such a shift would be the following reforms (for details and references, see Bosch, 2015b and Lehndorff, 2015): 

 



a boost for public services and investment in public infrastructure in conjunction with a radical shift towards a purposeful energy and environmental policy and a modernization of the welfare state that takes due account of gender policy (e.g. cutback of support for the male breadwinner model by the tax system, and a boost for investment in childcare and education). Such a restructuring would trigger a positive sum game for the German domestic market which could be helpful for the EMU as a whole while, at the same time, helping both the economy and society to meet the challenges of climate change and demographic change; a substantial increase in taxes on profits and high incomes needed to finance this public investment and services programme; support for the weakened collective bargaining system beyond the statutory minimum wage by means of a fresh approach to the extension of collective agreements and to the requirement of adherence to collective agreements in public procurement; and re-regulation of the labour market by extending the scope of protection through unemployment insurance; linking the notion of ‘reasonable’ employment conditions to be accepted by job seekers to the criterion of payment of collectively agreed or customary local wages; re-regulation of fixed-term and temporary employment (including equal pay); and the abolition of special regulations for mini jobs.

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Such a shift would be decisive for Europe, too. A more balanced socioeconomic development in the biggest EU economy would reduce the constant pressure on the other countries in the region, and in particular on those within the monetary union, to lower wages and to dismantle the welfare state. Thus, it would take some of the burden off other countries and make it easier for them to turn away from neoliberal policies. However, such a shift away from neoliberalism would also have to be carried through politically in those countries. Only then would it be possible to undertake the joint initiatives at the European level that Simonazzi et al. (2019, p. 220) have characterized as “a combined economic and social programme” and “[an] initiative on the scale of the Marshall Plan” that would include “sustained investment, new training models, programmes to ease worker transitions, income support, collaboration between the public and private sectors and policies to boost skills acquisition, stimulate productivity growth and foster cohesion and convergence.”

References Albu, N., Herzog-Stein, A., Stein, U. and Zwiener, R. (2017). Arbeitskosten steigen in Europa sehr verhalten: Arbeits- und Lohnstückkostenentwicklung 2016 im europäischen Vergleich. IMK Report, no. 128. Düsseldorf: Hans Böckler Stiftung. Bofinger, P. (2010). Eine andere Meinung zur Rolle Deutschlands in der Europäischen Währungsunion. Jahresgutachten2010/2011. Paderborn: Sachverständigenrat, 123–133. Bosch, G. (2015a). The German welfare state: from an inclusive to an exclusive Bismarckian model. In D. Vaughan-Whitehead (ed.), The European Social Model in Crisis: Is Europe Losing Its Soul?Cheltenham, UK: Edward Elgar, 175–229. Bosch, G. (2015b). Eine neue Ordnung der Arbeit: Herausforderungen für die Politik. In R. Hoffmann and C. Bogedan (eds), Arbeit der Zukunft: Möglichkeiten nutzen – Grenzen setzenFrankfurt: Campus Verlag, 480–499. Bosch, G. (2016). Auswirkungen des gesetzlichen Mindestlohns: Schriftliche Stellungnahme für die Mindestlohnkommission zu den Auswirkungen des gesetzlichen Mindestlohns. IAQ-Standpunkt, no. 2016–2004. Duisburg, Germany: Institut Arbeit und Qualifikation. Bosch, G. (2019). Does the German social model support the convergence of living conditions in the EU? In D. Vaughan-Whitehead (ed.), Towards Convergence in Europe: Institutions, Labour and Industrial Relations. Cheltenham, UK: Edward Elgar, 139–174. Bosch, G. and Kalina, T. (2018). Understanding rising income inequality and stagnating ordinary living standards in Germany. In B. Nolan (ed.), Inequality and Inclusive Growth in Rich Countries: Shared Challenges and Contrasting Fortunes. Oxford: Oxford University Press, 153–187. Celi, G., Ginzburg, A., Guarascio, D. and Simonazzi, A. (2018). Crisis in the European Monetary Union: A Core–Periphery Perspective. Abingdon, UK: Routledge. Chakrabortty, A. (2011). Which is the No. 1 problem economy in Europe? The Guardian, 8 August.http://www.guardian.co.uk/commentisfree/2011/aug/08/number-one-problem -economy-europe [accessed 11 June 2019]. Deutsche Bundesbank (2011). Zur Entwicklung der Ausfuhr in den vier großen EWUMitgliedstaaten seit Beginn der Währungsunion. Monatsbericht, July, 17–38.

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Dribbusch, H., Lehndorff, S. and Schulten, T. (2018). Two worlds of unionism? German manufacturing and service unions since the Great Recession. In S. Lehndorff, H. Dribbusch and T. Schulten (eds), Rough Waters: European Trade Unions in a Time of Crises. Brussels: European Trade Union Institute, 209–234. Dufresne, A. and Pernot, J.-M. (2013). Les syndicats européens à l’épreuve de la nouvelle gouvernance économique. Chronique internationale de l’Ires, 143–144, 3–29. Dustmann, C., Fitzenberger, B., Schönberg, U. and Spitz-Oener, A. (2014). From sick man of Europe to economic superstar: Germany’s resurgent economy. Journal of Economic Perspectives, 28(1), 167–188. European Commission (2012). Current account surpluses in the EU. European Economy, no. 9. Brussels: European Commission. European Commission (2014). Macroeconomic imbalances – Germany 2014. European Economy Occasional Papers, no. 174. Brussels: European Commission. Gornig, M., Michelsen, C. and van Deuverden, K. (2015). Kommunale Infrastruktur fährt auf Verrschleiß. DIW Wochenbericht, no. 43. Berlin: DIW ECON, 1023–1030. Haipeter, T. and Lehndorff, S. (2014). Decentralisation of collective bargaining in Germany: fragmentation, coordination and revitalisation. Economia & Lavoro, 48 (1), 45–64. Herzog-Stein, A., Hohlfeld, P., Rietzler, K., Stephan, S., Theobald, T., Tober, S. and Watzka, S. (2017). Aufschwung setzt sich fort: Prognose der wirtschaftlichen Entwicklung 2017/2018. IMK Report, no. 123. Düsseldorf: Hans Böckler Stiftung. Herzog-Stein, A., Lindner, F. and Zwiener, R. (2013). Is the supply side all that counts? How Germany’s one-sided economic policy has squandered opportunities and is damaging Europe. IMK Report, no. 87e. Düsseldorf: Hans Böckler Stiftung. Horn, G., Lindner, F., Stephan, S. and Zwiener, R. (2017). The role of nominal wages in trade and current account surpluses. IMK Report, no. 125e. Düsseldorf: Hans Böckler Stiftung. Horn, G. and Watzka, S. (2018). Ist Frankreich ein Sanierungsfall oder Deutschland? IMK Policy Brief, no. 10. Düsseldorf: Hans Böckler Stiftung. Knuth, M. (2014). Labour market reforms and the “jobs miracle” in Germany: “The impossible gets done at once; the miraculous takes a little longer”. Brussels: European Economic and Social Committee. Komninos, N., Musyck, B. and Reid, A.I. (2014). Smart specialisation strategies in south Europe during crisis. European Journal of Innovation Management, 17(4), 448–471. Krugman, P. (2012). Germans and aliens. New York Times, 9 January.https://krugman. blogs.nytimes.com/2012/01/09/germans-and-aliens/ [accessed 11 June 2019]. Kümmerling, A. and Lehndorff, S. (2014). The use of working-time-related crisis response measures during the Great Recession. Conditions of Work and Employment Series, no. 44. Geneva: International Labour Office. Lehndorff, S. (2015). Model or liability? The new career of the “German model”. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 149–178. Lehndorff, S., Bosch, G., Haipeter, T. and Latniak, E. (2009). From the “sick man” to the “overhauled engine” of Europe? Upheaval in the German model. In G. Bosch, S. Lehndorff and J. Rubery (eds), European Employment Models in Flux: A Comparison of Institutional Change in Nine European Countries. Basingstoke, UK: Palgrave Macmillan, 105–131. Lindner F. (2013). Can Germany be an example for the crisis countries? Economia & Lavoro, 47(3), 151–162.

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Ma, G. and McCauley, R. (2013). Global and euro imbalances: China and Germany. BIS Working Papers, no. 424. Basel: Bank for International Settlements. OECD (2019). Collective Bargaining Coverage. Paris: OECDStat. Phillips, L. (2011). EU ushers in ‘silent revolution’ in control of national economic policies. EUobserver, 16 March. http://euobserver.com/institutional/31993. Rietzler, K. (2014). Anhaltender Verfall der Infrastruktur: Die Lösung muss bei den Kommunen ansetzen. IMK Report, no. 94. Düsseldorf: Hans Böckler Stiftung. Schulten, T. and Müller, T. (2015). A new European interventionism? The impact of the new European economic governance on wages and collective bargaining. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 331–363. Simonazzi, A. (2015). Italy’s long stagnation. In S. Lehndorff (ed.), Divisive Integration: The Triumph of Failed Ideas in Europe – Revisited. Brussels: European Trade Union Institute, 69–94. Simonazzi, A., Ciampa, V. and Villamaina, L. (2019). Italy: How could industrial relations help a return to economic and social convergence? In D. Vaughan-Whitehead (ed.), Industrial Relations in Europe: Fostering Equality at Work and CrossCountry Convergence?Geneva: International Labour Office, 199–222. Simonazzi, A. and Ginzburg, A. (2015). The interruption of industrialization in Southern Europe: a center–periphery perspective. In M. Baumeister and R. Sala (eds), Southern Europe? Italy, Spain, Portugal, and Greece from the 1950s until the Present Day. Frankfurt: Campus Verlag, 103–137. SVR (Sachverständigenrat) (2017). Für eine zukunftsorientierte Wirtschaftspolitik. Jahresgutachten2017/2018. Paderborn: Sachverständigenrat.

Part II

Integration and disintegration in the European Monetary Union

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Did monetary union make political union less likely? Giorgio Fodor

Introduction Most studies on the origins and development of the European Monetary Union (EMU) have been done by economists, who have inevitably concentrated on technical issues and virtually neglected its wider political context. Developments that contemporaries considered crucial have now been forgotten, although at the time they demanded fundamental political decisions. It is now rarely remembered that the intergovernmental committee that launched the EMU worked in parallel with another intergovernmental committee on political union. Political union was also listed in the Final Act of The Treaty on European Union.1 At the time, the two forms of union were seen as logically complementary. In this chapter, I will deal with the question of European political union and its relationship to monetary union within the evolving international context of the late twentieth century. This will show why the question of political union suddenly became urgent in 1989 and why monetary union was achieved at the time. Many archives for this period are still closed, although some scholars have had access to many documents and some journalists have been allowed by politicians to consult top-level material. We also have memoirs written both by politicians who played a major role in this process and by a few policy advisors who were very close and participated in the key decisions. Many of these decisions were purely political and had to be made while considering fundamental strategic issues in a context of great uncertainty. Often these decisions were made in total secrecy, with special care given to avoid informing even colleagues from other departments of what was really going on. Because of this, it is necessary to try to reconstruct how top leaders saw and reacted to events and to use the information available through biographies and autobiographies as well as through interviews. Excluding works strictly confined to the issue of monetary union, I have heavily relied on the following books. For France, I relied on the last two volumes of Favier and MartinRoland’s series on François Mitterrand (Favier and Martin-Roland, 1996, 1999) – the authors were given access to very high-level documents and conducted many interviews, including many with Mitterrand himself – and on

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the memoirs of Jacques Attali, a very close advisor to Mitterrand (Attali, 2006). For Germany, I relied on Teltschik’s (1991) book (Horst Teltschik was a key advisor to Chancellor Helmut Kohl); and for the UK, I relied on Margaret Thatcher’s autobiography (Thatcher, 1995); Grant’s (1994) book on Jacques Delors, which gives a very clear exposition of the role played by this key actor, who had both vision and political ability; and, finally, on Dyson and Featherstone’s (1999) book on Maastricht, which has much useful information, among other things, on internal policy differences within the various countries. In addition, I found the Internet to be indispensable for consulting official documents.

Monetary union The need for a drastic reform of the European Monetary System (EMS) started to be seriously discussed in the first two months of 1988. On January 8 a memorandum to the Economic and Financial Affairs (ECOFIN) Council written by Édouard Balladur, the French Minister of Finance, stressed that countries with a current account surplus of 2% or 3% were a serious anomaly and that there was no pressure on countries that followed monetary policies that were too restrictive. This meant that the burden of adjustment was not fairly shared and fell exclusively on countries with a balance of payments deficit. This was followed on February 23 by a memorandum penned by Giuliano Amato (1988), the Italian Minister of the Treasury, who also mentioned that Germany’s structural surplus reduced the growth potential for other countries and warned that the complete liberalization of capital movements would create new vulnerabilities. He also asked for more harmonization in fiscal matters and regulation. Three days later, Hans-Dietrich Genscher, the Foreign Affairs Minister of the Federal Republic of Germany (FRG), issued a memorandum with the title “A European Currency Area and a European Central Bank” proposing a common European monetary space and a common central bank. It started with the following sentence: “The creation of a single European monetary area with a European Central Bank is an economically necessary supplement to the European single market.” Although it stressed the importance of price stability and of the Central Bank’s independence, his memorandum created great alarm in some circles in Germany – first, because his proposals implied a drastic change in the role of the Bundesbank, and second, because it proposed admitting into the European Currency Area (not necessarily a common currency) all countries participating in the European Monetary Mechanism. This was at odds with the policy of the Bundesbank and the German Ministry of Finance, which had always stressed that economic convergence had to be a precondition to admittance into a future monetary union. His call for a committee composed of experts (and not central bankers) caused further irritation. It was followed a few weeks later (on March 15) by a second German memorandum, this time penned by Jens Stoltenberg, who was at the time President of the

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ECOFIN Council, which was much more cautious and restrictive in tone. It should be noticed that at this stage there was no mention of the subject of political union, although in the minds of many the aim of “ever closer union” was always present. But compared with the Werner Report, published in 1970 while the Bretton Woods system was creaking, this caution is remarkable because for the Werner Report European monetary union was a “leaven for the development of political union, which in the long run it cannot do without” (Werner, 1970, p. 12). To launch the euro, it was necessary to organize this extremely ambitious and complicated task in such a way that it would not be stopped by those who opposed it. This meant finding ways of achieving progress through measures that did not require unanimity at the European Council. A crucial step forward was taken at the Hanover Council on June 27 and 28, 1988, when it was decided to have a committee chaired by the European Commission’s president, Jacques Delors, to report on possible steps towards a monetary union. Great Britain, then governed by Margaret Thatcher, was strongly against both a monetary union and against the creation of a European Central Bank. It is important to point out that the decision to create a committee that would later report to the European Council was a decision that did not require unanimity, an unanimity that could not be achieved at Hanover. Such was the opposition of Prime Minister Thatcher to these measures that the words “central bank” and “monetary union” had to be avoided in the communiqué but, as she did not have the power to veto the initiative, the committee was created. Genscher’s proposal of having a committee of experts was changed into one composed by central bankers with only three other experts. This proved to be a wise decision because it led the central bankers to look at the technical problems of the question and it slowly involved them in the project. At the beginning, there was suspicion and the Governor of the Bundesbank considered the possibility of resigning because he disagreed with the whole project; Delors’ chairmanship was very fair, and his reporting of the discussions was balanced. This helped to create an atmosphere of trust, while his proposal to use only English in the proceedings made communication more fluent and direct. This committee, chaired by Delors, produced a report that was examined at the Madrid Council on June 26 and 27, 1989, where it was decided to launch EMU beginning with a first stage one year later on July 1, 1990. This first phase implied only a vague coordination but was seen as the first step of a process. What happened in the following months can only be properly understood if placed with the context of the collapse of the political regimes in Eastern Europe.

Events in Eastern Europe: 1989 The events in Moscow and in other countries belonging to the Warsaw Pact had a decisive influence on the development of the discussions on monetary

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union and, for a brief period, on political union. Although the Twelve shared a common goal regarding Poland, Hungary and Czechoslovakia, the issue of German reunification opened old wounds and aroused new suspicions. The press reports from that period did not wholly reflect how deep these disagreements ran. Now we have first-hand reports by the main actors themselves, and this makes it possible to reconstruct accurately the chronology of the main events as well as the connection between the developments within the European Community and the evolution of the political situation in Eastern Europe. Not surprisingly, the leaders of different countries had different attitudes and often there were strong disagreements between politicians of the same country. Margaret Thatcher was outspoken in her opposition to the possible reunification of Germany and wanted to stop it by all possible means. She was also against the political integration of Europe, against fixed exchange rates and against monetary union. Moreover, François Mitterrand was deeply worried about the long-term consequences of reunification. He was afraid of going through another Anschluss, which was when Germany absorbed Austria in early 1938, or even another Munich, when, some months later in that same year, the Western Powers agreed to the further expansion of Germany through the absorption of German inhabitants of Czechoslovakia, an event that destroyed the political equilibrium in Europe. Mitterrand, however, thought it would be extraordinarily difficult to oppose openly the process of German reunification: he would not stop it but would only accept it after some conditions were met. It was necessary to integrate more closely the 12 members of the European Community, including the FRG, before unification and before the rest of the Eastern European countries could enter into the European institutions. A constant worry of Mitterrand’s was that the dramatic weakening of Soviet power would cause a backlash in Moscow provoking a coup against Mikhail Gorbachev that would be followed by an aggressively nationalistic government. What had happened at Tiananmen Square in China a few weeks earlier (June 1989) was on everybody’s mind. It would have been a major disaster if the Soviet fear of a powerful Germany froze the whole process of liberalization in Eastern Europe. Notwithstanding the great pressure that he felt to do so, Mitterrand never spoke in favour of German unification; but he never publicly opposed it either. His statements must be read very carefully in order to understand their real purpose. For example, when he spoke in favour of a democratic process that respected existing international agreements, he was saying that the population of the German Democratic Republic (GDR) had to be consulted on its future and that the Oder–Neisse border with Poland had to be recognized by a united Germany. Helmut Kohl, on the other hand, wanted to take advantage of the unexpected opportunities that arose and was eager to grasp them as soon as possible and create an irreversible process. He saw more clearly than others that popular support in East Germany for reunification could become a decisive factor. He also had better information than his foreign colleagues on this

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crucial variable. Kohl, however, was faced with serious constraints, in particular the possible opposition of the Soviet Union and of the United States to German reunification if certain strategic conditions were not met. Furthermore, Kohl had firmly in mind the forthcoming elections of December 1990 and the necessity of not antagonizing his electorate on the right by making concessions to foreign demands. This concerned both the eastern border as well as the Deutsche Mark. As we will see, the issue of the border for a short period created deep distrust between Mitterrand and Kohl. The Bundesbank and the German Finance Minister were deeply sceptical of European plans that could threaten their currency, and a good part of the German population shared their concerns. The United States had to face the problem of the future of NATO (North Atlantic Treaty Organization) and its role in the new Europe. For them it was crucial that Germany remained firmly attached to the West and not be tempted to accept reunification at the cost of withdrawing from NATO. Different outcomes seemed possible, depending on the future of the GDR: it could form a confederation with the FRG for a certain number of years while gradually adopting democracy and undertaking a program of liberalization for its economy, or it could be rapidly united with the latter by means of a political treaty. For Gorbachev, the issue was how to liberalize his bloc without provoking a collapse of the whole system. He had no sympathy for the leadership of East Germany, which was strongly opposed to his policy and allied to his conservative enemies. But he was opposed to the possibility of a reunited Germany inside NATO. At the same time, it was clear to him – as it was to everybody else – that, after the collapse of Communist rule in Poland, Hungary and Czechoslovakia, the soldiers of these states would not fight under the old Warsaw Pact. Furthermore, the economic situation was deteriorating dramatically, and this greatly weakened his bargaining power. After this introductory description of the aims and problems faced by the main actors, it is necessary to present a brief chronology of events and relate them to the negotiations that took place on monetary and political union.

The crisis of the GDR and the negotiations on monetary union A few days after the Madrid Council at the end of June 1989, significant events in Eastern Europe started to unfold; at this crucial moment, it was Mitterrand’s turn to preside over the European Council for a semester starting on July 1. By chance, he simultaneously had a similar role at the G7. In the first week of July, the Trade Union Association Solidarnosc was recognized in Poland and free elections were announced, while in Hungary the Communist Party freed itself from Soviet control. Shortly after the G7 meeting in Paris on July 15, President Wojciech Jaruzelski asked Solidarnosc to form a government. Hungary was changing its policy regarding the flow and control of nationals from other Eastern European countries. For example, it

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refused to send Romanian citizens of Hungarian origin back to Romania; soon afterwards, however, about 200,000 East Germans went into Hungary hoping to be able to cross its border with Austria. Vadim Zagladin, a very close advisor to Gorbachev, rang Jacques Attali, informing him that there would not be a Tiananmen Square in Warsaw or in Budapest. On August 24, the Hungarian Prime Minister asked Gorbachev for permission to open the frontier with Austria. One week later, on September 1, Thatcher asked Mitterrand to help her prevent German reunification. Mitterrand thought it was difficult to oppose it but tried to sooth his British colleague with a powerful argument. Gorbachev would never accept a united Germany inside NATO, while the United States would never allow the FRG to leave NATO. On September 11, Gorbachev authorized Hungary to open its border with Austria: East Germans could cross into West Germany through Austria. On October 8, big popular demonstrations forced the resignation of Eric Honecker, the East German leader, an opponent of Gorbachev’s perestroika. The next day, the Hungarian Communist Party dissolved itself. Less than a week later, on October 24, Kohl met Mitterrand in Paris. Kohl was keen to have no obstacles in his desire to deal directly with East Germany, while Mitterrand insisted that German reunification must take place in a European context. This meant closer ties among the 12 members of the European Community: he proposed to really launch the EMU together with the Social Charter at the next European Council at Strasbourg on December 8 and 9. Kohl listened without accepting nor rejecting the proposal, but this was rightly interpreted as a refusal. The next day, Mitterrand declared at the European Parliament that he would call, at the European Council in Strasbourg in December, for an Intergovernmental Conference (IGC) on Monetary Union in the autumn of 1990, before the German elections of early December. Kohl was furious, and two days later, on October 26, Mitterrand received a letter from him in which he asked for an indefinite postponement of the IGC, saying that it could perhaps be convened in 1991 – that is, one year later – but only if the European Council due to meet in Rome at the end of 1990 should approve the preparatory work of the various Finance Ministers. On the night between November 8 and 9, the Berlin Wall was opened, and on November 9 the East German authorities opened the border with West Germany. Kohl, who was on an official visit to Warsaw, decided to cancel his engagements and go immediately to Berlin. (It is worth pointing out that, due to the special status of Berlin in 1989, the German Chancellor could not fly directly to Berlin in a German plane. Air traffic to Berlin was a monopoly of the Allies. He had to fly from Warsaw to Hamburg in a German plane and then board a small United States Air Force plane to go to Berlin.) In his speech there, he pronounced a sentence that created immediate alarm not only in Eastern Europe but also among the 12 members of the European Community. He said that as a West German he recognized the border with Poland but it was up to the united Germany to approve the definitive borders

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of the country. Raising the issue in his first speech after the collapse of the Wall had a political significance that could not be ignored. From that moment, the issue of the Oder–Neisse border with Poland became a crucial point in the days that followed and risked to destroy the French–German alliance that had led the European Community for many years. In 1950, this border, drawn by the Allies at Potsdam in 1945, had been agreed upon in a treaty between Poland and the GDR and 20 years later by the FRG, which was led by Willy Brandt at the time. But these legal acts did not necessarily bind the new Germany: the Basic Law that created the FRG, which came into effect in 1949, stated that a united Germany would decide on its borders. Kohl had no apparent interest in reopening the issue, but he had a political problem. With his eyes fixed on the next elections in early December 1990, he did not want to antagonize the part of his electorate that had fled Eastern Europe at the end of the war. The surface area of Germany that had been transferred to other countries, more than 100,000 km2, was about the same as the surface of the GDR, and the refugees therefrom in addition to their descendants amounted to about ten million people. Their original party, Bund der Heimatvertriebenen und Entrechteten, transformed itself into a pressure group, the Bund der Vertriebenen, which had about 2 million members. Their sympathies oscillated between Kohl’s party and the extreme right Republicans, the only political party in Germany that asked for self-determination for the “German lands” behind the border. Kohl needed their votes and was most reluctant to officially recognize the Oder–Neisse frontier in November 1989. A similar problem arose with the issue of monetary union: he did not want to take any step that could imply giving up the Deutsche Mark before the elections. He was a sincere European and was hurt by the fact that people who knew him well could doubt his commitment to a stronger Europe and refused to understand his short-term electoral constraints. For his part, Mitterrand had no doubts about Kohl’s personal intentions, but he was worried about what could happen to Germany after Kohl and therefore wanted a formal commitment from the German Chancellor. In the Soviet Union and in Poland, Kohl’s words touched a raw nerve and renewed fears that a united Germany could try to use its new power to question its borders. The next month, between Kohl’s Berlin speech of November 10 and the European Strasbourg Council of December 8 and 9, was a period of acute tension between the European partners, especially between France and Germany. Alarmed by the developments in Germany, Mitterrand convoked an informal meeting in Paris to be held on November 18, while Thatcher wrote to Gorbachev, assuring him that Great Britain would prevent alterations to the status of Berlin assented to by the United States, the Soviet Union, Great Britain and France in their agreement of 1971. At a dinner in Paris on November 18, Mitterrand was keen to avoid discussing exclusively developments in Germany because he wanted to link these developments to his projects for integrating Europe more closely together. The meeting started very badly, with Thatcher “unchained” (Attali, 2006)

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against Kohl. Mitterrand opened a discussion on monetary union, whereupon not only Thatcher but also Kohl declared themselves against both monetary and political union. At this stage, German unification was still considered a distant possibility. When at the Paris dinner Kohl said that it was not possible to stop the German people from fulfilling their destiny, Thatcher, livid with rage (“folle de rage”; Attali, 2006), exclaimed: “You see, you see. That is what he wants.” On November 22, in an interview with the Wall Street Journal, Mitterrand warned that the Soviet Union would oppose the idea of German reunification but on November 24 Zagladin informed Attali of a crucial change in Gorbachev’s policy: if East Germans asked for reunification, he would not be able to oppose it. On that day, however, The Times published an interview with Thatcher, in which she refused to accept the idea of German reunification, a question that she said should not be posed for another ten or even 20 years. That same day, Kohl received a crucial piece of information: after having been assured by the German Foreign Minister Hans-Dietrich Genscher that Germany would remain in NATO, James Baker, the US Secretary of State, declared to the German Foreign Minister that the United States supported German reunification without reservation. This meant that at that moment both the United States and the Soviet Union seemed to accept German reunification. The US had received the assurances they wished on NATO, while the Soviet Union still needed to discuss some crucial matters such as financial aid, borders and the military status of Eastern Germany. The next day, free elections were announced in East Germany; this was interpreted by many as a sign that it would reform and continue for some time to function as an independent state. Two days later, on November 27, 1990, Mitterrand received a letter from Kohl in which the German Chancellor asked again for a postponement of the IGC, this time to an indefinite date. It could perhaps meet in 1991 if work was prepared by the Finance Ministers and approved at the European Council due to meet in Rome at the end of 1990. This was a direct refusal of the measures that Mitterrand had announced at the European Parliament on October 24 to be presented at the Strasbourg Council in December. On November 28, a sudden and major crisis occurred. Without warning anybody, including Mitterrand and Genscher, his own Foreign Minister, Kohl announced in the Bundestag his own Ten-Point Plan for German Unity. Although it respected Gorbachev’s demand of preserving both the Warsaw Pact and the GDR, it had as its objective a unified Germany that would be determined through direct negotiations between the two Germanies, excluding the Allied Powers of the Second World War. Mitterrand was furious and rang Kohl to inform him that France would be against plan unless Germany were to do three things before reunification: (1) accelerate negotiations on the European Union; (2) recognize the border with Poland; and (3) confirm that it would not be a nuclear power. Kohl did not commit himself and said he would think about it.

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His reply was brought to Paris two days later, on November 30, by Germany’s Foreign Minister. That the reply came through Genscher, a member of another political party who was often at loggerheads with Kohl, was already significant in and of itself and gave additional weight to the document. In it, Kohl accepted to launch at Strasbourg the negotiations for monetary and political union and to approve the European Social Charter. Genscher talked at length with Mitterrand on Germany’s prospects of reunification without, however, placing them in a European context. Irritated, Mitterrand gave an astonishing warning: “If German unity happens before European unity, you will find yourselves faced with an alliance of France, Great Britain and Russia like in the First and in Second World War. The Soviet Union will come with us and it will end in a war where all Europeans will be united against you. If, instead, German unification happens after the European one, we will help you” (Attali, 2006, p. 321). This was not a sudden outburst. On January 20, 1990, Mitterrand talked about the issue with Thatcher and told her that he had given the same message to Kohl (Salmon et al., 2010, p. 215). On December 1, Teltschik, one of Kohl’s closest advisors, received a call from a correspondent from Le Monde in Bonn. The exchange was unpleasant. The journalist complained that France had not been informed beforehand about Kohl’s Ten Point Plan, that for Kohl German unification had precedence over European integration, and that therefore France had to go back to older alliances. Teltschik wrote in his diary: “Does it mean cooperation with the Soviet Union against Germany?” but did not say it to the French journalist, who ended the conversation by stating that Kohl was endangering Gorbachev and that this could be the end of FrancoGerman cooperation (Teltschik, 1991, p. 61). It is in these days that the French Foreign Minister Roland Dumas asked himself whether Germany would privilege reunification over European integration and even abandon the European institutions. On the German side, there was suspicion that Mitterrand’s announced trips to Kiev and East Berlin in December were attempts to strengthen East Germany and establish closer cooperation with the Soviet Union. Kohl’s message through Genscher said nothing about the border between Germany and Poland, probably because on this issue the Chancellor was in deep disagreement with his Foreign Minister, who deplored in private that Kohl kept silent on this explosive issue. Mitterrand sent a letter to Kohl on December 1, informing him that at Strasbourg he would pose the question of the date for the convocation of the IGC on monetary union before the end of December 1990. This was a concession because it left open the possibility of having the question posed after the German elections of the same month. Mitterrand also proposed to meet Kohl to discuss these issues during the NATO summit in Brussels where George H.W. Bush would report on his meeting with Gorbachev in Malta: Kohl refused, saying that he would not have time. On December 4, four days before the Strasbourg European Council, the headquarters of the STASI, the Security Ministry of the GDR, were occupied

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by demonstrators; the next day, Kohl replied to Mitterrand’s letter, repeating again that the “inauguration” of the IGC would be decided at the European Council in Rome in December 1990. Mitterrand, who presided the Council during the semester, replied with a letter to all participants in which he set the agenda for Strasbourg: it would be there, and not in Rome one year later, that it would be decided that the IGC would start at the end of 1990. At the beginning of the Strasbourg Council, Kohl agreed to have an IGC to prepare the groundwork for economic and monetary union, but wanted in exchange a declaration supporting German reunification. Only the Spanish Prime Minister supported him, while the other leaders asked him to declare publicly that the united Germany would recognize the eastern border. A compromise was achieved with a long declaration that mentioned German unification in respect of previous agreements and treatises and in respect of the principles of Helsinki with regard to European integration. It was in this icy atmosphere of suspicion of the future Germany that Kohl remembered in an interview that the crucial concrete steps towards the establishment of the EMU were taken.

Political union: the first steps In the conclusions of the Strasbourg Council, there was still no mention of political union. The future of the GDR was still uncertain: Mitterrand visited the GDR on December 20 and declared in a toast that the GDR and France had still much to do together and signed agreements for the period 1990– 1994. He refused the invitation from Kohl to attend the symbolic opening of the Brandenburg Gate, and his whole attitude towards reunification was resented by a good part of the German press and population. The East German elections of March 18 basically marked the end of the GDR, but new issues arose that created tensions between the main European partners. They concerned, during the first half of 1990, the relations with the United States and the role of NATO and, in the second half of 1990, the approaching war with Iraq. Events in Eastern Europe forced the European Community to face new problems. How should it deal with these old European countries that were in a hurry to join? Clearly, having a European Council with tens of members would render decision-making almost impossible. Mitterrand wanted to preserve the powers of the European Council and was also worried that a sudden enlargement of the Community would dilute the possibility of having a more effective and independent foreign policy and would transform the European Community simply into a free-trade area. In his end-of-the-year speech given on December 31, 1989, Mitterrand launched the proposal of a European Confederation, which would contain all European countries, including later the reformed Soviet Union. It would be an umbrella under which the Eastern European countries could gradually adapt their societies to Western Europe’s institutions and market economy. After a certain period, they would be able

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to join the Community. This proposal was doomed to fail when it became clear that it would exclude the United States and include, after a period, the Soviet Union. Mitterrand also made the mistake of declaring that the transition period before accession to the Community could take “decades and decades.” Already in November of the previous year, Delors had raised the question of the impact of enlargement on the European institutions and had mentioned the possibility of having two IGCs: one on the EMU and another, after three or four years, on broader issues. In January 1990, he proposed a single IGC divided into two halves with a single president: one on the EMU and one on institutional reforms (Grant, 1994, pp. 134–135). He also mentioned a “European Federation.” On March 25, 1990, seven days after the East German elections, Mitterrand announced a joint French–German initiative on the political future of Europe and on 28 March 28, Kohl proposed an Intergovernmental Conference on Political Union. The Irish Prime Minister had already called for an extraordinary Council meeting in Dublin on April 18 to discuss the consequences of German unification for the Community. Mitterrand was keen to debate this problem in the context of European integration and wrote a letter together with Kohl, in which an IGC was proposed. Its aim would be to transform the European Community into the European Union. At the extraordinary European Council of April 28, 1990, the work of the European Commission on the technical problems arising from the integration of the GDR was presented and a discussion on political union was started. Thatcher had no difficulty in pointing out the hazy way in which this expression was used by the various participants. Many declared themselves in favour of political union, but each one had very different ideas of what it actually meant. The Italian Prime Minister Giulio Andreotti, who was in favour of the IGC, did not deny this ambiguity and said that “it would be dangerous to try to reach a clear-cut definition of what political union was” (Thatcher, 1995, p. 762). Thatcher criticized in more detail the ambiguities involved in her Statement to the House of Commons on May 1, 1990 (HC Deb. Vol. 171, cc. 902–921). The Council decided that the European Community would become the European Union before the end of 1992 and to postpone to its next meeting the decision on the IGC. At the Dublin Council of June 24 and 25, the decision was taken to call an IGC to discuss political union that would start on December 14, 1990. Why two conferences instead of one, as Delors had suggested earlier? According to Dyson and Featherstone (1999), an important factor was the wish of those in Germany more closely connected with monetary affairs – namely, the Finance Ministry and the Bundesbank – to avoid delegating key decisions on monetary union to the Foreign Ministry. Usually matters concerning treatises were dealt with by Foreign Ministries, and Theo Waigel, the West German

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Finance Minister, feared that Genscher would make concessions regarding the EMU in order to achieve progress in the negotiations on political union. Genscher agreed to stay away from monetary matters because he thought it would be wiser to give a free hand to monetary experts in order to reduce future criticism. The diplomat Joachim Bitterlich, from Kohl’s office, played an important role, taking sometimes a more moderate stand than his colleagues from the Finance Ministry. It should not be forgotten that Waigel was Chairman of the Christian Social Union in Bavaria, a sister party of Kohl’s Christian Democratic Union, while Genscher belonged to the Free Democratic Party. The European Council in Rome of December 14 and 15, 1990, had to discuss the IGC that was to begin on this last day. It tried to reconcile two different positions: it envisaged both to increase the powers of the European Parliament, a German request, and of the European Council, a French desideratum. On this last point, it left no doubts about its intentions. On the institutional framework of the EU, the European Council conclusions declared that there would be “one decision-making centre, namely the Council” and “It agreed that the essential role that the European Council has played over recent years in creating fundamental political momentum will continue. The Conference will consider whether the Community’s development towards the Union necessitates an accentuation of this role” (European Council, 1990, pp. 5 and 9).

Conclusion Although monetary union was achieved, political union, which was for a long time considered its necessary complement, was almost forgotten. What were the causes of this unexpected turn of events? An important difference concerns the two expressions themselves. It was clear to everybody what monetary union meant. Experts had been working on the subject for decades, and the IGC on Monetary Union that started to work in December 1990 accepted some basic steps proposed already in 1970 by the Werner Report, and these steps had also been accepted by the Delors Report of 1989. The final aim was a common currency or at least irrevocable exchange rates. The concept of political union was much less precise, and different groups had very different conceptions of the same term. There has always been a tendency in the European Council to paper over deep divergences by accepting that different participants gave their own meaning to the same expression. In her memoirs, Thatcher gives an extreme example of this: “I had been prepared to go along (with some misgivings) with the assertion in Council communiqués of the importance of the ‘social dimension’ of the Single Market. But I always considered that this meant the advantages in terms of jobs and living standards which would flow from freer trade” (Thatcher, 1995 pp. 750– 751). For Kohl, the best social policy was a sound fiscal policy and a stable currency (Kohl, 2014, p. 114).

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In the case of political union, two very different objectives were covered by this expression. There were those who believed that it meant a federal state, the United States of Europe, having in mind the United States of America. There were others who instead wanted a closer coordination among the existing states, with emphasis on defence, foreign policy and police matters, especially crime and terrorism. The first group, represented mainly by Germany, and in particular by Kohl, wanted a strong European Commission controlled by a strong Parliament. The role of the European Council could be that of a sort of Senate or Rathaus. The other group instead wanted to weaken the Commission and thereby to strengthen the role of national governments: it wanted a strong Council, a weak Parliament and a Commission whose main task was to enforce the decisions of the Council. This meant that two very different agendas were followed by the two groups although both said that they were in favour of political union. This had already happened in the 1960s and continued for decades. This explains why still in 2015 The Economist could write: “All of this raises the question: when Europeans refer to ‘political union,’ what do they mean?” (The Economist, 2015). It is not surprising that, when the IGC had to discuss institutional arrangements to achieve political union, no consensus could be reached. Even the much more modest goal of close coordination in matters of defence and foreign affairs proved impossible. In this case, a critical reason was that important countries were not willing to give up their right to act without external constraints. An early example was Germany’s unilateral decision to recognize the independence of Slovenia and Croatia against the policy of France and Britain. A more recent one was French and British policy on Libya. Is there any connection between the accomplishment of monetary union and the failure of political union? This question is not usually asked, but it is important. We should distinguish between two different periods. The first one is defined by the difficulties and uncertainties regarding the possible realization of the EMU, running from mid-1992 to May 1998, when it was finally decided which countries would be admitted into the euro. The second started with the Greek crisis and continues to this day. The first period was characterized by uncertainty about the possibility of actually creating the euro. The dramatic monetary crisis of 1992 not only forced countries like Italy and the UK out of the EMS, it also made it impossible to keep the French franc inside the agreed band of oscillation. After it became clear that the project would continue, the burning issue became which countries would be admitted into the first group of entrants. The discussions on political union became unrealistic while it seemed possible that some countries like Italy, Portugal and Spain could be excluded for a long period from the EMU. After the beginning of the economic crisis in 2008, a new phase started. There was a constant tightening of rules concerning budgetary policy, often outside the EU framework. With the Greek crisis, spreads started to increase and strong pressure was applied on countries in trouble. Sometimes in an

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open way, like in the letter of August 5, 2011, from Jean-Claude Trichet, the head of the ECB, to the Spanish Prime Minister, where the latter was invited to change, among many other things, labour market regulations “at the latest by end-August.” The letter is reproduced in José Zapatero’s memoirs (Zapatero, 2013, pp. 248–251). Zapatero replied positively the next day, a Saturday, and on Monday the ECB started buying Spanish bonds. In other cases, an unofficial deal was made. As Emma Bonino, a respected Member of Parliament declared, Italy was granted a certain leeway in its budget deficit in exchange for accepting more migrants. The importance of these cases is that they show that the EMU, with its flaws, made it possible to change the policies of some countries without any need of a political union. This, from a certain point of view, made political union less necessary. Finally, it may be pointed out that a key feature of the EMU, the concept of no bailout, makes it very difficult to ask for solidarity in other fields. Monetary union and political union were seen from 1970 to 1990 as two sides of a single process that had to develop simultaneously. In the end, only monetary union was achieved and paradoxically this made political union less likely and monetary union more fragile.

Note 1 “1. The Conferences of the Representatives of the Governments of the Member States convened in Rome on 15 December 1990 to adopt by common accord the amendments to be made to the Treaty establishing the European Economic Community with a view to the achievement of political union and with a view to the final stages of economic and monetary union, and those convened in Brussels on 3 February 1992 with a view to amending the Treaties establishing respectively the European Coal and Steel Community and the European Atomic Energy Community as a result of the amendments envisaged for the Treaty establishing the European Economic Community have adopted the following texts” (Treaty on European Union – Final Act, available at: https://eur-lex.europa.eu/legal-content/ EN/TXT/HTML/?uri=CELEX:11992M/AFI&from=FI [accessed 14 July 2019]).

References Amato, G. (1988). Memorandum to the ECOFIN Council. 23 February. Published as: Un motore per lo SME. Il Sole 24 Ore, 25 February. Attali, J. (2006). C’était Mitterrand. Paris: Fayard. Balladur, E. (1988). Europe’s monetary construction: Memorandum to the ECOFIN Council. 8 January.Paris: Ministry of Finance and Economics. Dyson K. and Featherstone, K. (1999). The Road to Maastricht: Negotiating Economic and Political Union. Oxford: Oxford University Press. European Council (1990). Conclusions of the Rome European Council. 14 and 15 December. Brussels: Council of the European Communities. https://www.consilium.europa.eu/m edia/20537/1990_december_-_rome__eng__part_i.pdf [accessed 14 July 2019].

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The Economist. (2015). Everything you need to know about European political union. The Economist, 28 July. https://www.economist.com/the-economist-explains/2015/07/ 27/everything-you-need-to-know-about-european-political-union. Favier, P. and Martin-Rolland, M. (1996). La Décennie Mitterrand. Vol. 3: Les défis. Paris: Seuil. Favier, P. and Martin-Rolland, M. (1999). La Décennie Mitterrand. Vol. 4: Les déchirements. Paris: Seuil. Genscher, H.-D. (1988). A European Currency Area and a European Central Bank: Memorandum to the General Affairs Council. 26 February.Bonn: Ministry of Foreign Affairs. Grant, C. (1994). Delors: Inside the House that Jacques Built. London: Nicholas Brealey Publishing. Kohl, H. (2014). Aus Sorge um Europa: Ein Appell. Munich: Droemer. Salmon, P., Hamilton, K. and Twigge, S. (2010). Documents on British Policy Overseas. Series III, Volume VII, German Unification 1989–1990. Oxford: Routledge. Teltschik, H. (1991). 329 Tage: Innenansichten der Einigung. Berlin: Siedler. Thatcher, M. [1993] (1995). The Downing Street Years. London: HarperCollins. Werner, P. (1970). Report to the Council and the Commission on the realization by stages of of economic and monetary union in the Community (“Werner Report”). 8 October.Luxembourg: Council of the European Communities. Zapatero, J.L.R. (2013). El Dilema: 600 Dias de vértigo. Barcelona: Planeta.

5

External imbalances and European integration Michael Landesmann

Introduction Although global in character, the financial and economic crisis that erupted in 2008–2009 is destined to be seen as a pivotal event in the history of Europe’s development, particularly with respect to its cross-country integration experience and a rethinking of the appropriateness of its policy framework.1 In this chapter, I will focus on the implications of the crisis for the low- and medium-income economies (LMIEs) of Europe, which consist of the economies of Central, Eastern and Southeast Europe (CESEE) and the Southern European Union (EU) economies (Greece, Portugal and Spain)2 as well as other countries in the EU’s neighbourhood.3 I shall refer to this large group of economies (including some non-EU countries) as “Europe’s South” in order to emphasize development gaps and imbalances in European integration. By mid-2019 (when this chapter was being completed), it looked as if the worst of the Euro crisis was over: the European banking system had recovered to some extent, although some worrying fragile segments remained, and there had been a modest overall recovery which improved the overall labour market situation. On the other hand, the move towards a “European Banking Union” points to a glass less than half-full, and many other areas of essential economic policy reforms are still outstanding (especially in the area of fiscal policy coordination). Similarly, the overall debt situation in some European economies remains problematic both with regard to private sector debt levels (household and corporate) as well as to sovereign debt. On top of that, the economic and related social crisis in many countries has made the political climate for policy reform more difficult. Developments in Europe’s South have been characterized by strong differentiation, namely, dramatic declines in gross domestic product (GDP) during the crisis in the Southern EU economies with sharp rises in unemployment rates (particularly those of young people). In Eastern Europe, the economic crisis initially took a severe toll: with the exception of Poland and Albania, most Eastern European countries experienced negative GDP growth rates over the period from 2008 and 2013; only a few countries had by the end of

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2013 reached GDP levels exceeding those prior to the crisis. However, from around 2014 onwards a growth differential re-emerged between the CESEE countries and the old member states of the EU (see Figure 5.1). As I will point out below, the underlying driver of the “North–South divide” in Europe and also the main factor in the differentiation among the LMIEs is the build-up of external imbalances prior to the crisis both within the EU and in countries in Southeast Europe closely connected with the EU. I will discuss the causes of this build-up as well as the inadequacy of the policy framework of the EU and the Eurozone to deal with the resultant imbalances. Finally, I will come to four main conclusions regarding the North–South divide in Europe and regarding the EU’s current policy framework. In brief, my conclusions are as follows. First, the main differentiating feature among the emerging European economies that I will discuss is the pre-crisis build-up of (structural) current account disequilibria associated with developments in external debt in general and the debt positions of households and corporations in particular. The precrisis build-up of disequilibria and debt accounts are to blame for most of the differentiated impact of the crisis on different economies over the period from 2008 to 2013. Second, a sub-group of three Central European economies (the Czech Republic, Poland and Slovakia) had been scarcely affected by the debt buildup. These countries showed little sign of competitiveness problems in their tradeable sectors (which was also the case with Hungary), while the Southern EU and most of the countries in Southeast Europe and the Baltic states developed unsustainable disequilibria in both these respects. Third, important groups of economies, such as those of the Southern EU, most of the countries of Southeast Europe and some countries in Central Europe (Slovenia, Hungary), had entered a vicious circle: high initial debt levels and dim growth prospects translated into greater doubts about sustainability. The consequence was higher interest rates that imposed a constraint on investment and encouraged corporate and household deleveraging (further compounded by the weak state of their banking systems). Fourth, the prospects of offsetting factors, such as a potential longer-term improvement in competitiveness leading to an export-led recovery, were dim in the context of low investment in the domestic economy and low growth in the European economy as a whole. Furthermore, the reliance simply on real exchange rate adjustment, first in the context of mostly fixed (or pegged) exchange rate regimes or Euro membership and second in an overall climate of very low overall inflation in the Euro area as a whole, was not enough to counteract the negative factors that were at play in the stagnating and contracting economies. Further, such a strategy would hardly be compatible with an attempt to upgrade the position of an economy in international trade and production relationships. This chapter thus points to a situation in which the process of sustained income convergence that had characterized the decade prior to the current

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financial and economic crisis might either continue at a significantly reduced pace or come to a complete halt. Following the impact of the financial and economic crisis, deleveraging processes, difficulties in dealing with large private sector debt positions, weak banking systems, and the associated feedback effects on sovereign debt now characterize many of the LMIEs in Europe. The inflow of foreign direct investment and the build-up of cross-border production networks, which played a crucial role in enabling some of the successful Central European economies to upgrade their export capacities, now also show signs of slowing down (Hunya and Schwarzhappel, 2013–2018). Following my analysis in this chapter, I will argue that if Europe is to return to a “convergence phase,” wherein the LMIEs will again be growing at faster rates than the more advanced economies, it is of the utmost importance that more policy space be provided to countries suffering from chronic weaknesses in their tradeable sectors. Policy instruments have to be designed and used to counteract to some extent the underlying dynamic of the agglomeration of industrial activity in Europe. Using appropriate policy instruments should encourage a wider range of countries to participate in cross-European industrial networks. There is now a strong case to be made to make room to allow the design and use of “new” forms of industrial policy at the national and European levels in order to support the build-up of industrial capacity in Europe’s periphery. The advantage of these “new” forms of industrial policy (for details, see Landesmann and Stoellinger, 2019) is that they avoid the pitfalls of some of the “older forms,” in that they support new entrants (much of “old industrial policy” favoured incumbents) and emphasize new activities and products, thus contributing to a process of industrial diversification. There are obvious constraints on the use of industrial policy instruments, given the EU’s competition policy and the rules of the European Single Market. However, an industrial policy directed towards new entrants, new activities, and new products that provides support for good infrastructure should be more than palatable to EU competition authorities. The obvious potential threat of an entrenched North–South divide for the European integration process should motivate initiatives to find a new balance between competition and industrial policies, a balance that allows the asymmetric use of industrial policy instruments in favour of weaker countries and regions. A sustained “convergence” process requires that every country have an export sector above the critical size needed to escape a structural current account disequilibrium. This has to be a top priority for national and European policy-makers at the present time.

The European growth and convergence model prior to the crisis The pre-crisis integration model in relation to Europe’s emerging market economy (EME) region4 was characterized by a high degree of liberalization of external economic relations. Trade relations were thoroughly liberalized, and

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there was a commitment to free international capital movements (in all its forms). In the CESEE region in particular, financial markets were fully opened up to foreign financial institutions, and in most of these economies foreign banks were able to attain a dominant market position (see, e.g. Becker et al., 2010). As Figure 5.1 shows, the period from the mid-1990s onwards coincided with a process of convergence in many countries of the CESEE region, as these economies embarked (after a difficult first phase of transition) on a growth path with rates substantially above those of their western neighbours. For a number of these economies, the catching-up process was nonetheless interrupted at times by policy mistakes (such as misguided forms of privatization and problematic monetary and exchange rate policy decisions, most notable of which was opting too early for a fixed exchange rate regime). The performance of the Southern EU economies reveals much less evidence of convergence over this period, with Italy (and then Portugal) showing particularly low growth;5 Greece and Spain, however, showed slightly above-average growth. Underlying the growth performance of the lower-income, lower-productivity CESEE economies was their ability to take advantage of the opportunity afforded them by technology transfer (the so-called “Gerschenkron effect”).6 In the particular case of former transition economies, the term “technology” should be interpreted rather broadly to include product design, organizational structures, and behavioural practices facilitated by changes in institutions and in legal frameworks. In the case of many of these economies, the speed of technology transfer was reinforced by their anchoring to EU pre-accession and (then) accession arrangements. This anchoring made the region better able to attract foreign direct investment, which is a major conduit for the type of technology transfer alluded to above. Low relative unit labour costs combined with relatively high human capital endowment made the region attractive to foreign investors. This, in turn, gave these economies access to high-income markets and the possibility of being integrated into cross-border production networks. Only in some of the economies did this lead to a substantial recovery of industrial production capacities, that is, a process of reindustrialization after the earlier period of – often massive – deindustrialization which most countries experienced at the beginning of the transition period. In many other economies, a longer period of political and economic turbulence such as in most countries of Southeast Europe and in the Baltics led to a situation in which pre-transition levels of industrial production were never attained. This, in turn, showed up in sustained gaps in trade balances and had grave consequences in terms of vulnerability to external shocks, a point which we shall explore below. Furthermore, the economically weaker and vulnerable countries (in the Balkans and the Baltics) in particular adopted various versions of fixed exchange rate regimes. The reason was often a lack of trust in domestic monetary authorities and an attempt to avoid large exchange rate fluctuations

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that could characterize shallow foreign exchange markets. By pegging the exchange rate, the countries also wanted to speed up financial and monetary integration with the Euro area. In turn, the choice of exchange rate regime contributed strongly to sustaining and accentuating the problem of deteriorating trade balances. The period after the eruption of the financial crisis interrupted the “catching-up”/“convergence” process. With the exception of Poland, Romania, Turkey and Albania, we do not see markedly higher growth rates in European LMIEs over the period 2008–2018 compared to the EU-15. When subdividing this period into an immediate crisis period (2008–2013) and a recovery period (2013–2018), we see that the CESEE countries resumed their convergence process in the latter period, with no evidence that the same happened in Southern Europe.

External imbalances of different groups of Europe’s low- and mediumincome countries As discussed above, the pre-crisis European integration framework (with its monetary and financial markets dimension) was designed to encourage large inflows of foreign investment from the more developed to the less developed countries, with external imbalances expected to be temporarily widening, then narrowing and eventually closing as income levels converged, mainly on account of export growth. The outcome in Central Europe (particularly, the Czech Republic, Hungary, Slovakia and Poland) has been more or less as intended, but not in the countries of Southern Europe or in the Baltic states or in Southeastern Europe. The development of external imbalances prior to the crisis led to an accumulation of foreign debts with clearly unsustainable growth dynamics. Uncertainties surrounding the future growth of exports of goods and services point to a structural problem that may also restrain the growth of those countries in the longer-term, given the somewhat less-favourable climate for foreign investments that has been developing post-crisis (see Hunya and Schwarzhappel, 2013–2018). In order to discuss economic developments in low- and medium-income countries (LMIEs) in the European economy, countries will be grouped on the basis of common and related features, the most important of which date back to pre-crisis developments. Particular emphasis is placed on the build-up of external and internal disequilibria prior to the financial crisis, which then led to different adjustment pressures following the onset of that crisis. Figure 5.2 shows developments in the current account and its components, while Figure 5.3 presents the pre- and post-crisis developments in various debt segments: private debt (decomposed into corporate and household debt), public debt and external debt (all expressed as a percentage of GDP). The information contained in Figures 5.2 and 5.3 provides

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the background to differences across countries in the build-up of external disequilibria, as well as in the debt positions of the economies on entering the crisis, which proved to be the main challenges in the subsequent adjustment processes. The figures also show the developments during the crisis and up to 2018. The evidence contained in the two figures also provides the main criteria for grouping countries in the way that I do in the following analysis. Current account developments are considered first. The Central European economies (CE-5)7 exhibit a relatively positive performance in terms of their current account developments, which did not experience any substantial deterioration before the crisis. Furthermore, the trade accounts (the dark shaded bars in Figure 5.2) confirm the relative strength of those economies in terms of their relative export (to import) performances. A number of economies have been able to achieve positive trade balances (the Czech Republic and Slovakia), and others have come close to balancing even prior to the financial crisis. Given this evidence, it would seem reasonable to conclude that these economies encountered no significant competitiveness problems.8 Much more problematic were developments in the other groups of economies. All the Baltic economies as well as those of Romania and Bulgaria recorded strongly deteriorating current accounts before the crisis, which were predominantly associated with deteriorating trade balances. In part, those deteriorating trade balances were a consequence of inordinately high growth rates in some of the economies prior to the crisis – to some extent reflecting a later start in their catching-up processes; however, there is clear evidence here of external balances “moving out of gear” as their trade balances in particular turned sharply negative. As for the Southern EU economies, we can see that competitiveness problems became particularly pronounced in two countries with persistently large current account deficits, Greece and Portugal, with Spain closely behind. Current account problems featured less prominently in Italy, but one must bear in mind its very low growth performance over this period (see Figure 5.1). The remaining countries in Southeast Europe (SE-6)9 exhibit very high trade deficits, reflecting a very small export base on which their economies can draw. Current accounts experienced a marked deterioration in the period prior to the crisis in two economies, namely, those of Montenegro and Serbia. Most of the economies in the group rely on major transfers in the form of remittances from their nationals living and working abroad, which thus partly offset their large trade deficits. As is well known, current account imbalances have to be financed and the capital inflows funding these accumulate in the form of debt positions in different sectors of the economy. The accumulation of domestic and foreign debt by sector is presented in Figure 5.3. The figure shows data for 2002 and 2008 in order to illustrate developments prior to the crisis, and it then shows data for the period from 2008 to 2013 of the deleveraging of private sector debt levels and the growth of public debt due to the recession and bank rescue operations that followed the financial crisis. The last phase, 2013–2017, is the latest period

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for which we can currently obtain comparative statistics. The information presented in the figures reveals again important differences across economies. Let us review first the differentiation across groups of economies prior to the crisis (2002–2008). Among the CE-5 countries, relatively modest (if any) increases can be observed in the various debt levels of the Czech Republic and Poland, and a somewhat higher increase in private debt can be observed in Slovakia (whereas public debt dropped as a percentage of GDP prior to the crisis). Meanwhile, there have been marked increases in the private sector debt positions of Slovenia (mostly corporate debt) and Hungary. Furthermore, Hungary increased its public debt to 73 per cent of GDP in 2008, which is exceptional among the countries of Central and Eastern Europe, followed by Poland, where public debt rose to 50 per cent of GDP in 2008. The Baltic states as well as Bulgaria and Romania were characterized by the rapid development of private debt over the pre-crisis period, while public debt (as a percentage of GDP) was driven down, as it benefitted from high growth rates over that period and from the associated tax revenue. Among the SE-6 countries, Croatia also displayed a rapid rise in private sector debt, while Albania was characterized by a higher level of government debt, which, however, fell (as a percentage of GDP) in the period leading up to the crisis, much like it did in most other economies. The Southern EU economies (Spain, Portugal, Greece) started from higher levels of private sector debt – even in 2002 – than the CESEE countries mentioned above, which reflects the higher levels of financial intermediation in these countries. As to developments prior to the crisis, we can see dramatic increases in private sector debt levels with only moderately increasing or even declining public debt levels (as a percentage of GDP). Looking at the period following the outbreak of the crisis in 2008–2009, one can see the substantial increase in public debt in many of the economies during the course of the crisis. This reflects the impact of the recession (and, at times, of deep contractions), on the one hand, and the role that the state played in alleviating the debt position of the private sector and in rescuing banks, on the other. The latter was the case in Ireland and Spain, while in the CESEE economies only a few of the banks were domestic banks, although, where this was the case, severe banking crises were experienced, for example in Slovenia, and this severely affected the countries’ public debt position.

The impact of the crisis: external accounts adjustment In the following section, I will discuss certain features of the adjustment processes that occurred in the wake of the financial and economic crisis. More specifically, I will look at both the important transitory features as well as the more permanent impact of the initial disequilibria on the patterns of recovery or the lack thereof. Figure 5.4a shows a clear relationship between one of the indicators of an existing disequilibrium prior to the crisis, the ratio of private sector debt to

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GDP, and the subsequent growth trajectories of the different economies. A similar relationship is shown in Figure 5.4b between the pre-crisis current account deficit and subsequent growth. We can conclude based on the data from the figures that the extent of the previous build-up of private sector debt or the pre-crisis current account disequilibria, as the case may be, had a significant negative impact on medium-term growth performance following the crisis. The differentiation across economies is also apparent from Figure 5.5, in which both export and import growth rates are plotted over the period 2008–2013, thus allowing us to distinguish between various groups of economies: (a) those in the top two quadrants which experienced relatively high export growth; (b) those which experienced import contractions or very low import growth but relatively weak or negative export growth (this group comprises most of the Southern EU countries, as well as quite a few of the Southeast European countries plus Slovenia and Hungary); and (c) those with weak export growth and still substantial import growth (this group comprises the rest of the Southeast European economies). The point of this figure is to show that there are different ways of adjusting to unsustainable external accounts, which is important for the future growth prospects of “Southern economies.” Negative external accounts can be “adjusted” through strengthening exports or reducing imports. Figure 5.5 (top) for the period 2008–2013 and Figure 5.5 (middle) for the period 2008–2018 show that countries followed quite different paths in this respect: some “rebalanced” their economies through strongly improved export performance, while others did so predominantly through containing import growth, the latter reflecting the impact of the recession (or contraction) which their economies went through. While I am not able here to discuss in any detail the reasons for such differentiated adjustment patterns (e.g. the roles that exchange rate regimes, wage flexibility and monetary policy played), I would like nevertheless to point something out, namely, that the Southern EU economies remain in the bottom-left quadrant with both below-average export growth and below-average import growth. On the other hand, countries such as Slovenia, Ireland, North Macedonia and Montenegro substantially improved their relative export performance. Summing up, it is quite apparent that the crisis brought about a need to correct strong external imbalances and large private sector debts that built up prior to the crisis. The extent of adjustment was directly related to the size of the previous current account disequilibria and private sector debt build-up, and those adjustments (and their severity) imposed clear medium-term costs in terms of GDP growth. Furthermore, patterns of adjustment across economies varied greatly, with some countries relying almost exclusively (even in the medium term) on import adjustments, while others were more successful in terms of export growth.

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Figure 5.5 Continued

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External and sectoral imbalances and the “manufacturing imperative” for Europe’s EMEs Sectoral distortions and levels of industrial production The above section discussed the issue of external imbalances and the need to “rebalance” in the face of severe reductions of capital inflows or even their reversal (such “sudden stops” could be clearly seen to be a feature of the developments depicted in Figure 5.2 above), specifically in those economies which built up large external imbalances in the pre-crisis period. Let us now move on to the need for “rebalancing” – that is, the strengthening of the tradeable sector of those economies that experienced large current account deficits in the period prior to the crisis. Industrial production accounts for the bulk of the tradeable sector in most economies, so I am particularly interested in its development. Figure 5.6 shows levels of industrial production in relation to pre-crisis levels. The differentiated performance across groups of economies is clearly visible: the rather marked recovery of the CE-5, but also of the Baltics and Romania is evident together with much more problematic developments in Southeast Europe. These barely reached 2008 levels in 2018. The abysmal situation of the Southern EU economies also emerges clearly, where industrial production has yet to reach pre-crisis levels. Additional information is provided in Figure 5.7, where the contributions of different sectors of the economy to overall GDP growth have been plotted.10 Three sub-periods are shown: the pre-crisis period 2004–2008, the crisis period 2009–2013 and the recovery period 2014–2017. The

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Figure 5.7 Sectoral contributions to GDP growth (from constant price data). Notes: Based on NACE rev. 2 or NACE rev. 1 classification scheme: C (manufacturing), F (construction) and TS (tradeable services) comprise H+J+K+M (other market services), while NTS (non-tradeable market services) comprises G (wholesale and retail trade) plus I+L+N+R+S+T, and NMS (non-market services) comprise O+P+Q. Contributions are calculated by multiplying the share of total GDP at current prices by real growth at preceding year prices. Source: wiiw database incorporating national and Eurostat statistics.

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following sectors are identified in Figure 5.7: manufacturing (C) as the classic tradeable goods sector; construction (F); a range of sectors which we categorize as “tradeable services” (TS) comprising “other market services” (transport services, IT services and financial, business and professional services); non-tradeable services (NTS), which comprise wholesale and retail trade (G) and real estate services, among others; and finally non-market services (NMS). From Figure 5.7, the following patterns can be detected. The manufacturing sector performed very poorly in terms of its contribution to overall GDP growth in the Southern EU countries in the pre-crisis period. GDP growth relied almost entirely on one or the other of the services sectors (TS or NTS) or on construction (F). In contrast, CESEE economies exhibited a more balanced picture with regard to different sectors’ contributions to GDP growth. Manufacturing played a particularly important role in the Czech Republic, Poland and Slovakia, but also in the other CESEE economies (Hungary, Slovenia), where tradeable and non-tradeable services made a very important contribution to GDP growth; the development of manufacturing was also important. Croatia, on the other hand, is an example of a Southeast economy whose manufacturing sector performed poorly. The pattern above is also characteristic of developments in the immediate crisis period (2009–2013), with manufacturing being the most strongly hit sector (apart from construction) in the Southern EU economies (and also in Hungary, Slovenia and Croatia). Following the differentiated pattern, it then becomes the lead sector again in the CE-5 economies over the period 2014–2017, while showing a relatively poor performance in Southern EU countries (compared to non-tradeable services). This points to the fact that also in the “recovery” period 2014–2017 there is little evidence of sectoral adjustment in the Southern EU countries in favour of a strengthening of the tradeable sector. The “manufacturing imperative” for Europe’s EMEs In the literature, much has been written about the role of manufacturing at various stages of development and the move towards services. There is strong evidence that the manufacturing share in an economy increases up to a certain level of income per capita before it is expected to stabilize and subsequently to fall (e.g. Syrquin, 2008; Rowthorn and Ramaswamy, 1997; see also Haraguchi and Rezonja, 2010). However, factors other than just real income levels affect the share of the manufacturing sector in different economies, such as specialization in foreign trade and current account imbalances. Figure 5.8 depicts manufacturing’s share of GDP in relation to GDP per capita in 2005 (the mid-point for the pre-crisis period) for EU member countries plus Southeast Europe (SEE). The general tendency of the share of manufacturing to decline with rising real incomes in this group of economies is not confirmed in the case of the spectrum of European economies (see the

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weak positive slope of the regression line). What emerges instead is the segmentation among the groups of economies in Europe’s “periphery”: on the one hand, there is the group of Central European economies (the Czech Republic, Slovakia, Slovenia, Hungary) and also Romania and Lithuania,12 which show a rather high share of manufacturing in relation to their levels of GDP per capita (i.e., they lie above the regression line). The other Baltic states (Estonia, Latvia), Croatia, Poland, and all the Southern countries (Portugal, Greece, Spain), on the other hand, lie below the regression line. In addition, all SEE economies are located well below the regression line, with Albania and Montenegro having especially small manufacturing shares. Only Serbia is close to the regression line. Among the advanced European economies, we can also distinguish two groups of economies: Ireland, Germany, Austria, Finland and Sweden, each of which has a very strong manufacturing sector; and France, Denmark and the Netherlands with a low manufacturing share. Italy and Belgium lie on the regression line. Let us now discuss the relationship between longer-term trade balances and the manufacturing sector’s share of GDP. Figure 5.9 shows two regression lines, one indicating the relationship between (longer-term) trade balances and the manufacturing share of GDP for the LMIEs and another showing this relationship for more advanced EU member countries. The regression line for the less advanced economies is shifted upwards compared to that for the more advanced ones; this means that lower-income economies require a higher share of manufacturing to achieve a similar balance in the trade accounts (something like a 5–7 percentage point higher share of the manufacturing sector).13 The reason is that more advanced economies can compensate more easily for a smaller manufacturing sector by exporting tradeable services than LMIEs can. The group of economies that had particularly persistent large deficits (export– import ratios below 95 per cent) in their trade accounts in the pre-crisis period among the lower-income economies comprises Latvia, Bulgaria, Romania and all the Western Balkan countries and Southern EU countries. On the other hand, we can also see the relatively good performance of the Central European economies (the Czech Republic, Hungary, Slovakia and Slovenia). What has been established so far can be summarized in the following four points: 

Among the LMIEs of Europe (“Europe’s South”), quite distinct groups of economies can be distinguished: on the one hand, there is the group of Central European economies (the Czech Republic, Hungary, Slovakia, Slovenia) as well as Romania, which have a manufacturing sector accounting for a relatively high share of GDP. On the other hand, there is the rest of the LMIEs, which have manufacturing shares which are rather below what one would expect at their levels of income.

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Furthermore, in the pre-crisis period the Central European economies also boasted a healthy longer-term trade balance, while Bulgaria, Romania, Croatia, the Baltics and the Southern EU countries (Greece, Portugal, Spain) showed rather high net import positions on their external trade accounts. With the exceptions of Bulgaria, Romania and Lithuania, these economies also had a small share of GDP in manufacturing, a factor which I have shown to be correlated with weak trade accounts. Among the more advanced economies there are also differences in terms of manufacturing as a share of GDP; however, this is less relevant for an explanation of longer-term trade accounts since, as noted above, advanced economies have more scope to specialize internationally on tradable services. For the group of European EMEs, it thus seems that a strong manufacturing sector is an important condition for longer-term external equilibrium. And when the financial crisis generated capital market uncertainty, those European EMEs with a weak manufacturing sector became particularly vulnerable to the capital flow reversals (see Figure 5.2) that accompanied the onset of the financial crisis. Given the more cautious attitude of international capital flows also in the years following the crisis, emerging European economies with a weak manufacturing sector can thus expect that their growth will remain “balance-of-payments-constrained.”14

In a number of studies (Stöllinger et al., 2013; Stehrer and Stöellinger, 2015; Stöellinger, 2016), it was documented that over the past 25 years Europe has experienced a strong process of agglomeration of manufacturing export capacities in a Central European manufacturing belt, which includes Germany and Austria, on the one hand, and Central Eastern Europe (the CE-5), on the other. This agglomeration has resulted from developmental processes that have been well explored in the economic geography literature such as locational economies of scale and the importance of geographic proximity for trade and logistics costs. This makes it difficult for economies that are not currently part of the Central European “manufacturing core” to build up sufficient export capacities to escape from the trap of balance-of-payments-constrained growth in the future. Such tendencies are supported by Figure 5.10, which shows the relationship between two variables: the differential growth between manufacturing and GDP (both at constant prices) over the period from 2002 to 2013 and the share of manufacturing in 2005 (i.e., some years before the outbreak of the crisis). What we observe is a positive relationship between these two variables, which corresponds to a picture of divergence: countries in Europe’s periphery which already had a low manufacturing share experienced lower growth rates in manufacturing than in the economy as a whole, while countries with a strong manufacturing sector (the Central European economies) experienced a positive growth differential of manufacturing relative to the economy as a whole. Hence, the relative weaknesses and strengths of different countries with regard to manufacturing became more pronounced over that period.

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Figure 5.10 Differential growth manufacturing – total economy, 2008–2018 (per annum) and share of manufacturing in GDP, 2013. Note: RO, ME, AL, TR Diff. Manufacturing growth – GDP growth 2013–2017. Source: Eurostat, wiiw calculations. Growth rates are calculated using constant price data.

The importance of manufacturing for overall export growth is also shown in Figure 5.11, which plots differential growth in manufacturing compared with growth in the economy as a whole against export growth (total exports). Again, we observe a picture of divergence, in that economies with low export growth also experienced relatively low growth in manufacturing compared with the economy as a whole, which means that in these economies the

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Figure 5.11 Differential growth manufacturing – total economy, 2008–2018 (per annum) and (total) export growth. Note: RO, ME, AL, TR diff. manufacturing growth – GDP growth 2013–2017. Source: Eurostat, wiiw calculations. Growth rates are calculated using constant price data.

economic structure shifted further away from manufacturing. Such a trend is particularly worrying for LMIEs in which manufacturing constitutes the most important part of the tradeable sector and thus the most crucial one for potential export growth. To summarize, the manufacturing sector is particularly important for LMIEs (as compared to more advanced economies which can rely on a

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stronger contribution from the tradeable services sector) to make sure their economies do not suffer from chronic longer-term trade imbalances. This provides the basis for a “manufacturing imperative” for LMIEs to avoid a “trade-balance constraint” on growth and catch up in a post-crisis world in which sustained current account disequilibria can no longer be financed as easily as they could prior to the crisis. The evidence for “structural divergence” shows that countries with a weak manufacturing sector were moving further away from manufacturing. This was not the case for the Central European countries, which experienced a strengthening in the position of the manufacturing sector. The overall economic geography of Europe is characterized by manufacturing capacities being concentrated in a “Central European manufacturing core” (Germany, Austria and Switzerland, on the one hand, and the CE-5, on the other). In short, the importance of manufacturing in avoiding longer-term structural imbalances on current accounts, especially for LMIEs creates a serious problem for large segments of Europe’s “periphery” from a longer-term development perspective.

Implications of divergence: political economy considerations The implications of the trends examined in this chapter (longer-term imbalances in trade structures, agglomeration tendencies in European manufacturing, the reinforcement of weaknesses in the tradeable sectors for a range of European EMEs during the crisis) clearly should not be taken lightly. The labour market effects of the recent crisis have been severe. Youth unemployment figures during the crisis were particularly alarming, and a clear “centre–periphery” differentiation emerged giving rise to sizeable mobility patterns across Europe. Two groups of Europe’s South (the Southern EU and the Western Balkans) exhibited youth unemployment rates of about 50 per cent and the CEE-3 group (Bulgaria, Romania, Croatia) experienced unemployment rates over 30 per cent. Developments in Ukraine and the ever-precarious situation in the Caucasus region add to the picture of highly uneven and fragile labour market conditions across Europe. One of the developmental implications is a high migration rate, with younger and more skilled members of the labour force in particular leaving their countries; this, in turn, has had (and will have) a detrimental impact on demography and the available skill mix in these countries. Furthermore, research has shown that the development of a “remittance-dependency” culture has adverse consequences for labour supply (activity rates), for the educational performance of children and – at the macroeconomic level – for real exchange rate developments, all of which further reduces competitiveness (see, e.g., Ratha, 2013 and references therein). The labour market developments are in part the effect of policies of fiscal consolidation, which can have strongly uneven distributional impacts on different groups of society. In an integrated Europe, attempts to alleviate some

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of the “divergence” problems through debt resolution and transfer mechanisms have generated further tensions between (“debtor” and “creditor”; “surplus” and “deficit”) countries regarding “burden-sharing.” This, in turn, has reduced the willingness of member states to support the integration process just at a time when further “deepening” and policy coordination (especially regarding fiscal policy, financial markets and social policies) may be required to support long-term stability in the workings of the EU and to re-establish the latter’s legitimacy in the European population.

Summary and policy conclusions I have argued in this chapter that trust in the “European convergence model” has been severely dented by both pre-crisis developments and developments that took place during the crisis itself, and that this constitutes a serious challenge for the growth and integration project in Europe as a whole. I have also pointed to a core issue in this challenge: persistent structural current account problems15 in a range of European LMIEs (in what I termed “Europe’s South”) for which the current policy framework of the EU has not yet found a satisfactory response. There are a number of causes of persistent structural external imbalances. In the case of the Eastern European transition economies, one cause relates to the dramatic process of deindustrialization that characterized the first phase of transition and from which a significant number of Eastern European economies have still not recovered. Another cause relates to the processes involving structural distortions which took place in the decade prior to the crisis. In a number of Southern EU and Eastern European economies, there was a sustained bias in favour of the “non-tradeable” sector, and hence a relative shrinking of export capacity took place. Furthermore, in the pre-crisis period a cumulative divergence of such processes was observed across European economies: economies with a stronger tradeable sector share experienced a further strengthening of the latter, and those with a weaker share experienced a further weakening of the latter. A number of factors accounted for such structural divergence processes. First, vigorous financial market integration encouraged strong credit booms in the private sector and led to investment in the non-tradeable sector. Furthermore, weak national financial market regulation (and a lack of EU-wide regulators) and policy choices in non-EMU economies where historically weak monetary authorities have opted for fixed or pegged exchange rate regimes played important roles in this. Second, there are clear tendencies that show manufacturing activity in Europe becoming geographically concentrated in a “core area,” and it seems difficult for other (peripheral) economies and regions to enter such evolving cross-border production networks; this is a particular problem for LMIEs, which are much more dependent on manufacturing to provide the bulk of their exports. Third, all of this has to be seen

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in a global context where China and other EMEs have developed strong manufacturing capacities that have put pressure on industrial restructuring, reinforcing agglomeration tendencies through cross-border production networks. Developments in the wake of the crisis have shown that the unbalanced nature of the development of tradeable sectors (and thus of export capacities) in Europe cannot easily be reversed. The crisis itself has hit the manufacturing sectors in many of the weak economies, and a period of reduced foreign direct investment inflows in the post-crisis era has made it more difficult for the (structurally) weak economies to mimic the favourable processes of technology transfer that characterized the successful pre-crisis developments in Central European economies. What are the policy implications from this looming “North–South divide” in Europe? If Europe is to return to a “convergence phase” with LMIEs again growing at faster rates than the more advanced economies, it is of utmost importance that policy instruments be calibrated to make up for the smaller role that foreign direct investment is playing in the post-crisis environment. It also requires that the underlying dynamic of further agglomeration of industrial activity in Europe be counteracted. The use of appropriate policy instruments should encourage a wider range of countries to participate in cross-European industrial networks. New forms of industrial policy at the national and European levels are needed to support the build-up of industrial capacity in Europe’s periphery. There is insufficient space here to elaborate on effective forms of “new” industrial policies (Landesmann and Stoellinger, 2019) that would avoid the pitfalls of some of the “older forms.” In short, they should be strongly focused on the tradeable sector, support new entrants (much of “old industrial policy” favoured incumbents), and emphasize new activities and products, thus contributing to a process of industrial diversification. In the current global and regional context, one has to be aware of the importance of linking up with international production networks and of building up contextual conditions (education, research facilities, infrastructure, finance) which support such an endeavour. There are obvious constraints on the use of industrial policy instruments, given the EU’s competition policy and the rules of the European Single Market. However, an industrial policy directed towards new entrants, new activities and new products – and one which provides good infrastructure – should be more palatable to the EU competition authorities. In addition, the obvious potential threat of an entrenched “North–South divide” for the European integration process should motivate initiatives to find a new balance between competition and industrial policies, a balance that would allow the asymmetric use of industrial policy instruments in favour of weaker countries and regions. A shift in policy is all the more necessary, as political developments in the course of the crisis have shown the limits of Europe developing into a “Transfer Union.” A sustained convergence process requires that every country have an export sector above the critical size needed to escape a structural current account disequilibrium. This has to be a top priority of national and European policymaking at the present time.

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Acknowledgements Many thanks go to the wiiw statisticians, particularly to Beate Muck, who prepared the graphs in this chapter. In parts, the chapter updates and uses material from Landesmann (2015).

Notes 1 The concerns raised in this chapter have a lot in common with those presented in the book by Celi et al. (2018), and it is Anna Simonazzi, who has made numerous valuable contributions on economic, social and political developments in Europe, who we are celebrating in this volume. See also the contributions by Darvas (2012) and De Grauwe (2012), which, in part, cover some of the areas of concern in this chapter. 2 The case of Italy is somewhat complicated: the country does not suffer from external imbalances; however, it does fall into the group of countries which have experienced significant private and public debt build-up, have a weak banking sector and look back now on a long period of very low economic growth. It will thus, at times, be included in the group of LMIE countries. 3 Countries in the EU’s neighbourhood, such as the countries of the Western Balkans, have been included in the analysis, as they are highly connected economically with the EU and the central issue of “structural external imbalances” considered in this chapter applies very much to them as well. 4 The abbreviation “EME” is used interchangeably here with the term “Europe’s South.” 5 Italy is difficult to categorize as being a member of the EU’s “South” or “North” as it has features of both. 6 Named after Alexander Gerschenkron’s “advantage of backwardness” thesis (Gerschenkron, 1962). 7 The CE-5 countries consist of the Czech Republic, Hungary, Poland, Slovakia and Slovenia. 8 Of course, the trade accounts per se are insufficient to reflect fully competitive strengths and weaknesses, as they can, for example, become sharply positive or negative when GDP growth exceeds or falls short of that of the main trading partners. However, as we have seen in Figure 5.1, the Central European economies have, almost without exception, experienced growth rates, before the crisis, substantially greater than those of their main trading partners (the more advanced Western European economies). 9 The SE-6 consist of Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro and Serbia. 10 Contributions are calculated by multiplying the share of the selected industry by its growth rate. 11 Based on the NACE rev. 2 classification scheme. 12 In the case of Lithuania, this is due to its important petroleum-refining sector. 13 Figure 5.9 also shows that the exports-to-imports coverage is particularly low in the case of the Southeast European economies (and also Greece) in the pre-crisis period (2002–2008). This indicates the non-linearity of this relationship, which is due to particular features of the region, such as the important role of remittances (in the case of the Balkan countries) and of the credit bubble (in the case of Greece and some of the other Balkan economies). 14 See the literature associated with the writings of Thirlwall (1979, 2011). 15 By “structural current account” problems, I mean that inadequate export capacities do not allow an economy to grow at a reasonable rate (in the case of catching-up economies at a rate higher than that of advanced economies) without encountering an unsustainable build-up of debt and (eventually) financing problems.

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References Becker, T., Daianu, D., Darvas, Z., Gligorov, V., Landesmann, M.A., Petrovic, P.J. … and Weder di Mauro, B. (2010). Wither growth in central and eastern Europe? Policy lessons for an integrated Europe. Bruegel Blueprint Series, no. 11. Brussels: Bruegel. Celi, G., Ginzburg, A., Guarascio, D. and Simonazzi, A. (2018). Crisis in the European Monetary Union: A Core–Periphery Perspective. London: Routledge. Darvas, Z. (2012). Intra-euro rebalancing is inevitable, but insufficient. Bruegel Policy Contribution, no. 2012/15. Brussels: Bruegel. De Grauwe, P. (2012). In search of symmetry in the Eurozone. CEPS Policy Brief, no. 268. Brussels: Centre for European Policy Studies. Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press. Haraguchi, N. and Rezonja, G. (2010). Patterns of manufacturing development revisited. UNIDO, Research and Statistics Branch Working Paper, no. 22/2009. Vienna: United Nations Industrial Development Organization. Hunya, G. and Schwarzhappel, M. (2013–2018). wiiw FDI Reports. Vienna: The Vienna Institute for International Economic Studies (wiiw). Landesmann, M.A. (2015). The new north–south divide in Europe: can the European convergence model be resuscitated? In J. Fagerberg, S. Laestadius and B.R. Martin (eds), The Triple Challenge for Europe: The Economy, Climate Change and Governance. Oxford: Oxford University Press, 60–87. Landesmann, M.A. and Stöllinger, R. (2019). Structural change, trade and production networks: an ‘appropriate industrial policy’ for peripheral and catching-up economies. Structural Change and Economic Dynamics, 48(1), 7–23. Ratha, D. (2013). The impact of remittances on growth and poverty reduction. Migration Policy Brief, no. 8. Washington, DC: Migration Policy Institute. Rowthorn, R. and Ramaswamy, R. (1997). Deindustrialization: causes and implications. IMF Working Paper, no. 97/42. Washington, DC: International Monetary Fund. Stehrer, R. and Stöllinger, R. (2015). The central European manufacturing core: what is driving regional production sharing?FIW-Research Report, no. 2014/15(2). Vienna: Forschungsschwerpunkt Internationale Wirtschaft. Stöllinger, R. (2016). Structural change and global value chains in the EU. Empirica, 43(4), 801–829. Stöllinger, R., Foster-McGregor, N., Holzner, M., Landesmann, M.A., Poeschl, J. and Stehrer, R. (2013). A ‘manufacturing imperative’ in the EU – Europe’s position in global manufacturing and the role of industrial policy. wiiw Research Report, no. 391. Brussels: European Commission. Syrquin, M. (2008). Structural change and development. In A.K. Dutt and J. Ros (eds), International Handbook of Development Economics, Vol. 1. Cheltenham, UK: Edward Elgar, 48–67. Thirlwall, A.P. (1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45–53. Thirlwall, A.P. (2011), Balance of payments constrained growth models: history and overview. PSL Quarterly Review, 64(259), 307–351.

6

The Italian economy from WWII to the EMU Structural weaknesses and external constraint Giuseppe Celi and Dario Guarascio

Introduction The history of Italian industrialization is one of relatively scarce raw materials (at least with respect to some key resources), scattered industrial capabilities, regional divides, and imbalances. This is also true of the creation of key infrastructures (e.g., railways) and institutions in the aftermath of Italian unification (Cipolla, 1990, 1995). With these historical drawbacks affecting the peculiar evolutionary trajectory followed by the Italian economy in the post-WWII period, openness has represented both an opportunity for and a potential constraint on the country’s development. To thrive and develop, economies need to achieve two major objectives (De Cecco, 1971): they need to build up a production matrix as large and diversified as possible and penetrate markets characterized by sustained demand flows capable to stimulate an enlargement of the production base. Under certain circumstances, however, the two objectives may clash. On the one hand, a latecomer economy like Italy’s (Simonazzi and Ginzburg, 2015) might aim to meet external demand, in order to find new outlets and incentivize national companies to boost their productive capacity. On the other hand, the relative fragility and the limited diversification of the production matrix expose the economy to the risk of dependence (on foreign capital and technologies) and external imbalances, making it less resilient in the event of a financial crisis. When a structurally fragile economy establishes intensive trade and financial relations with more advanced counterparts, the relations are likely to take on the form “asymmetrical complementarity” (De Cecco, 1971). That is, to produce and sell their goods fragile latecomers tend to need machinery, intermediate goods, and technologies provided by economic leaders, who are thus able to consolidate their hierarchical position. The combination of international openness and internal fragility may also result in the weakening of the state’s capacity to (a) enhance its industrial structure by favouring the emergence and consolidation of technologically strategic sectors; (b) reduce internal divides (both regional and in terms of income distribution); and (c) sustain internal demand and eventually orient it towards specific lines of production (Cesaratto and Zezza, 2018). Relative

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weakening and dependence can, in addition, be aggravated by financial and monetary factors. By internationalizing without having adequately consolidated their production matrix, fragile latecomers (such as Italy) are likely to increase their external debt (both private and public) and thus their degree of dependency, in particular vis-à-vis their stronger trading partners. The financial (i.e., liberalization of capital movements) and monetary (i.e., pegging of exchange rates) agreements that tend to characterize periods or phases of intense economic openness, on the other hand, could tighten the external constraint by further reducing the scope for state anti-cyclical interventions by imposing wage compression and deflationary measures (Celi et al., 2018). This chapter focuses on the evolution of Italy’s external constraint from the early post-WWII period, the age of the so-called “Italian economic miracle,” to the formation of the European Monetary Union (EMU). Rather than concentrating exclusively on static and strictly macroeconomic elements (i.e., elasticities of imports and exports, as in Thirlwall’s well-known model), this chapter analyses Italy’s external constraint vis-à-vis the changing structure of world production and trade relations, also taking into account the role of institutions and technology. In this light, structural heterogeneities and asymmetric power relations are key drivers of the international performance and positioning of nations, industries and firms, as well as of the factors accounting for differences (and evolutionary patterns) in terms of the nature, extent and effectiveness of nation-states’ economic policies (Simonazzi et al., 2013; Celi et al., 2018; Cesaratto and Zezza, 2018). Adopting a “historyfriendly” perspective, our analysis highlights how changes in policy scenarios at the national level are inextricably linked with changing trends in global capitalistic relations (Braudel, 1973).

The Italian “golden-age” How did the Italian economy stand at the dawn of the post-WWII phase? According to De Cecco (1971), Italy was positioned in an intermediate place between the advanced economies (fully developed from an industrial and technological point of view) and the underdeveloped economies (those that are almost completely dependent on external sources as regards medium- and high-complexity products) of Europe. In the early 1950s Italy, like most of the other European countries, was on the verge of a phase of prolonged and sustained growth helped by the gradual opening-up of the European market. However, the structural weaknesses identified above continued to represent an obstacle and a gap separating the Italian economy from its more developed counterparts. Two key elements lay behind this intermediate-laggard condition: technology and wages. According to De Cecco (1971), Italian industrial development relied on a seemingly inexhaustible industrial reserve army represented by the mass of workers forced out of a shrinking agricultural sector (see the discussion below). This army constituted a remarkable opportunity for Italian firms

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that faced a vast, young, poorly unionized (at least in the initial phase of the post-WWII period) and inexpensive workforce. Italian industrial plants tended to imitate those designed abroad and, like them, were expected to provide productivity gains via technological refinements and wage incentives (aiming at incentivizing individual productivity). However, coming into play with (mostly European) counterparts that were more advanced in industrial and technological terms, Italy was forced to compete (both internally and externally) with them on a level playing field. As a result, Italian companies tended to offset their technological gap by continually recruiting new workers, taking advantage of the low cost and high flexibility characterizing such new entrants. More generally, this pressure on the cost of labour was determined by the partially dependent nature of technical progress, only a relatively small part of which Italy was capable of generating autonomously.1 Consequently, Italian firms identified the availability of cheap labour input as a crucial factor that enabled them to stay on the market. This opened the way to keen conflict between firms set on preserving the status quo and unions fighting for higher wages given the astonishing productivity performance in that phase. Between 1953 and 1963, Italy experienced its “economic miracle” (Graziani, 1972; De Cecco, 1971; Garofoli, 2014; Cesaratto and Zezza, 2018). Driven by both domestic and external demand, the Italian economy grew at rates almost unparalleled in the international arena (Dosi et al., 1990). This performance was supported by increasing openness to international markets coupled with substantial state interventionism, which resulted in a steady process of industrialization with rising investments (mostly public) and productivity (Graziani, 1972, 2000; Garofoli, 2014). Thanks to such a remarkable economic performance, Italy managed to achieve three key economic policy goals: monetary stability, balance-of-payments equilibrium and sustained investments contributing to upgrade its industrial structure (Graziani, 2000). A crucial role was played by a set of large state-owned companies (i.e., most of those owned by the Istituto per la Ricostruzione Industriale, IRI, which was established in 1933) accounting for a large share of total investments. An important role was also played by direct public investments (in segments like infrastructure) and state financial interventionism aiming to drive accumulated capital towards technologically promising sectors. In this context, some IRI companies operated as virtual “industrial policy agents” (Ciocca, 2015), favouring the emergence of new industrialized areas and generating technological spillovers that were highly beneficial for the small and medium private companies proliferating as a consequence of the “miraculous” growth rates (as well as the abundance of cheap labour) and the expectations of profits entailed by the latter. The subsequent phase (1964–1970) was also characterized by remarkable growth rates in both productivity and income. However, this growth did not affect employment and investments. Salvati (2000) attributed the relative fall in investments to a more general drop in domestic aggregate demand and, more specifically, to the lack of certain crucial welfare reforms. Given this context, and aiming to maintain their steady growth performance, exporting

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firms started relying more and more on wage compression rather than on technological upgrading and innovation (Ciocca et al., 1973). This was the phase of high growth without development (Garofoli, 2014). The Italian productive structure consisted of many small firms, few large firms (including the crucial component of state-owned enterprises) and an emerging cluster of medium-large firms2 successfully gaining considerable international market share by imitating the technological leaders’ products and reducing labour costs per unit of output. If it was a miracle, however, it was, at best, an “incomplete miracle.” Despite astonishing growth rates and industrialization in relevant sectors, the fragilities characterizing the Italian economy as a latecomer (Simonazzi and Ginzburg, 2015) were still in place when the rampant growth period came to an end. Four major causes may be held responsible for this “missed opportunity” (Salvati, 2000). First, a legacy of long-lasting structural weaknesses turned out to be so deeply rooted that, as soon as the expansionary phase came to an end, they immediately spread their negative effects all over the economy (Dosi and Guarascio, 2018; Cesaratto and Zezza, 2018).3 Second, there was a tendency towards wage and, more broadly, internal demand compression. This element was partly linked to the peculiar Italian socioeconomic, industrial and institutional set-up extensively described by De Cecco (1971). Despite significant improvements in technological terms, Italian companies were still lagging behind in the production of high-tech investment goods. As a result, these companies had to pursue a two-fold strategy, relying on both price (i.e., driving wages downward) and technological competitiveness (i.e., innovating and imitating) unlike their foreign competitors, who achieved productivity gains mostly via a combination of innovation and high wages (De Cecco, 1971). Third, the linkage between the sustained GDP and employment growth observed during the “miracle phase” was accompanied by increasing inefficiency in Italian public expenditure (and, more broadly, in Italian institutions). As Graziani (2000) pointed out, as a result of the Southern regions’ inadequate industrial development, it was impossible for them to absorb the excess labour supply no longer employable in the agricultural sector, which gradually began to reduce its size. In this context, public employment became a way to absorb this labour supply, in practice substituting what a well-designed industrial policy based on long-term investment would have achieved, while also strengthening the Italian industrial base. This resulted in a loss of efficiency on the part of the state’s administration, and it had indirect negative effects on companies’ productivity and indeed on the economy at large. Fourth, there was a missed opportunity in the policy domain (Salvati, 2000), which can be interpreted as a combination of a lack of adequate welfare reforms and the absence of an effective and well-designed industrial policy. As Cesaratto and Zezza (2018, p. 4) emphasize, “the Italian bourgeoisie was not as far-sighted as the German bourgeoisie in allowing the large masses to share in the fruits of the miracle.” This lack of participation can be seen in

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terms of both wages and the provision of welfare goods (i.e., social housing, social services, public transport and democratic education). This element contributed to further fuelling the social conflict that had started in the second half of the 1960s. Instead of building up an efficient welfare state which would have broadly ameliorated social conditions with potentially positive feedback on aggregate demand and productivity, the Italian elites opted for a discretionary use of public spending aimed at ensuring the consensus of particular social groups and anaesthetizing social conflict (Celi et al., 2018). The miracle phase was also incapable of favouring, from a firmlevel perspective, the evolution from a “familistic” organizational model to a more managerial one able to generate (rather than import) organizational and technological innovations. The post-WWII period represented for the Italian economy a phase of skyrocketing growth coupled with dramatic industrial and social transformations. Per capita income rose to unprecedented levels, and millions of workers exited from the informal sector – often linked to an agricultural sector, particularly in the southern regions, organized according to pre-capitalist criteria – to be employed in the industrial or rapidly growing service sector. The economy was upgraded in structural and technological terms with new sectors emerging and consolidating – such as electronics, nuclear energy and fine chemistry – new infrastructures being established, and large state-owned companies contributing to enriching the productive and technological base. Internationalization represented an opportunity insofar as many Italian companies penetrated important foreign markets, successfully competing with more advanced counterparts such as those based in France and Germany. However, the long-lasting structural weaknesses besetting the Italian economy continued to constrain its development prospects, holding Italy back from reaching the technological and organizational standards of its more advanced competitors. As Cesaratto and Zezza (2018) underline, the degree of structural upgrading that Italy could have experienced between the early 1950s and the second half of the 1960s was frustrated by the absence of a modern managerial capitalism. Moreover, state interventions in terms of industrial policy – significantly successful in basic technologies such as steel – proved to be less effective in other advanced sectors. This was mostly due to the lack of a comprehensive and systemic strategy as well as to poor synergy between the public and private sectors.

Failure to adapt and mistakes in policy design in a changing global context The late 1960s marked the end of the high-growth phase that had gotten underway at the beginning of the 1950s. Three elements characterize this transition. First, the policy of wage compression adopted to increase the relative competitiveness of Italian export goods started fuelling social conflict and turmoil. Second, radical change in global economic conditions also

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played a role. In the late 1960s, the factors that had ensured vigorous growth since the end of WWII ran out of steam. As extensively illustrated in Celi et al. (2019, pp. 92–93), the two engines that had supported growth in the previous period – investment and exports – began to splutter. Both in the US and in Europe, the leading role of investment tended to wane. Growth is left to rely on the sole engine of exports occasionally supplemented by private consumption, with unsustainable effects in the long run, since, given the stagnation of wages, the growth in consumption was financed with private debt. International markets were increasingly exposed to relentless competitive pressure, with innovation, product quality and diversification becoming central elements needed to gain market share. The Italian economy struggled (and often failed) to adapt its production model to the new competitive context, thus seeing the re-emergence of structural weaknesses – partly hidden during the “miraculous growth” phase – once again beginning to widen the gap separating Italy from the major advanced economies of the world. In this respect, the relatively low propensity to innovate, which characterized Italian companies during the high-growth period,4 may partly account for the difficulty that the country had with promptly adapting to this new phase. Third, the economic policy landscape changed significantly (Burnham, 2001; Krippner, 2011). The 1970s constituted the high-inflation transition phase, during which almost all advanced economies (and even many developing economies) switched from a “politicized” management of economic policy based on discretionality5 to a “depoliticized” one based on the automatism of rules (Celi et al., 2019).6 Italy went through this phase of instability (i.e., the 1970s) facing intense and diffuse social conflicts. This contributed to preventing (see, among others, Ciocca, 2007 and Cesaratto and Zezza, 2018) the achievement of a “social compromise” designed to support both the accumulation of capital and the construction of a strong welfare state (continuing along the tradition of “missed opportunities” mentioned above). As during the previous 20 years, public expenditure was utilized to achieve short-run objectives – mostly to satisfy specific social needs in order to put an end to the most problematic outbreaks of conflict – rather than to pursue systemic reforms. During the 1970s, the surge of strikes and the numbers of workers taking part in them was astonishing. At peak times (e.g., in 1971 and 1973), more than 5,000 strikes were recorded with close to 300,000 non-worked hours. Figure 6.1 shows the developments in social conflict in Italy between 1950 and 2007. In Italy, social conflicts were further exacerbated by the intensity and persistence of the inflationary trend related to oil shocks. Inflation rose relatively more than it did in other capitalist countries due to a stronger dependency in Italy on foreign oil-producers. At the same time, the relative strength of the labour movement prevented the adoption of resolute deflationary measures.

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12,000

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Figure 6.1 Number of strikes (LHS), workers participating at strikes and non-worked hours (RHS): Italy, 1950–2007. Source: The authors’ elaboration of ISTAT data.

Moreover, from 1975 onwards nominal wages were indexed to the rate of inflation. In such an unstable and conflictive context, an expansionary monetary policy operated as a “stabilizer” to preserve external competitiveness, partly offsetting the continuous increase in nominal wages, accommodating the expansion of public spending aimed at strengthening welfare state institutions, and subsidizing the industrial sector to maintain employment levels (Cesaratto and Zezza, 2018). The 1970s were also the decade that saw the Italian economy’s structural weaknesses looming larger, as the country began its retreat within the global technological and economic hierarchies, notably in some technologically promising sectors where it had managed to carve out a role throughout the highgrowth post-WWII period. As reconstructed by Gallino (2003), the lack of strategic selectiveness, persistence and appropriate intensity of (public and private) investments as well as the lower commitment of some large stateowned companies significantly weakened Italy’s technological capabilities, contributing to its exit from some of the key emerging technological oligopolies. The political and entrepreneurial choices that lay behind this backsliding could be defined as “anti-industrial” actions undermining some of the pillars upon which the Italian economy relied to reduce (but not fully fill) the technological gap vis-à-vis its main competitors – Germany, above all others. There are, in this regard, some paradigmatic examples (Dosi and Guarascio, 2016). Way back in the 1960s, the Italian government had refused to support the development of computers designed by the internationally successful Olivetti, paving the way for the country’s marginalization in the IT sector. The Olivetti projects had, in fact, turned out to be radically innovative and, if adequately supported, would have allowed Italy to acquire a technological

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competitive advantage of key importance. Similar anti-industrial moves were made in the chemical sector. The large conglomerate Montedison was gradually transformed into a financial and political operation, squandering its technological expertise and the fruits of its experience while creating the conditions for its subsequent downsizing and final shutdown. The retreat from the highest technological segment of the pharmaceutical sector, in turn, is epitomized by the liquidation of Farmitalia, a little jewel which had been among the top companies carrying out anti-cancer applied research in the 1960s (Dosi and Guarascio, 2016). With the end of the 1970s, the process of European financial and monetary integration entered a phase of acceleration (Celi et al., 2018). Italy took part in this process, bruised by more than ten years of harsh social conflict and weakened, in structural terms, by missed opportunities (in terms of economic policy) and damaging industrial policy choices.

The bumpy road towards the EMU: becoming the periphery With the evolving process of Europeanization7 and the resulting accomplishment of the EMU, the nature of Italy’s external constraint changed. While, in the three decades after WWII, albeit with alternate phases,8 the Italian external constraint was mainly linked to the dynamics of current account, after the birth of the European Monetary System (EMS), and in the following years, a sort of “financialization” of the external constraint took place. In other words, current account disequilibria were not corrected as in the past via wage compression, changes in internal demand composition or exchange rate variations. The disequilibria were offset through capital movements in the opposite direction (Graziani, 1986).9 In such an increasingly integrated context, a peculiar mechanism started to operate: the Italian current account deficit vis-à-vis the country’s stronger European counterparts (primarily Germany) was matched by capital inflows stemming from these areas and flooding the Italian financial system (making the latter increasingly fragile due to the risk of sudden stops and crises). A point worth stressing here is that this mechanism, besides highlighting the crystallization of an increasingly stringent external constraint for Italy, had through the outflow of capital the effect of ensuring that an exporter like Germany was able to avoid the appreciation of its own currency. In a context of generalized disinflation (i.e., the 1980s), the augmented stringency of the external constraint was exacerbated by the structural weaknesses (thus by the lack of sound competitive armoury) hampering the Italian industrial sector, which continued to pursue competitiveness mostly by reducing labour costs. Actually, during the 1980s Italian firms embarked on a restructuring process with the aim of increasing productivity, as is argued by Giavazzi and Spaventa (1989). In order to carry out the investments needed for the restructuring, firms relied on profits accumulated during the inflationary phase of the 1970s (thanks also to wage exchange rate devaluations). According to Giavazzi and Spaventa (1989), this unconventional inter-temporal policy-mix (devaluation-inflation in the 1970s and

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restructuring in the 1980s) yielded successful results in terms of GDP growth and gross fixed capital formation, making the costs of disinflation painless. However, behind the restructuring of the 1980s and its outcome in terms of GDP growth – so enthusiastically emphasized by Giavazzi and Spaventa (1989) – lay the aggravation of the structural weaknesses described in the previous section and the continuation of a growth strategy based mostly on price competitiveness.10 Overall, the much-vaunted good performance of the Italian economy in the 1980s was to prove ephemeral. The currency crisis of 1992 drove Italy out of the EMS, and the debt-toGDP ratio reached a peak of 120%, contributing to making public debt one of the major concerns connected to Italy’s flawed economic situation. The collapse of the EMS in 1992 represented the culmination of a concatenation of circumstances11 which, together with a series of economic, political and “technical” motivations,12 accelerated progress towards the single currency. The “financialization” of the Italian external constraint, discussed above, became increasingly radical in the context of changing economic policy, preparing the ground for the introduction of the common European currency. In only a few years, a monetary policy “with hands tied”13 became the “only game in town”: strict discipline in the conduct of fiscal policy, redefinition of external constraint in terms of financial balances – that is, balance of payments account (not current account alone) – and control of government budget deficits and public debt. From this time on, Italy started managing her external constraint by relying mainly on fiscal discipline. Of course, this reduced the scope for levers such as investments and industrial policy, further reducing the possibility of dealing with the long-lasting structural weaknesses hampering the Italian economy. The increasingly dominant idea was this: if balance-of-payments equilibrium is no longer achievable through changes in interest rates (no longer manageable by individual countries), the only tool economies are left with are (virtuous) fiscal policies capable of keeping debt service under control so as to prevent capital outflows. Fiscal austerity, in the second half of the 1990s, and falling interest rates, in the early years of the EMU, had lowered Italy’s public debt to around 100% of GDP. Fiscal consolidation had, however, been accompanied by such an undistinguished performance by the Italian economy as to give rise to debate on Italy’s economic decline. Figure 6.2 shows the employment and unemployment trends in Italy between the end of the 1970s and 2015. Ginzburg (2005, 2008) provides an insightful critical reconstruction of the mounting debate around Italy’s decline. Ginzburg’s criticism focuses primarily on the arguments of those supporting the thesis of an ongoing decline – the “declinists.”14 Notwithstanding the fact that they embrace a long-term and structural perspective, these authors tend to overlook the serious crisis that affected major Italian industrial sectors between the 1980s and 1990s.15 The “declinists” cognitive frame, Ginzburg (2008, pp. 13–15) argues, is imbued with neo-classical influences, which leads them to wrongly identify the relatively small average size of Italian firms as one of the major causes of the

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60

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58 57

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52 51

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Employment rate (left axis)

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Figure 6.2 Employment and unemployment rates: Italy, 1977–2015 (%).

decline. Instead, Ginzburg is more sympathetic towards the non-declinist position (Becattini and Coltorti, 2004), highlighting the contrast between the relative decline of large Italian firms, on the one hand, and, on the other hand, the remarkable performance of the networks of small and medium-size enterprises (SMEs) clustered in what came to be called “industrial districts.” According to Becattini and Coltorti (2004, p. 93), “the organic connection between the development of the districts and the affirmation of Made in Italy represents the essential key to account for Italy’s lasting position among the major industrialized countries.”16 Providing support to this thesis, Ginzburg (2008) underlines the importance of adopting what he defines as a “transformation approach,” according to which economic development is the result of the formation (and decline) of markets (emerging in accordance with a Polanyian type of socio-institutional co-movement) and the co-evolution (and interaction) of demand and supply. The transformation approach provides a disaggregated representation of the economic system according to which (a) firms and institutions are interdependent and their geographical localization matters (i.e., companies are positioned in relation to the spatial distribution – national and international – of suppliers and purchasers); (b) product innovation and quality (of final and intermediate goods) have important repercussions on the economic system (challenging the conventional way of measuring productivity growth and competitiveness); (c) technology, income distribution and preferences are embedded in social interactions; and (d) insufficiency of aggregate demand has effects on the configuration of supply. The transformation approach provided by Ginzburg (2005, 2008) can help us better understand the changes in Italy’s external constraint during the years of participation in the EMU.

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Since the 1990s and during the build-up phase of the EMU, the development of globalization brought about profound changes in the European economy, the major drivers being (a) increasing competition from the emerging markets, whose high rates of growth represented not only a threat but also an opportunity for European firms; and (b) the pervasive diffusion of information and communications technology (ICT) encouraging the international fragmentation of production and reducing the importance of scale economies in favour of network economies (Momigliano, 1985). In this phase, another major driver of change affecting the industrial, technological and hierarchical European landscape was the reorganization of the German manufacturing platform with massive relocations abroad, especially towards Central Eastern European countries (Stehrer and Stollinger, 2015). On the one hand, the consolidating position of Germany as a “bazaar economy” – that is, as a hub importing a massive share of the intermediate goods produced abroad – together with the increasingly close German–Eastern-European connections led to a reorganization of the European industrial matrix and a partial crowding out of Italian suppliers, partly replaced by increasingly competitive Eastern European producers (Simonazzi et al., 2013). The restructuring of the German economy and, in particular, of its labour market (the Hartz Reforms playing a crucial role in this respect) turned out to be a further factor penalizing Italian exporters of final consumption goods. The cause of this adverse effect on Italy’s trade balance was twofold. First, the flexibilization of the labour market in Germany (Celi et al., 2018) favoured a policy of wage moderation that increased (on the price side) the relative competitiveness of German goods. Second, the growing share of low-paid workers and working poor in total German employment reduced the level and the quality of German consumption good imports, turning them away from medium-quality goods in favour of cheaper goods exported, in particular, by China. During the period 1999–2008, eastward relocations, labour market reforms and wage moderation contributed to generating an astonishing German trade surplus, especially towards the Southern European countries (Celi et al., 2018). This was part of a profound process of change in terms of interdependencies and hierarchical relations in Europe, leading to the emergence of two peripheries subordinated to the same core (Germany): (a) the “Eastern Periphery,” which – becoming an integral part of the German-led European manufacturing platform – expanded and strengthened its industrial base, displacing, in part, the productions of Southern Europe; and (b) the “Southern Periphery,” which saw a weakening of its industrial base and a growing dependence on financial flows from abroad. These structural transformations made the Italian external constraint more stringent on the real side. In addition, as remarked by Storm and Naastepad (2015), capital flows stemming from the core contributed to financing debt-led growth in Southern Europe (mostly based on debt-led consumption and real estate bubbles). This process assumed the form of a “misallocation” of resources, magnifying Southern Europe’s structural weaknesses, which proved to be fatal when, around 2008, capital flows suddenly stopped and the financial crisis exploded.

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Between 2008 and 2018, Italy plunged into three recessions: (a) the first was triggered by the repercussions in Europe of the sub-prime crisis that originated in the US;17 (b) the second followed the deflationary measures included in the austerity programmes imposed by the European Commission on the Eurozone’s deficit countries (self-imposed reform programmes, in the case of Italy);18 and (c) the third (which occurred in the third and fourth quarters of 2018), which was announced by ISTAT19 in January 2019. In fact, Italy has been stuck in a perpetually deflationary situation since the Maastricht Treaty of 1992, which imposed “a new order on Italian capitalism” (Storm, 2019). The obsession with the containment of the public debt prompted Italian policy-makers to relinquish the goal of full employment, leading to a weakening of the trade unions with negative effects on real wages. Between 1992–2008, Italian real wages per worker grew at an average annual rate that was half that of the Euro-420 (0.35% as against 0.7%) (cf. Storm, 2019). It is interesting to observe that, in the same period, the rate of growth of Italian wages did not differ much from that of German wages (0.35% as against 0.4%, on average, per year). Contemplating this evidence, one cannot but reflect on the different outcomes that wage moderation has had in the two countries. In Germany, wage moderation has been eased by labour market segmentation with strong positive effects on the German current account. The increase in the incidence of low-paid employment on total German employment, especially in the less-unionized segments of the service sector, indirectly affected export competitiveness by reducing the cost of services to exporting industries, increasing the real wages of “insiders” and favouring wage moderation (complementing the effects of low-cost inputs from eastward relocations). A similar process of labour market flexibilization and segmentation (and wage restraint) took place in Italy. This process unfolded, however, in the middle of a generalized structural weakening of the economy (assuming the form of an “impoverishing tertiarization”) not determining – as in the case of Germany – a rise in the relative competitiveness of export goods and the associated increase in external surplus.21 As in Germany, the relative impoverishment of large strata of the Italian population led to an increase in low-price/low-quality consumption goods imported from China. While the increase in low-quality goods consumption (Celi et al., 2018) was matched by a rising surplus driven by capital goods exports in Germany, this was not the case in Italy. For the Italian producers of medium- and high-quality consumption goods, this resulted in a two-fold displacement: (a) the negative impact of increasing import penetration of cheap consumer goods in its internal market; (b) and the adverse effects, on Italian exporters, of the redirection of German imports towards cheaper, lowquality producers (China, above all). In other words, the strangulation of internal demand (Storm, 2019) combined with the loss of external competitiveness vis-à-vis the core (Celi et al., 2018) eroded and further impoverished the Italian productive matrix.

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Conclusion As a latecomer country, Italy received both advantages and disadvantages from internationalization (Simonazzi and Ginzburg, 2015). On the one hand, Italy saw rapid industrialization, which was mostly driven by significant success as a manufacturing goods exporter (towards, in particular, the gradually expanding European market). On the other hand, the Italian industrial system failed to complete and technologically upgrade its productive matrix, remaining subordinate to its more advanced counterparts (De Cecco, 1971). Indeed, the structural evolution of Italy’s external constraint during the post-war period can be interpreted in terms of productive complementarity vis-à-vis the European core countries (Germany, above all): Italy exporting components and consumer goods (or capital goods close to the final stage of consumption) and receiving, in exchange, German capital goods. This Italian–German “symmetrical complementarity” (De Cecco, 1971) has been convincingly explained by Ginzburg (1984), who took into account the interactions between the waves of accumulation occurring in Germany and those subsequently occurring systematically in Italy. In the period 1960–1980, the complementary integration between Italy and Germany envisaged phases of accumulation followed by longer phases of export growth and stabilization of domestic demand. The intensification of importintensive investments in Italy was associated with an expansion of Italian internal demand, increasing employment and rising wages – circumstances that in due course led to a balance-of-payments crisis (eventually exacerbated by capital flight) which, in turn, was counteracted by monetary and/or fiscal restraint measures followed by a new cycle of exports. This dynamic alternated between an improvement in and the deterioration of Italy’s external constraint. In the post-Maastricht era (and especially during the EMU period), total acceptance of the rules of the game associated with an increasingly stringent external constraint has represented a landmark for Italian policy-makers. The aptitude to comply with the dictates of the new post-Maastricht order (Storm, 2019) was associated with a complete neglect of the profound changes occurring in European core–periphery relations. The combination of dramatic developments within and outside the Eurozone – the emergence of the Central Europe Manufacturing Core managed by Germany, globalization and marked GDP growth in low-cost emerging countries – helped to increase economic divergence and polarization between (and within) European countries. The 2008 crisis and the subsequent stress on austerity exacerbated divergences, with severe consequences for the long-term viability of the European Union. Ginzburg and Simonazzi (2017) have recently pointed out that the time has come for more balanced European economic integration, calling for a generalized commitment to putting an end to labour devaluations while pursuing production upgrading, diversification and structural change. In this context, the peripheral countries (including Italy) need a developmental state capable of broadening their productive capacity and enhancing their capabilities so as to reduce between- and within-country divides.

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Notes 1 Writing in 1971, De Cecco stated that the Italian investment goods sector was completely dependent on technologies designed and produced abroad. The direct consequence of this was that Italy was hierarchically subordinated not only to the US – the leading economy of the post-WWII phase – but also to the technologically more advanced European economies, most notable of which was that of Germany. 2 According to Graziani (2000), in this period firms were induced to increase their relative size in continual pursuit of scale economies to reduce production costs and thereby maintain price competitiveness. 3 A paradigmatic example is the North–South divide: after a moderate period of convergence in terms of per capita incomes, the divergence began to widen again, reflecting structural asymmetries (particularly in terms of industrial and technological capacity) which remained unchanged during the high-growth phase. 4 Attracted by the availability of a plentiful and cheap labour supply, companies resorted largely to cost-competitiveness strategies, investing less in technological capabilities than their foreign competitors (on this point, see De Cecco [1971], and the previous section). 5 A discretionality limited to well-defined areas of macroeconomic policy, as in Keynesian public intervention. 6 A depoliticization of the economic space based on some key pillars that would definitively crystallize during the 1980s: (a) a significant reduction of public interventions in the economy; (b) the liberalization of the financial markets (both domestic and international) and the end of the states’ financial interventionism (Celi et al., 2019); (c) the gradual weakening of trade unions; and (d) the resizing of mass manufacturing production in the advanced economies and the start of the international fragmentation of production (Celi et al., 2019, p. 93). 7 By “Europeanization” we mean the way the process of globalization and deregulation, which originated in the US, has been translated to Europe since the 1980s (Celi et al., 2018). 8 See De Vivo and Pivetti (1980) and Ginzburg (1984). 9 As we will see below, the same mechanism was in operation in the first decade of the EMU (1999–2008), when capital flows from central to peripheral countries fuelled real estate bubbles and imports in Southern Europe (Celi et al., 2018). 10 Interesting considerations on the economic performance of Italy in the 1980s are contained in Ginzburg (1988). 11 In 1986, the Single European Act was drawn up with a view to creating a single market by 31 December 1992. A subsequent EC Directive (24 June 1988) required the elimination of capital controls by 1 June 1990. German reunification took place on 3 October 1990. 12 For a broader discussion of the reasons behind the acceleration of monetary integration in Europe, see Celi et al. (2018). 13 Paradoxically, this expression had positive associations in terms of a strategy aimed at increasing credibility in the fight against inflation. In this respect, see, for instance, the article by Giavazzi and Pagano (1988). 14 Ciocca (2004) was mentioned by Ginzburg as the forerunner of the declinist thesis. Positions in line with that of Ciocca were formulated by Toniolo and Visco (2004) and Nardozzi (2004). 15 As documented by Gallino (2003). 16 Cited by Ginzburg (2008, p. 13). The translation is our own.

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17 The Centre for Economic Policy Research (CEPR) provided an interpretation of the Eurozone crisis as a typical balance-of-payments crisis induced by a “sudden stop” in capital inflows (Baldwin et al., 2015). For a criticism of the CEPR crisis narrative, see Ginzburg and Simonazzi (2017). 18 For a detailed analysis of the role of austerity in the Eurozone crisis, see Celi et al. (2018, pp. 96–139). 19 Italian National Institute of Statistics. 20 France, Germany, Italy and the UK. 21 Germany was able to compensate for the impoverishment of part of its population with imports of cheaper consumption goods but also with exports of capital goods, resulting in a striking current account surplus.

References Baldwin, R., Beck, T., Bénassy-Quéré, A., Corsetti, G., De Grauwe, P., Den Haan, W., Giavazzi, F., Gros, D., Kalemli-Ozcan, S., Micossi, S., Papaioannou, E., Pesenti, P., Pissarides, C., Tabellini, G. and Weder di Mauro, B. (2015). Rebooting the Eurozone: Step I – agreeing a crisis narrative. CEPR Policy Insight, no. 85. London: Centre for Economic Policy Research. Becattini, G. and Coltorti, F. (2004). Aree di grande impresa ed aree distrettuali nello sviluppo post-bellico dell’Italia: un’esplorazione preliminare. Rivista Italiana degli Economisti, 9(1), Supplement, 61–102. Braudel, F. (1973). Capitalism and Material Life. New York: HarperCollins. Burnham, P. (2001). New Labour and the politics of depoliticisation. British Journal of Politics & International Relations, 3(2), 127–149. Celi, G., Ginzburg, A., Guarascio, D. and Simonazzi, A. (2018). Crisis in the European Monetary Union: A Core–Periphery Perspective. Abingdon, UK: Routledge. Celi, G., Ginzburg, A., Guarascio, D. and Simonazzi, A. (2019). Secular stagnation in the EU? The weakening of the European engine of growth. History of Economic Ideas, 27(1), 89–113. Cesaratto, S. and Zezza, G. (2018). Farsi male da soli: Disciplina esterna, domanda aggregata e il declino economico italiano. CreaM-Working Paper Series, no. 5. Cassino, Italy: University of Cassino and Southern Lazio. Ciocca, P. (2004). L’economia italiana: un problema di crescita. Rivista Italiana degli Economisti, 9(1), Supplement, 7–28. Ciocca, P. (2007). Ricchi per sempre? Una storia economica d’Italia, 1796–2005. Turin: Bollati Boringhieri. Ciocca, P. (2015). Storia dell’IRI: L’IRI nella economia italiana. Bari, Italy: Editori Laterza. Ciocca, P., Filosa, R. and Rey, G.M. (1973). Integrazione e sviluppo dell’economia italiana nell’ultimo ventennio: un riesame critico. In Contributi alla ricerca economica, Vol. 3 (pp. 58–135). Rome: Banca d’Italia. Cipolla, C.M. (1990). Storia economica dell’Europa preindustriale. Bologna: Il Mulino. Cipolla, C.M. (1995). Storia facile dell’economia italiana dal Medioevo a oggi. Milan: Mondadori. De Cecco, M. (1971). Lo sviluppo dell’economia italiana e la sua collocazione internazionale. Rivista internazionale di scienze economiche e commerciali, 10, 973–993.

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De Vivo, G. and Pivetti, M. (1980). International integration and the balance of payments constraint: the case of Italy. Cambridge Journal of Economics, 4(1), 1–22. Dosi, G., Pavitt, K. and Soete, L. (1990). The Economics of Technical Change and International Trade. New York: New York University Press. Dosi, G. and Guarascio, D. (2016). Oltre la “magia del libero mercato”: il ritorno della politica industriale. Quaderni di rassegna sindacale, 17(3), 91–103. Dosi, G. and Guarascio, D. (2018). Innovazione tecnologica, politiche industriali ed evoluzione delle industrie. In L. Pennacchi and R. Sanna (eds), Lavoro e innovazione per riformare il capitalismo. (pp. 135–146). Rome: Ediesse. Gallino, L. (2003). La scomparsa dell’Italia industriale. Turin: Einaudi. Garofoli, G. (2014), Economia e politica economica in Italia: Lo sviluppo economico italiano dal 1945 ad oggi. Milan: Franco Angeli Editore. Giavazzi, F. and Pagano, M. (1988). The advantage of tying one’s hands: EMS discipline and Central Bank credibility. European Economic Review, 32(5), 1055–1075. Giavazzi, F. and Spaventa, L. (1989). Italy: the real effects of inflation and disinflation. Economic Policy, 4(8), 133–171. Ginzburg, A. (1984). Dependency and the political solution of balance of payments crises: the Italian case. Studi e Ricerche del Dipartimento di Economia Politica, no. 25. Modena: University of Modena. Ginzburg, A. (1988). Locomotiva Italia?Materiali di Discussione, Dipartimento di Economia Politica, no. 37. Modena: University of Modena. Ginzburg, A. (2005). Le porte del cambiamento: a proposito di alcune recenti interpretazioni del ristagno dell’economia italiana. Economia & Lavoro, 39(2), 5–20. Ginzburg, A. (2008). Le nuove PMI: Strategie di riposizionamento, qualificazione e specializzazione del sistema produttivo reggiano. Reggio Emilia, Italy: API. Ginzburg, A. and Simonazzi, A. (2017). Out of the crisis: a radical change of strategy for the Eurozone. European Journal of Comparative Economics, 14(1), 13–37. Graziani, A. (1972). L’economia italiana: 1945–1970. Bologna: Il Mulino. Graziani, A. (1986). Un contributo per l’analisi delle recenti vicende economiche italiane. In La politica economica e l’occupazione: l’esperienza italiana dell’ultimo decennio, Conference proceedings, Milan, 25–26 October 1985. Milan: Azimut. Graziani, A. (2000), Lo sviluppo dell’economia italiana: Dalla ricostruzione alla moneta europea, 2nd ed. Turin: Bollati Boringhieri. Krippner, G.R. (2011). Capitalizing on Crisis. Cambridge, MA: Harvard University Press. Momigliano, F. (1985). Le tecnologie dell’informazione: effetti economici e politiche pubbliche. In A. Ruberti (ed.), Tecnologia domani. Bari, Italy: Editori Laterza. Nardozzi, G. (2004). Miracolo e declino: L’Italia fra concorrenza e protezione. Bari, Italy: Editori Laterza. Salvati, M. (2000). Occasioni mancate: Economia e politica in Italia dagli anni ’60 a oggi. Bari, Italy: Editori Laterza. Simonazzi, A. and Ginzburg, A. (2015). The interruption of industrialization in Southern Europe: a center–periphery perspective. In M. Baumeister and R. Sala (eds), Southern Europe? Italy, Spain, Portugal and Greece from the 1950s until the Present Day. Frankfurt: Campus Verlag, 103–137. Simonazzi, A., Ginzburg, A. and Nocella, G. (2013). Economic relations between Germany and Southern Europe. Cambridge Journal of Economics, 37(3), 653–675. Stehrer, R. and Stollinger, R. (2015). The central European manufacturing core: what is driving regional production sharing?FIW-Research Reports 2014/15, no. 22. Vienna: Forschungsschwerpunkt Internationale Wirtschaft.

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Storm, S. (2019). How to ruin a country in three decades. Institute for New Economic Thinking, 10 April. https://www.ineteconomics.org/perspectives/blog/how-to-ruin-a -country-in-three-decades [accessed 19 June 2019]. Storm, S. and Naastepad, C.W.M. (2015). Crisis and recovery in the German economy: the real lessons. Structural Change and Economic Dynamics, 32, 11–24. Toniolo, G. and Visco, V. (eds) (2004). Il declino economico dell’Italia: Cause e rimedi. Milan: Bruno Mondadori.

Part III

The social effects of neoliberal macroeconomics

7

Market income inequality and welfare state redistribution in Europe Some facts and policy suggestions Maurizio Franzini

Introduction Income inequality within a large number of European countries is very high, and it has grown in almost all of them over the last 30 years. This common trend may have different explanations, the most frequently mentioned of which are globalisation and technological change. However, as many scholars have observed (Stiglitz, 2012; Atkinson, 2015), these are inadequate explanations because, among other things, they neglect the role of specific national and supranational policies. Actually, many other factors could be playing an important role in this trend. For example, among European countries, some mechanisms may be active that allow the transmission of inequality from one country to another. From this perspective, Celi et al. (2018) make an interesting claim that growing inequality in Germany has changed the consumption habits of a significant part of the population by increasing the demand for low-quality goods with consequences for exports to Germany from countries like Italy that produce consumer goods of higher quality. This, in turn, can affect inequality. This is an important point; such connections mediated by market relations should be the object of further studies. However, to better evaluate the characteristics of inequality within European countries and to get a grasp of the mechanisms that lie at their root, a preliminary step is to identify the role played by market forces, on the one hand, and by the state through redistribution, on the other. That is to say, it is necessary to analyse separately the dynamics of market income inequality and disposable income inequality, the latter differing from the former essentially because of the redistributive action of the state. The first aim of this chapter is to examine the trend of these two forms of inequality within the following 14 European Union (EU) countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, the UK, the Netherlands, Poland, Portugal, Spain, and Sweden. These countries are representative of different welfare regimes. The period under examination is the decade following the 2008 financial crisis.

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The main questions I will try to answer are the following: What are the trends of inequality in disposable incomes and market incomes in the various countries? How similar are European countries in these respects? Are redistributive policies sufficient to counter the tendency of disposable income inequality to grow, or do we need policies that can prevent market inequality itself? The second aim of this chapter is to shed some light on inequality within the EU as a whole and not in its individual states, an issue that is of some relevance in a community of states that is referred to as a ‘union’. I will also make some comparisons with the US and suggest measures that can be used to reduce inequality in the EU as a whole should this become a policy objective.

Market income and disposable income inequality in 2008 and 2016 As is well known, household disposable income is obtained by adding monetary transfers by the state to the total income earned in the markets (mainly as labour or capital income) and subtracting the direct taxes paid by the members of the household. Both household market income and disposable income are transformed into individual incomes through appropriate equivalence scales. The difference between inequality in market incomes and in disposable incomes reflects the redistributive action of the state. Actually, it would be more accurate to say that it reflects a part of the redistributive action of the state because, for example, indirect taxes and transfers in kind – whose redistributive effects are difficult to determine – are not considered. Moreover, anticipating a point that I will consider in more detail later, the monetary transfers include pensions that cannot be considered as full transfers, being as they are, in general, dependent on the social contributions paid in active life. In what follows, I will analyse income inequality in the 14 above-mentioned EU countries, distinguishing between market income and disposable income in 2008 and 2016.1 In this analysis, I will use the Gini coefficient as an inequality measure. Market income inequality Table 7.1 shows the Gini coefficient for market incomes (in 2008 and 2016) and, in the last column, the rate of change in that coefficient over the period under consideration. The countries are ranked according to this last variable. In 2008, market inequality measured by the Gini coefficient exceeded 50% in three countries: Spain, Portugal, and the UK (absolute maximum of 51.9%). The coefficient was below 43% in three countries: Denmark (absolute minimum of 40.5%), Sweden, and the Netherlands. In 2016, inequality was highest in Greece (53.6%) and lowest in Sweden (43.5%). Moreover, the position of many countries in the ranking had changed.

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Table 7.1 Market income inequality, Gini coefficient, 2008 and 2016 (%). Country

2008

2016

Rate of change

46.30 40.50 47.20 50.00 48.30 41.70 47.00 48.90

51.60 45.1* 50.60 53.60 51.60 44.50 49.90 51.70

11.40 11.40 7.20 7.20 6.80 6.70 6.20 5.70

49.00 51.90 42.60 49.40

50.10 53.00 43.50 50.4*

2.20 2.10 2.10 2.00

51.90 47.10

50.60 45.90

–2.50 –2.50

Sharp increase Spain Denmark Finland Greece France Netherlands Belgium Italy Slight increase Austria Portugal Sweden Germany Decrease UK Poland Source: OECD data. Note: *Data refer to 2015.

Obviously, these dynamics depend on the rate of change of the Gini coefficient. As shown in Table 7.1, this rate was positive for all countries except two: the UK, recording the highest inequality in 2008, and Poland. In six countries, the deterioration was strong, higher than 5%, and it was even higher than 10% in two of them (Spain and Denmark). In four other countries, inequality increased, though slightly, by less than 5%. Clearly, the worsening of market inequality is the dominant tendency. Disposable income inequality Data on disposable incomes are shown in Table 7.2. In 2008, the Gini coefficient reached its highest value in the UK (maximum of 36.9%) and in all four Mediterranean countries (Portugal, Greece, Spain, and Italy), while the lowest values were recorded in the three Nordic countries (Denmark [minimum 24.2%], Sweden, and Finland). In 2016, things changed. Due to the considerable deterioration of Denmark and Sweden, Finland exhibited the lowest inequality (25.9%). The UK, despite the decrease, remained the country with the highest Gini coefficient.

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2008

2016

Rate of change

25.90 24.20

28.20 26.3*

8.90 8.70

32.70 31.70 28.50 32.80 28.10

34.10 32.80 29.3* 33.30 28.40

4.30 3.50 2.80 1.50 1.10

26.60 28.60 29.30

26.60 28.50 29.10

0.00 –0.30 –0.70

26.40 36.90 35.50 30.80

25.90 35.10 33.10 28.40

–1.90 –4.90 –6.80 –7.80

Sharp increase Sweden Denmark Slight increase Spain Italy Germany Greece Austria No relevant change Belgium Netherlands France Decrease Finland UK Portugal Poland Source: OECD data. Note: *Data refer to 2015.

The rate of change of the Gini coefficient has been positive and high in Sweden and Denmark, two Nordic countries. It is noteworthy that inequality in disposable incomes increased substantially in Sweden, despite the reduction in market inequality. In three Mediterranean countries (Italy, Spain, and Greece) and two Continental countries (Germany and Austria), the rate of change has been positive but slight. Three other Continental countries (Belgium, the Netherlands, and France) have shown substantial constancy (with decreases of less than 1% in the case of the latter two). Conversely, inequality decreased quite slightly in Finland and more sharply in Portugal, Poland, and the UK. Welfare state and redistribution I will now compare changes in market and disposable income inequality between 2008 and 2016. Making this comparison essentially means measuring the redistributive action by the state through direct taxes and monetary transfers to households, as I mentioned above.

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To measure these changes, I will first calculate the ratios between the Gini coefficient in disposable and market incomes in both 2008 and 2016 and then the percentage change between these two ratios. The rate of change will be negative if the Gini coefficient in disposable incomes has grown less (or fallen more) than has the Gini coefficient in market incomes; therefore, it is possible to argue that redistribution became more intense. The opposite is true in the case of a positive rate of change. Table 7.3 shows the relationship between the Gini coefficients in 2008 and 2016, as well as the corresponding rate of change. The countries are ordered according to the change in the intensity of redistribution, which is considered to have increased sharply if the corresponding rate exceeds 5% and to have increased slightly in the case of a positive but less than 5% rate of change. The redistribution is considered to be intense if it brings the Gini coefficient of disposable incomes to below 60% of the corresponding Gini coefficient for market incomes. In 2008, this was the case with Finland (minimum, at 55.9%), Belgium, Denmark, Austria, and Germany. The UK (maximum, at 71.1%), Spain, the Netherlands, and Portugal showed the highest ratios (i.e., the redistribution was not intense). Table 7.3 Intensity of redistribution, 2008 and 2016 (%). Country

2008

2016

Rate of change

62.50 51.20 56.40 64.00 66.10 53.30 61.90 62.10

–8.70 –8.50 –7.00 –6.60 –6.40 –5.80 –5.40 –5.30

71.10 59.80 64.80 57.30

69.40 58.30 63.40 56.70

–2.40 –2.40 –2.10 –1.20

57.70 60.80

58.10 64.80

0.80 6.60

Sharp increase in redistribution Portugal Finland France Netherlands Spain Belgium Poland Greece

68.40 55.90 60.70 68.60 70.60 56.60 65.40 65.60

Slight increase in redistribution UK Denmark Italy Austria Decrease in redistribution Germany Sweden

Source: Author’s elaboration of OECD data.

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Over the period 2008–2016, the rates of change (of the Gini coefficients of disposable incomes) are positive and above 5% in eight countries, positive and below 5% in four countries, and negative in only two countries: Germany and Sweden. Thus, in Germany and Sweden, redistributive policies made inequality in disposable incomes grow more than inequality in market incomes. In 2016, Sweden was less redistributive than were two Mediterranean countries, namely, Italy and Portugal. The most redistributive country in 2016 was Finland (which became even more redistributive), and the least redistributive was the UK (which was also more redistributive than in the past). A clarification is in order as to the possibility of considering the difference between the two Gini coefficients as an expression of the intensity of the redistributive action of the state. Apart from the failure to consider transfers in kind and indirect taxes, the point is that monetary transfers include public pensions that are not entirely redistributive between individuals. In fact, at least some part of them is a sort of intra-individual and inter-temporal transfer, and it is especially so when pensions are tightly linked to the social contributions paid during active life (as in the defined contributions scheme). This point also deserves attention because the influence of pensions on the difference between market and disposable income inequality in almost all European countries is not at all negligible (Franzini and Raitano, 2015). Market and disposable income inequality: which relations? I will now try to draw some general conclusions from the data analysed so far. First, there is a general increase in market inequality between 2008 and 2016. It has grown in all the Mediterranean, Nordic, and Continental countries, with Poland and the UK being the only two exceptions. Second, there seems to be no clear correlation between changes in market inequality and changes in the intensity of redistribution. In other words, countries have reacted differently to the growing inequality coming from the markets. For example, Denmark and Spain experienced the same rate of deterioration in market inequality (11.4%) but very different rates of change in the intensity of redistribution (6.4% versus 2.4%). Analogously, the intensity of redistribution increased at very similar rates in Poland and Greece, but the dynamics of market inequality were very different in these two countries. It can be useful to try to group the countries according to the rate of change in market and disposable income inequalities. Are there cases of reduced inequality in disposable income – that is, the income that is most important for individual economic well-being – in the presence of nondecreasing inequality in market incomes? Of course, a particularly more intense redistribution could achieve this goal, but the examination of the cases will help provide a more precise idea of the possibility of this happening. To this end, I consider two variables: the rate of change in market inequality and that of disposable income, grouping countries on the basis of the sign and magnitude of these two rates.

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Tables 7.1 and 7.2 allow us to identify countries where there has been either (strong or slight) deterioration or improvement in one of the two Gini coefficients. Table 7.4 classifies the countries accordingly. As can be seen, the only country in which disposable income inequality has decreased in the presence of a sharp increase in market income inequality is Finland, which occurred because of a much more intense rate of redistribution (see Table 7.3). A strong increase in the intensity of redistribution has allowed Portugal to see improvement in inequality in disposable incomes, despite the slight worsening in market incomes. By contrast, both in Poland and the UK, disposable income inequality decreased after a decrease in market income inequality. The main conclusion that can be drawn from this analysis is rather simple: redistribution cannot, in general, prevent a worsening in disposable income inequality if market income inequality worsens at the pace at which it has been proceeding in the last years or decades in most European countries. More precisely, in all the Continental, Mediterranean, and Nordic countries that have been considered here, market inequality has grown in the nine years under investigation, and, in many cases, this tendency has been in place for a long time. For example, in the mid-1980s the corresponding Gini coefficient was 38.7% in Italy, 43.9% in Germany, and 37.3% in Denmark. In many cases, redistribution has prevented the worsening of market inequality from turning into an equal worsening of available income inequality; however, for almost all the countries (Finland and, to a lesser extent, Portugal being the only exceptions) this was not sufficient to reverse the trend towards increasing disposable income inequality. Moreover, this capacity of redistribution seems to have weakened in recent years (Causa and Hermansen, 2017).

What we need: inequality-reducing policies The implication of what I have just stated for the design of policies aimed at reducing inequality in available incomes is straightforward: reduce market income inequality while, of course, being mindful of redistribution. Table 7.4 Classification of countries based on changes in market income and disposable income inequality. Market income inequality Disposable income inequality

Sharp increase

Slight increase

Sharp increase

DK

S

Slight increase

E, GR, I

A, D

No relevant change Decrease

B, F, NL FL

PT

Decrease

UK, PL

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By intervening in market inequality, it is possible not only to set limits to the ‘magnitude’ of disposable income inequality but also to achieve other advisable goals. For example, inequality could become less unacceptable than it is today for reasons other than its ‘magnitude’. Indeed, markets tend to transmit a high share of inequality from one generation to another, even if the degrees vary across countries; they reward not-so-meritocratic skills (think of the ‘ability’ to speculate in financial markets) and create segmentations in which the decisive element is often the different ‘power’ of the subjects. An example is the gender pay gap. Reducing such a gap through redistribution – should this be a policy goal – would be hardly acceptable from the point of view of social justice. The recognition of equal productive merit must take place in the market, and this requires, in this specific case, reduction of the weaknesses that are at the root of the gender pay gap (e.g., reducing vertical and horizontal segregation, promoting a more equal share of care work in the household). Moreover, an extensive redistribution necessary to correct a high level of market inequality could have a negative impact on economic growth. This is the result obtained by Ostry et al. (2014) in a study that makes use of a rich cross-country comparison and that finds that, contrary to what is commonly thought, lower inequality (through either lower market inequality or more intense redistribution) is correlated with higher growth (calculated as the average during five-year periods). However, rather different from lower market inequality, very large redistributions seem to impair the duration of growth. Actually, a set of national and supranational policies is responsible for the observed worsening in inequality. It is not only a matter of the ‘natural’ forces of globalisation and technological progress, as is often claimed. Recently, this has been recognised also by the International Monetary Fund. In a note, three of its authoritative economists state: “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion” (Ostry et al., 2016, p. 38). Many non-redistributive policies have affected inequality. A partial list includes those that have modified the functioning of the labour and financial markets, those that have changed the relationship between capital and labour within companies, those that have strengthened intellectual property rights, and those that have influenced individual endowments. Hacker (2011) – who coined the term ‘pre-distribution’ – observed that not only ‘made’ policies but also ‘omitted’ policies have been relevant, and, as an example of the latter, he mentioned what could have been done to allow for a better reconciliation between work and family and therefore have positive consequences for gender inequality. Of course, many other policies have been ‘omitted’, and each country has its own. In conclusion, “many of the most important changes have been in what might be called ‘pre-distribution’ – the way in which the market distributes its rewards in the first place” (Hacker, 2011, p. 35). Therefore, it is necessary to focus on “market reforms that encourage a more equal distribution of economic power and rewards even before the government collects taxes and pays out benefits.”

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Market inequality as a structural problem ‘Pre-distribution’ had attracted the attention of some observers well before the inequality of the past decade materialised. I am referring, above all, to James Meade, the great Cambridge economist who, as O’Neill (2015) rightly remembers, wrote the following in the early 1960s: But what of the future? … There would be a limited number of exceedingly wealthy property owners; the proportion of the working population required to man the extremely profitable automated industries would be small; wage rates would thus be depressed; … we would be back in a super-world of an immiserated proletariat and of butlers, footmen, kitchen maids, and other hangers-on. Let us call this the Brave New Capitalists’ Paradise. It is to me a hideous outlook. What could we do about it? (Meade, 1964, p. 33). From here, Meade deduced that redistributive policies would not be enough. Instead, more incisive public action was needed to achieve two objectives: a ‘proprietary democracy’, as he called it, and some advanced form of liberal socialism. These objectives require what many today would call pre-distributive policies. In the meaning of Meade, these are rather radical policies because they concern property rights (widely understood) and the ‘rules of the game’, in addition to the endowments of individuals. It is interesting to note that Piketty (2014), in his extraordinarily successful book, makes a reference to Meade, claiming that he is following in the latter’s footsteps; however, in the book he seems to have followed Meade’s footsteps only in part, because his policy recommendations are, in fact, limited to the global wealth tax, which does not share the essence of pre-distribution policies. Piketty himself recognised all this; in fact, in an article published shortly after his book, he states: “I may have devoted too much attention to progressive capital taxation and too little attention to a number of institutional evolutions that could prove equally important, such as the development of alternative forms of property arrangements and participatory governance” (Piketty, 2015, p. 87). Meade’s understanding of pre-distribution also appears to have been much more radical and invasive than the one that was at the centre of a debate – the only one, perhaps, on the subject so far – in the UK a few years ago, following what the then leader of the Labour Party, Ed Miliband, said in September 2012: “Predistribution is about saying, ‘We cannot allow ourselves to be stuck with permanently being a low-wage economy and hope that through taxes and benefits we can make up the shortfall’” (BBC News 2012). Actually, pre-distribution cannot be conceived of as a policy exclusively aimed at raising wages. In fact, in the debate I have just mentioned, another concept of pre-distribution was proposed, which made it almost coincide with policies for equality of opportunity – that is, for the realisation of the always

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coveted goal of levelling the playing field. This position leads to a focus on so-called ‘human capital’ (O’Neill and Williamson, 2012; Diamond, 2014). This is a relevant point, but human capital should not be conceived of as the only relevant dimension when it comes to opportunities. Moreover, it would be wrong to presuppose that compensation in the labour market depends almost exclusively on human capital. There is strong evidence for the overwhelming importance of other variables (Franzini and Raitano, 2015). Indeed, opportunities depend on many other ‘endowments’. More important is the fact that one cannot determine what the opportunities are in markets without having examined how the markets work and what they actually reward, a point which is often underestimated. Therefore, equality of opportunity is a difficult concept to define, not to mention to realise, independently from the so-called ‘rules of the game’ which impact upon the working of the markets (Franzini, 2013). Therefore, to counter the inequality created in the markets, it is necessary to pursue several rather radical objectives and to equip oneself with instruments suited to the task. In particular, it is necessary to intervene in the ‘rules of the game’, as some observations by Hacker, after his original report on pre-distribution (Hacker, 2014), seem to confirm. On the basis of these considerations, and as I have argued elsewhere (Franzini, 2018), a policy aimed at preventing market inequalities should fall into three major areas: endowments, ‘rules of the game’ – that is, the ways in which markets operate – and redistributive policies (because some redistributive policies can have pre-distributive effects). The ultimate effect of interventions in these three areas should be to strengthen those individuals who are weak in the market and weaken those who are too strong. Predistribution: endowments, rules of the game, and selected redistributive policies With regard to endowments, reference has already been made to human capital, understood mainly as education. The problem is the classic one of equality of access which is far to be achieved. In fact, in many countries there is a very strong correlation between the educational qualifications of parents and of their children, and the probability of obtaining a tertiary degree depends heavily on the family background. Among the criteria used by the Organisation for Economic Co-operation and Development (OECD) to evaluate recent school reforms in Europe, there is one that consists in the ability of these reforms to remove the obstacles to the attainment of high levels of education by those who come from disadvantaged backgrounds. Extremely few of the reforms implemented recently in the advanced countries of the EU actually go in this direction (OECD, 2015). In fact, adhering to a peculiar interpretation of competition, several schools still compete to attract students from privileged backgrounds. The likely effect of this tendency is to segregate educational carriers, which is to

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move in the opposite direction of equal opportunity. Pre-distribution policies should put more educational resources at the disposal of the disadvantaged from the earliest stages of education and should widen the set of choices for students facing economic problems. Endowments also concern physical capital and wealth, whose consistency and distribution is much more correlated with inherited legacies than with the savings accumulated in the course of one’s life. Reducing inequalities in bequests is, therefore, a pre-distribution measure, and it is so even if the practically indispensable instrument to achieve it, an adequate inheritance tax, has initial redistributive effects. ‘Rules of the game’ The policies aimed at modifying the ‘rules of the game’ seek to affect the functioning of the markets, all of the markets. Let us start from the product market. Today, thanks to the lack of competition, several companies are able to reap enormous rents. Different types of barriers allow this; often, they take new and perhaps poorly considered forms. Here are some examples: in digital platforms, the main obstacles to entry are the network effects, and, in many markets, notoriety and visibility are powerful obstacles to entry. These are barriers of a new type. The overall effects on inequality of market power are manifold. Coupled with the forms of internal corporate governance, such power makes it possible to guarantee stratospheric compensation to executives – either directly or indirectly (i.e., through bonuses and stock options). Market power can also modify bargaining power within companies, determining a compression of the share of added value going to wages, as some studies on the so-called ‘superstar companies’ have shown (Autor et al., 2017). There may even be cases where the rent allowed by that power translates into a benefit for those workers who are endowed not with human capital but with what might be called ‘relational capital’ (Franzini et al., 2016). Therefore, a revision of antitrust policies is needed. They should pay special attention to cases in which the increase in inequality is coupled with the worsening of efficiency, which cannot be identified with the reduction of consumer prices, as has been done, above all in the US, in recent decades. A further aspect that I will only briefly mention – but which deserves to be discussed more fully than it has been done so far – concerns the possibility that, in markets that are competitive in other areas, firms can exert a sort of manipulative power on consumers, exploiting both information asymmetries and the weaknesses of rationality disclosed by the development of behavioural economics. Akerlof and Shiller (2015) have drawn attention to this complex phenomenon. Intervening in this matter is extremely difficult, and there is no single solution. However, a combination of consumer ‘education’ and well-designed and well-applied regulation (on financial products, on how to use data, etc.) could limit the extent of the phenomenon.

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It can be emphasised that financial markets add up various causes of growth in inequalities, and, in particular, of unacceptable ones; market power is very wide, and the problem of information asymmetries and manipulation is very acute. Therefore, the above recipe should apply particularly to these markets. A further area of intervention concerns intellectual property rights. Their strengthening, implemented in the last few decades, has certainly contributed to widen the market shares controlled by some companies, with consequences not only for inequality but perhaps also for the overall propensity to invest, given the difficulty of having access to innovation that could be subject to marginal improvements through productive investment. A revision of this protection could help considerably in fighting market inequality. A related area of intervention is corporate governance. The specific problem is the stratospheric compensation of many executives, which is often the result, not of increased competition (as is claimed), but of the enormous power that executives themselves have to set their own compensation and to exploit the huge rents earned in the product market. Possible measures to reverse the situation include strengthening shareholders’ power in the setting of such compensation and capping executive pay at a given multiple of the mean wage in the company. A further, delicate problem is the enormous rent that can be appropriated thanks to the technology of joint consumption in an increasing number of markets. The possibility to reach and ‘serve’ an ever-wider audience with zero marginal costs is at the root of the stratospheric levels of compensation that have become the norm in the world of sport and entertainment, and beyond. The basic question is the following: if, by offering the same service (therefore without any extra effort or merit), it is possible to reach a wider audience, and if this happens thanks to new technologies, to whom should the extra revenue (often mediated by advertising) be assigned? Perhaps a good part of it can be considered a sort of ‘manna’ from the sky, to which everyone in society can claim rights. Finally, pre-distribution should strengthen the contractual capacity of the workers as a whole and of the most vulnerable workers in particular. In this way, the wage share could recover part of the losses suffered in the last few decades and the degree of dispersion of labour income, which is one of the reasons behind the very serious phenomenon of the working poor, could be reduced. In this regard, it is necessary to introduce, where it is lacking, or to better design, where it already exists, a measure such as a minimum wage. And we need to encourage the strengthening of the contractual position of workers, particularly in light of what is going on in the gig economy. Pre-distributive effects of redistributive policies The third set of measures in a pre-distributive programme consists of policies that have redistributive effects at first but that affect the distribution of market incomes over a longer time horizon; therefore, they can also be considered pre-distributive.

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Consider inheritance taxes. The fist effect of such taxes, if their revenues are transferred properly, is of a redistributive nature between the beneficiaries of hereditary bequests and the rest of the population. However, over a longer time horizon, the effect will be to limit inequalities in wealth stocks and, therefore, also in capital incomes flowing from them (Cowell et al., 2017). These long-term effects can be very important. Another example concerns the progressivity of taxes and, in particular, the height of marginal tax rates. There is evidence of a link between decreasing marginal tax rates and increasing gross (not only net) top incomes. The phenomenon, as Barnes (2015) also underlines, can be explained by the pre-distributional effects of higher marginal tax rates. Piketty et al. (2014) set forth an interesting hypothesis: the prospect of higher net marginal incomes (when tax rates fall) provides an incentive to increase one’s gross income, and this can, in particular, take the form of full use of the bargaining power within companies by executives. A further measure could be a guaranteed minimum income, which would have, among other things, the effect of preventing market wages from falling below a certain level. This would lessen the pressures towards higher inequality. Of course, special attention should be paid to coordinate a measure of this kind with a minimum wage. Although one could stop here, surely other measures could be part of a well-structured pre-distributive policy.

Inequality in the EU as a whole and a comparison with the US A comparison with the US can be useful. In 2016, the inequality in market incomes in the US measured through the Gini coefficient was 50.7% (on the basis of OECD data). This figure is generally either the same or lower than that of the major European countries. As shown in Table 7.1, market inequality was higher than 50.7% in Italy, France, and Spain, whereas it was almost identical in the UK and Germany. In smaller European countries, it was either higher (Greece and Portugal) or similar (Finland, Austria, and Belgium), and it was markedly lower in only a few small countries. Moreover, in a large number of countries (particularly Italy, France, Finland, Spain, Belgium, and Greece), this inequality worsened more than it did in the US between 2008 and 2016. With reference to disposable income, in 2016, the Gini coefficient in the US was 39.1%, which is significantly higher than it was in European countries, apparently pointing to a much lower redistributive intensity in the US welfare state. However, if we consider the whole EU – which is more comparable with the US – instead of individual European countries, the results are much more problematic. The fundamental reason is that the difference in mean incomes between European countries is very high, and this contributes to widening inequality in the EU as a whole.

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Income inequality in Europe as a whole and its comparison with the US has been a subject of attention for a long time. In 1996, Atkinson tackled the problem and found that inequality in the EU-15 was lower than in the US. This result – similar to that of Brandolini (2006) and Beblo and Knaus (2001) – refers to the EU before the entry of new countries, in particular of countries with a very low average per capita income. These entries seem to have changed the situation. In considering the 28 EU countries, Boix (2004) and Dauderstädt and Keltek (2011) came to the conclusion that inequality in the EU as a whole was greater than in the US (unlike the EU-15). Milanovic (2011, 2012) found that inequality in the EU was substantially the same as that in the US and underlined the impact of entry into the EU of countries, such as Bulgaria and Romania, with very low mean incomes. On the basis of this evidence, and with all the necessary caution, we can draw the following conclusions. On the one hand, as far as market inequality is concerned, we cannot rely on studies of such inequality at the EU level; however, considering that inequality between European countries is very high and that inequality within several major EU countries exceeds that of the US, it is plausible to assume that such inequality is decidedly greater in the EU as a whole (both the EU-15 and the EU-28). On the other hand, inequality in disposable incomes in the US is higher than that within many European countries, but inequalities between European countries can explain the results achieved by the studies cited above of a non-inferior level of inequality in disposable income at the European level. However, a recent study (Blanchet et al., 2019), based on a very rich data set, comes to very different, almost opposite, conclusions: the inequality in disposable incomes is lower in Europe as a whole (including 10 non-EU member states) than in the US; pre-tax income inequality is lower (not higher) within European countries; and the intensity of redistribution is higher (not lower) in the US. However, it is easy to understand at least some of the reasons why these results are so markedly different from those above. The first reason is that the Europe referred to in this study is made up of 38 countries, including also ten non-EU member states (e.g., Switzerland, Norway, Iceland, etc.). In some of these countries, the Gini coefficient is quite high, exceeding 30% – in Switzerland, for example – whereas it is well below that threshold in most of the other countries, such as Norway. The second reason is that the pre-tax incomes on which the study is based are not the same as the market incomes which I referred earlier. In fact, they include pensions, which are actually considered as deferred market income. Pensions in the EU generally have the effect of significantly reducing inequalities, which could be a large part of the explanation of differences between pre-tax and market income inequality. Moreover, if one excludes pensions from redistribution (as happens in this study going from pre-tax to post-tax incomes), it becomes plausible that the US welfare state appears to be more redistributive.

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The third reason for the differences between our conclusions is that the index of inequality used by Blanchet et al. (2019) is not the Gini coefficient but the ratio between the income of the richest 10% and the poorest 50%. In conclusion, there is much to investigate in respect of overall inequality in the EU and its comparison with inequality in the US. However, there seems to be little doubt that in the major European countries market inequality (if pensions are excluded) exceeds that of the US and that national welfare systems in the EU, thanks to pensions, are more redistributive than are those of the US. However, in the EU as a whole, due to the considerable differences in average national income per capita, the overall inequality in available incomes is, very likely, comparable to that of the US. If reducing inequality in the EU as a whole were a policy objective, then two types of measures would be needed: those aimed at tackling inequality within individual countries, which I referred to in the previous section, and those that can narrow the wide gap in average income between countries.2

Conclusion In this chapter, observing the trend of inequality in market incomes and in disposable incomes in a large number of European countries over the last years, I have argued that markets almost everywhere tend to generate growing inequality, and that there is not much hope that disposable income inequality can be reduced through redistributive policies alone. The experiences of almost all European countries lend support to this claim. To a large extent, this situation is the historical result of specific national and supranational policies that, to say the least, did not pay enough attention to inequality. What is needed today are national and supranational policies going in the opposite direction and addressing, above all, the reduction of market inequality. Such pre-distributive policies can be of different types and consist of interventions aimed at modifying the unequal distribution of endowments, both of human capital and of wealth, at modifying the working of all markets (products, labour, and financial markets) and at enhancing those redistributive policies that can have the greatest pre-distributive effects. Accurately designing each of these policies and ensuring that they are wellcoordinated is not an easy task, and it is made even more complex by the fact that different levels of government are involved. If this is true, it is also true that there are no other ways to seriously tackle inequality. Therefore, my policy suggestion is this: try pre-distribution. Redistribution by itself, while indispensable, cannot do the job of reducing disposable income inequality while market income inequality continues to increase. Moreover, inequality in the EU as a whole should not be neglected. It is very high and is probably not lower than it is in the US. Should this become a policy objective, further measures besides the ones mentioned above would be necessary, measures that can narrow the gap in average income between member states.

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Notes 1 In the few cases where the data for these two years are not available, I will refer to the closest year for which it is. 2 According to the estimation by Blanchet et al. (2019), in Europe (remember that they refer to 38 countries), almost one-fourth of total inequality is due to differences between countries. In the US, the figure is much lower at less than 2%.

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Franzini, M. (2018). Redistribuire non basta: perché e come intervenire sulle disuguaglianze di mercato. In M. Franzini and M. Raitano (eds), Il mercato rende diseguali?Bologna: Il Mulino, 295–312. Franzini, M. and Raitano, M. (2015). Income inequality in Italy: tendencies and policy implications. In D. Strangio and G. Sancetta (eds), Italy in a European Context: Research in Business, Economics and the Environment. London: Palgrave MacMillan, 50–74. Franzini, M., Patriarca, F. and Raitano, M. (2016). The channels of influence of parents’ background on children’s earnings: the role of human and relational capital in monopolistic competition. CIRET WP Series, no. 3/2016. Rome: Centro Interuniversitario di Ricerca Ezio Tarantelli. Hacker, J. (2011). The Institutional Foundation of Middle-Class Democracy. London: Policy Network. Hacker, J. (2014). The Free Market Fantasy. London: Policy Network. Meade, J. (1964). Efficiency, Equality and the Ownership of Property. London: George Allen & Unwin. Milanovic, B. (2011). The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. New York: Basic Books. Milanovic, B. (2012). Income inequality in Europe and the US: regional vs. socialclass inequality. Inequality in Focus, 1(2), 5–8. http://documents.worldbank.org/cura ted/en/558911468159605091/pdf/714000BRI010Bo0InFocusJuly2012FINAL.pdf [accessed 24 June 2019]. OECD (2015). Education Policy Outlook 2015: Making Reforms Happen. Paris: OECD Publishing. O’Neill, M. (2015). Piketty, Meade and predistribution. Crookedtimber.org, 17 December. http://crookedtimber.org/2015/12/17/piketty-meade-and-predistribution/ [accessed 24 June 2019]. O’Neill, M. and Williamson, T. (2012). The Promise of Pre-distribution. London: Policy Network. Ostry, J.D., Berg, A. and Tsangarides, C.G. (2014). Redistribution, inequality, and growth. IMF Staff Discussion Note, no. SDN/14/02. Washington, DC: International Monetary Fund. Ostry, J.D., Loungani, P. and Furceri, D. (2016). Neoliberalism: oversold? Finance and Development, 53(2), 38–41. Piketty, T. (2014). Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press. Piketty, T. (2015). Putting distribution back at the center of economics: reflections on capital in the twenty-first century. Journal of Economic Perspectives, 29(1), 67–88. Piketty, T., Saez, E. and Stantcheva, S. (2014). Optimal taxation of top labor incomes: a tale of three elasticities. American Economic Journal: Economic Policy, 6(1), 230–271. Stiglitz, J. (2012). The Price of Inequality. New York: Allen Lane.

8

Labour market reforms in Europe and young people’s labour market integration in turbulent times Mark Smith and Paola Villa

Introduction This chapter focuses on employment policy making in Europe before, during and in the aftermath of the Great Recession (2000–2013) in order to shed some light on the relationship between (a) changes in the overall economic conditions and the relative disadvantage suffered by young people in the labour markets of European Union (EU) countries; and (b) the intensity (measured by the number of policies enacted over time) and nature of labour market policy activity in the context of EU-level influences and changing economic conditions. Traditionally, researchers consider policy making as a driver for labour market outcomes, but here we are interested in considering policy making as an outcome shaped by a specific institutional and economic context. Our assumption is that far too often labour market reforms are planned and enacted under the pressure of rising unemployment or increasing concentration of disadvantages among certain groups (i.e., exclusion from secure and decent jobs). While labour market policy making should have a structural perspective and adjust the rules governing the labour market to emerging needs (related to digitalisation, globalisation, the new working poor, etc.), on the contrary it is frequently a response to contextual pressures. Such reactive policy making may be necessary in the short term, but the goal of labour market reforms should be to make the functioning of the labour market more efficient (i.e., favouring the matching between workers and jobs made available by firms) and more inclusive (integrating disadvantaged workers as well as assuring some equity in the functioning of the labour market). Yet labour market reforms may also be subject to short-term influences that can contradict these higher goals, regardless of whether the reforms are successful in their initial goals. Our aim is to highlight trends in the policy goals of labour market reforms in Europe. One such goal, before the crisis, was shaped by the emergence of “flexicurity” as a key theme of the EU labour market policy framework. Our analysis provides a lens through which we can consider enacted policies targeted towards “flexicurity” and those targeted towards

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the inclusion of young people. We chart shifting policy models and the underlying implications for young people, analysing the intensity and focus of member state policies. By analysing a database of almost 3,600 policies enacted by member states over the period 2000–2013, we examine changes in labour market institutions contextualised for general economic conditions in EU countries. Our analysis shows a marked increase in the intensity of policy making and shifting policy focus towards young people along with the deterioration in labour market conditions. Policy-making intensity is measured by counting policy measures enacted over time. Since we are interested in this intensity of policy making, rather than the impact of policies per se, we therefore assume an equality between measures enacted. In line with the trends observed in the European Employment Strategy (EES) guidance, policies focused on young people only increased after conditions in youth labour markets had deteriorated significantly. Finally, our analysis reveals how policy priorities wax and wane over a relatively long period with the parallel evolution of EES guidance, national reforms, and policy responses to changing economic conditions. This chapter underlines the importance of taking a longer-term and stable approach to labour market policy making that relies on institutional complementarities at the national level. Yet policy making occurs in the context of economic, financial and political pressures. In relation to young people, our analysis suggests that countries with a tradition of youth policy and stable institutional arrangements were better able to cope with the choppy waters of the changing economic and policy environment during the crisis and austerity sub-periods. Those with a weaker institutional history were forced into a flurry of more reactive policy making as they tried to cope with a more turbulent European economic and policy environment. Such results point to the need for a long-term and coordinated policy perspective (well-integrated into institutional frameworks at the national level) in order to address challenges faced by those entering the labour market in Europe.

Background literature Labour market policy making is central to the life outcomes of much of the population, yet it is also a contentious domain. In the early 1990s, the dominant interpretation of the high and persistent unemployment in Europe focused on labour market rigidities, in particular the strictness of employment protection legislation (EPL). The suggested solution was to deregulate labour markets in order to make them more flexible and to reduce the generosity of the welfare state in order to reduce unemployment. The debate around “eurosclerosis” culminated with the publication of the Organisation for Economic Co-operation and Development (OECD) Jobs Study in 1994 and the launch of the EES in 1997, both of which were focused on labour market flexibility (i.e., “adaptability,” in the European Commission’s (EC) jargon). As policy makers started to implement labour market reforms enhancing flexibility, the debate pivoted

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towards stylized trade-off between flexibility and growth, on the one hand, and inequalities and labour market segmentation, on the other (Simonazzi and Villa, 1999). Moreover, the underlying assumption that labour market flexibility improved economic performance was increasingly disputed (Solow, 1998; Freeman, 2005). The growing concern about the side effects of labour market flexibility led to reformulations of the EES, with a shift of focus from the concept of “labour market flexibility” to that of “flexicurity” (Smith and Villa, 2016). This has been described as an integrated strategy that attempted to reconcile employers’ need for a flexible workforce (i.e., low EPL) with workers’ need for employment security (i.e., some confidence that they will not face long periods of unemployment with the support of effective active labour market policies [ALMPs]). Since its launch, the EES has been influential in shaping policy thinking and in encouraging governments to implement labour market reforms. Indeed, over the period considered here (2000–2013), the EES exercised its influence on member states through the Open Method of Coordination (OMC) by establishing the Employment Guidelines (EGs), setting quantitative targets, and giving guidance at the national level through Country-Specific Recommendations (CSRs) (Smith and Villa, 2016). Through these mechanisms, EU countries were encouraged to make their labour markets more flexible (i.e., more responsive to changes) with an emphasis on moving from job security (i.e., high EPL) to employment security (i.e., flexibility accompanied by ALMPs). The so-called “flexicurity model” was seen as an ideal institutional response to the flexibility–security policy debate with the EU recommending that member states (especially those with poor labour market performance) improve the efficiency of their labour markets through a combination of flexibility and security.1 Changes in policy via structural labour market reforms were supposed to improve the functioning of the labour market in order to make quicker adjustments to change (via layoffs, loosening EPL, and making ALMP more efficient). The underlying assumption was that an increase in flexibility should lead to “higher employment opportunities for all.”2 However, critical evaluations of the effectiveness of these policies pointed to the consequences of the shift of emphasis from job security to employment security, in particular highlighting the effects on school-to-work transitions, subjective insecurity and the effectiveness of policy reforms (Leschke, 2012; O’Reilly et al., 2015; Smith et al., 2019). The EES has evolved since the early 1990s. Before the Great Recession, both EGs and CSRs focusing on young people were mainly concerned with issues related to education and training, with little concern given to problematic youth transitions (Smith and Villa, 2016). However, where flexibility was increased, this often happened on the margins and at the expense of new entrants. New lines of segmentation emerged, with the burden of flexibility falling disproportionately on young workers with “atypical” contracts. Flexicurity policies (particularly those reducing job security) enacted to improve the overall labour market “efficiency”

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disproportionately had an impact on new entrants, even when they were not explicitly targeted at young people (Madsen et al., 2013; O’Reilly et al., 2019). In relation to young people, these so-called “reforms at the margin,” which were enacted prior to the economic crisis, made it easier to hire workers but with negative consequences accumulating on new entrants to the labour market.3 On the one hand, these policies allowed the entry of many young people into employment when the economy was growing, though they often became trapped in poor-quality, precarious jobs. On the other hand, temporary jobs created something of a boomerang effect when the crisis erupted: young workers were among the first to lose their jobs, and an increasing number of young job seekers faced long searches.4 During the crisis, it became evident that the greater difficulties in school-towork transitions risked the creation of a “lost generation,” where a non-negligible share of young people were trapped in poor-quality, precarious jobs (Berloffa et al., 2016). One dimension reveals the scope of these risks, and this is how the notion of youth has been shifting: from 15–19 to 15–24, to 15–29 and, in some countries, to 15–34 (O’Reilly et al., 2019). Youth is no longer a distinct and regular transitory phase, and there are important implications over the life-course for this generation, including the scarring effects of time in precarious employment, poor training, weak careers, and low earnings, but also well-being and decisions around family formation and independence (Russell et al., 2019). Eventually, the problems faced by young people were acknowledged at the EU level and there were calls to address segmentation and long-term unemployment disproportionately affecting young adults. They were considered in a number of official documents, and they were mirrored in specific policy recommendations to member states and in the launch of new policy tools (in particular, the Youth Guarantee) (O’Reilly et al., 2015). Yet these EU policy initiatives arrived late, with insufficient funds, and were addressed at countries with strong budget constraints (Smith et al., 2019). As underlined by several studies on the assessment of the Youth Guarantee (e.g., Dhéret and Roden, 2016; Eichhorst and Rinne, 2017), those countries most in need of a reduction in youth unemployment and NEET (Not in Education, Employment, or Training) rates (i.e., the periphery of the EU) were exactly those where the institutional capacities to deliver such policies were least developed. Furthermore, these were also the countries most affected by fiscal consolidation measures (de la Porte and Heins, 2016), and thus lacked resources to establish relatively expensive ALMPs. The difficulties faced by the Youth Guarantee reveal two critical issues. First, there was a disjuncture within the European policy coordination mechanism between the recommendations for labour market policy and macroeconomic-policy constraints. Second, there was the implicit assumption that labour market policies (in particular, activation strategies) could solve the problems resulting from unfavourable economic conditions (i.e., insufficient job creation capacity).

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Despite the regular flexicurity recommendations and continuous efforts, especially by Mediterranean countries, to enact new reforms, the EU labour market appears to have markedly deteriorated in terms of efficiency. Whilst in the years before the crisis there was a cyclical movement along the Beveridge curve, after its onset the curve moved outwards (Simonazzi and Villa, 2016). This signifies matching difficulties on EU labour markets: new job openings are not filled with unemployed workers, so that already high levels of structural unemployment are further increased. Moreover, the degree of “efficiency” in the functioning of the labour market, as captured by the position of the Beveridge curve, appears to be lower today than before the crisis.5 In short, the labour market reforms appear to have exacerbated school-to-work transition difficulties by creating greater risks for young people. Labour market policy and policy regimes are frequently treated as an independent variable that shapes the context and outcomes for labour market participants (e.g., Russell et al., 2019). Yet it is also important to recognise that policy making does not occur in a vacuum. As the experience during the crisis illustrates, governments tend to respond to changes in economic climate with changes in labour market regulations. For example, an increase in youth unemployment due to economic downturn would encourage the implementation of new labour market policies. In this sense, policy making in itself becomes an outcome in itself that is dependent on the economic climate and the institutional pressures on policy makers. While this approach is somewhat unconventional, and does not take into account the causes of declining job creation and/or an upsurge of unemployment, it is nevertheless appealing as an innovative way to explore the tensions in the climate for labour market reforms between structural goals, hurried policy enactment and external institutional pressures. In the rest of this chapter, we explore the evolution of European labour market reforms before and during the economic crisis in the context of the economic conditions shaping policy makers. In particular, we present empirical evidence in order to discuss three issues: (a) the evolution in policy intensity over time (2000–2013) and across country groups within the EU; (b) the attention given to policies specifically targeted at young people; and (c) the changes recorded (over the period considered) in the distribution of policy measures by main area of intervention directly related to the “flexicurity model.”

Method A focus on policy making rather than on policy outcomes requires information on the activities of policy makers and, in particular, on the enactment of labour market policies. The LABREF database records reforms (broken down by policy measure) enacted by member states affecting the regulation of the labour market.6 This provides a rich source of data on policy developments across the EU with coverage of all member states. These data are organised around nine broad policy areas: labour taxation, unemployment

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benefits, other welfare-related benefits, active labour market policies (ALMPs), job protection (EPL), disability and early retirement schemes, wage bargaining, working-time organisation, and, finally, immigration and mobility.7 These domains are further subdivided by policy field. We operationalise policy making by counting policy activities, which are recorded by tracking policy measures that are enacted over time. This inherently assumes a level of equality across different measures in terms of significance and impact. Thus, the quantitative analysis that we propose here is focused on the intensity of policy making rather than on its impact.8 Moreover, we propose that policy makers tend to react to the deterioration of labour market conditions by enacting new labour market reforms instead of carefully designing new measures aiming to reduce labour market deficiencies and imperfections. Therefore, we measure the impact of the economic crisis through the use of contextual labour market variables (including unemployment rates, long-term unemployment shares, and NEET rates) and look at the association of said variables with policy intensity on the labour market. Given the impact of the economic crisis on young people, we are particularly interested in quantifying the share of policy measures explicitly targeted at this group. In addition, we are interested in seeing the influence of the stylised flexicurity model, which was proposed in the EES, on national policy making. In order to do that, we aligned the policies with the principles of flexicurity – job security, employment security, and income security (EC, 2007). This classification was undertaken by studying the numerous policy areas and policy fields in the database and by verifying the details of each policy in order to ensure coherence with the three flexicurity principles. Policies that were not linked to the core principles of flexicurity were dropped from this part of the analysis. The retained policies on job security (i.e., EPL), employment security (i.e., ALMP) and income security (i.e., unemployment benefits and other welfare support measures) account for 2,216 policies (around two-thirds of all policies recorded over the period 2000– 2013). Policies were subsequently grouped according to the “direction” of the measure (as recorded in the original database), which either promoted or reduced the level of job security, employment security or income security (including changes in coverage). The rationale was to illustrate whether they strengthen (+) or weaken (–) different elements of the flexicurity model. Policy fields were not classified when there was too much ambiguity and/or an absence of detail, and in these cases they were subsequently dropped from the analysis.

Results The economic and financial crisis of 2008–2009 had profound effects on youth labour markets across the EU with repercussions being felt long after the official end of the recession. Table 8.1 illustrates for two age groups (15–24 and 15–29) youth unemployment rates, youth unemployment ratios and NEET rates for EU countries in 2013, the year recording the worst performance for young people in most EU member states. As pointed out by O’Reilly et al. (2019, pp. 5–9), these

Table 8.1 Key youth labour market indicators by country in the EU-27: unemployment rate, unemployment ratio and NEET rate, 2013 (%). 15–24 yrs U rate

U ratio

15–29 yrs NEET rate

U rate

U ratio

NEET rate

Continental Belgium

23.7

7.3

12.7

16.5

8.2

14.9

France

24.9

9.0

11.2

18.5

10.0

13.8

7.8

4.0

6.3

7.3

4.5

8.7

16.9

4.0

5.0

11.0

5.2

7.2

9.7

5.7

7.3

8.6

5.9

8.6

Bulgaria

28.4

8.4

21.6

21.8

10.2

25.7

Czech Rep.

18.9

6.0

9.1

12.3

6.2

12.8

Estonia

18.7

7.4

11.3

13.8

7.8

14.3

Hungary

26.6

7.3

15.5

17.7

8.0

18.4

Latvia

23.2

9.1

13.0

16.4

9.4

15.6

Lithuania

21.9

6.9

11.1

17.1

8.5

13.7

Poland

27.3

9.1

12.2

18.9

10.0

16.2

Romania

23.7

7.1

17.0

15.8

7.6

19.6

Slovenia

21.6

7.3

9.2

19.0

10.2

12.9

Slovakia

33.7

10.4

13.7

24.3

12.2

19.0

Greece

58.3

16.5

20.4

48.7

24.2

28.5

Spain

55.5

21.0

18.6

42.4

24.0

22.5

Italy

40.0

10.9

22.1

29.8

12.3

26.0

Portugal

38.1

13.3

14.1

28.9

15.3

16.4

Germany Luxembourg Austria Central Eastern

Mediterranean

Nordic Denmark

13.0

8.1

6.0

11.9

8.1

7.5

Finland

19.9

10.3

9.3

15.1

9.4

10.9

Netherlands

13.2

9.1

5.6

10.9

8.2

7.5

Sweden

23.6

12.8

7.4

17.2

11.2

7.9

Cyprus

38.9

14.9

18.7

27.5

16.4

20.4

Ireland

26.7

13.3

16.4

21.5

13.2

18.8

Malta

12.7

6.8

9.9

9.2

6.1

10.9

Anglo-Saxon

Labour market reforms in Europe 15–24 yrs

157

15–29 yrs

U rate

U ratio

NEET rate

U rate

U ratio

NEET rate

UK

20.7

12.1

13.2

15.1

10.2

14.6

EU-27

23.8

10.0

13.0

18.9

10.7

15.9

Sources: Eurostat EU-LFS (EU Labour Force Survey), authors’ own analysis. Notes: U: unemployment; NEET: not in employment, education or training; see text for details of indicators. See endnote 9 for details on country groupings.

three indicators are to be seen as complementary in that they measure different phenomena. The unemployment rate is the proportion of youth actively looking for a job as a percentage of all those in the same age group who are in the labour force; hence, it excludes students and is not sensitive to the proportion of the youth cohort studying. The unemployment ratio includes students as part of the total population against which it is calculated; therefore, it is sensitive to the share of young people in education. Since they are measured against a wider population, unemployment ratios are lower than unemployment rates. The NEET rate is the percentage of the youth population not in education or training among all young people in the same age group; it has become an increasingly important measure, as it identifies the share of young people not accumulating human capital (Smith et al., 2019). This measure can be interpreted as an indicator reflecting the fragility of school-to-work transitions in a particular country. These three indicators capture the variety of youth experiences between countries. Indeed, they reflect the varying performance of countries, the overall macroeconomic and labour market conditions, and the effectiveness of labour regulation in facilitating young people’s transitions to sustainable employment (O’Reilly et al., 2019, p. 7). For example, countries with similar NEET rates (e.g., Poland and Portugal) can have very different levels of youth unemployment rates or ratios, and countries with similar unemployment rates (e.g., Bulgaria and Ireland) can have very different unemployment ratios or NEET rates (figures refer to the 15–29 age group). The careful interpretation of these figures and their inter-relationships illustrates the specificities of youth challenges, the risks of focusing on single indicators and the need to determine policy priorities at the national level. Debates about which indicators should be used are both political and academic in nature: they are academic in terms of how we should appropriately measure and interpret the phenomena of youth disadvantages, and yet they are political in terms of emphasis and the importance given to the development of policies to address particular problems. In both cases, multiple indicators may both shed light on the complex situation on youth labour markets and also reduce bias. The extent to which policy makers do indeed respond to such pressures on the labour market is one of the aims of our analysis. Although we cannot

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draw a causal link between labour market indicators and policy makers’ motives, we can provide an overview and contextualise policy making and the shifting institutional environment before, during and after the crisis while also locating policy activity focused on young people. We consider policy making in the EU-27 across the period 2000–2013, distinguishing between three sub-periods: pre-crisis (2000–2007), crisis (2008–2009) and austerity (2010–2013). The first key point to note is the rising intensity of policy making over time. The database, of almost 3,600 policies over a period of 14 years (2000–2013), demonstrates a clear rise in the intensity of policy making. For EU countries, there were 190 policies per year in the pre-crisis period, but 313 during the crisis and 354 during the sub-period of austerity. Figure 8.1 contextualises the policy-making trends with total and youth unemployment rates for the same sub-period. Here, the upward trend in policy-making intensity – the annual number of new labour market policies enacted – is clearly visible. There is indeed a marked step change in policy making in 2007 and again in 2012. After a downward trajectory, unemployment rates for young people jumped by 4.4 percentage points between 2008 and 2009 (here aged 15–24 but also for the 15–29 group). The figure also

500

25.0

450 400

20.0

350 15.0

250 200

10.0

Rate (%)

Number of policies

300

150 100

5.0

50 0

youth policy U youth (15–29)

other policy NEET (15–24)

U (all) U (ratio, 15–24)

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0.0

U youth (15–24)

Figure 8.1 Average “policy intensities” and labour market indicators in the EU-27, 2000–2013. Notes: Average “policy intensity”: the indicator reports the average number of labour market policies enacted on average per year in the EU-27. U: unemployment (rate/ ratio); NEET: Not in Employment, Education or Training; see text for details on the indicators. Sources: Eurostat EU-LFS, LABREF database, authors’ own analysis.

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captures the rise in youth policy making as the consequences of the economic crisis became visible in youth unemployment. The number of policies explicitly targeted at young people was negligible in the pre-crisis sub-period (2000–2007). The rise occurred in 2008 but was most marked in 2012, when there was a doubling of the number of polices specifically focused on young people. The association between overall unemployment rates and policy-making intensity (measured by R-squared) is quite weak (0.38), while the association between youth unemployment rates and youth-focused policy is higher (0.69 and 0.73 for unemployment rates for the 15– 24 group and the 15–29 group, respectively). The data for NEET rates and unemployment ratios are only available for the shorter period 2006–2013, but the correlations remain high at 0.69 and 0.73, respectively. In order to illustrate differences across countries in the evolution of the intensity of policy making, we group countries using the widely used taxonomy of flexicurity models originally proposed in 2007 by the EC.9 The rising trend in policymaking intensity is visible across all country groups. Table 8.2 reports information on policy-making intensity broken down by country group and economic period (i.e., number of policy measures enacted per year, adjusted for the number of years and the number of countries). The data show that this increasing trend in policy making is marked and at a higher level in the Mediterranean group: averages for the crisis and austerity sub-periods were 15.4 and 24.3, respectively, compared to 9.7 for the pre-crisis sub-period. Continental and Central Eastern European (CEE) countries also show higher levels of policy making particularly during the crisis and austerity sub-periods. This country-group-specific pattern is also marked for the youth-focused policies (again adjusted), although during the crisis period it is the Continental, Nordic and Anglo-Saxon countries that show a peak in policymaking activity. The Mediterranean and CEE countries are also those that experienced the most dramatic rises in unemployment, having recorded high youth unemployment rates (Table 8.2). Although the unemployment ratios are more similar between country groups, again the Mediterranean countries, joined by the Anglo-Saxon countries, show a sharp crisis peak. Similarly, it is the Mediterranean, CEE and Anglo-Saxon country groups that demonstrate both the sharp rise in and high levels of NEET rates. In addition to the shifting labour market indicators, one of the dominant influences on policy making over the austerity sub-period consisted of pressures for fiscal consolidation measures (de la Porte and Heins, 2016). As public deficit soared, countries in the Eurozone were urged to reduce their “excessive deficits” while they continued to enact labour market reforms. The impact upon the labour market policy making of these countries was marked. Within the European Monetary Union (EMU) framework, the labour market became the main means of adjustment and labour market reforms became the primary policy instrument permitted. These effects are evident in our analysis – with the exception of a few years, the Euro group countries had a consistently higher intensity of policy making on the labour market (Table 8.2). This pattern became more pronounced during the

Table 8.2 Average “policy intensities”+ and contextual youth labour market indicators by country group,++ 2010–2013. Pre-crisis (2000–2007)

Crisis (2008–2009)

Austerity (2010–2013)

All years (2000–2013)

11.2 12.2 14.4 9.7 15.4 9.9 10.9

12.5 13.8 13.0 11.8 24.3 7.8 9.8

9.1 9.8 10.4 8.2 14.6 7.9 7.4

1.2 1.3 1.7 0.6 1.8 1.4 1.9

1.8 1.9 1.7 1.3 4.3 1.3 1.4

0.9 0.9 1.1 0.6 1.7 0.8 0.8

18.1 18.4 15.7 19.3 25.4 15.2 15.1

22.6 22.7 15.9 26.8 40.9 17.3 22.3

19.6 19.4 15.4 23.5 27.9 15.0 15.2

7.7 7.5 6.0 8.1 8.6 7.6 6.7

7.9 8.0 6.3 6.5 9.4 8.8 8.4

9.5 9.4 5.9 8.7 13.7 9.9 11.0

8.6 8.4 6.0 8.1 10.2 8.4 8.2

11.2

11.7

13.0

12.2

Adjusted policy count (total policies) EU-27 Eurozone Continental Central & Eastern Mediterranean Nordic Anglo-Saxon

6.8 7.2 8.2 6.0 9.7 7.4 5.3

Adjusted policy count (policies on youth) EU-27 Eurozone Continental Central & Eastern Mediterranean Nordic Anglo-Saxon

0.4 0.4 0.7 0.3 0.3 0.4 0.3

Unemployment rate (15–24 yrs) EU-27 Eurozone Continental Central & Eastern Mediterranean Nordic Anglo-Saxon

18.5 17.9 15.0 22.8 22.0 13.8 11.7

Unemployment ratio (15–24 yrs) EU-27 Eurozone Continental Central & Eastern Mediterranean Nordic Anglo-Saxon NEET ratio (15–24 yrs) EU-27

Labour market reforms in Europe

Eurozone Continental Central & Eastern Mediterranean Nordic Anglo-Saxon

161

Pre-crisis (2000–2007)

Crisis (2008–2009)

Austerity (2010–2013)

All years (2000–2013)

11.2 9.2 11.8 12.7 5.9 10.5

11.8 8.8 11.7 14.0 6.5 11.7

12.9 8.6 13.8 17.5 6.9 14.4

12.2 8.8 12.8 15.4 6.5 12.8

Sources: Eurostat EU-LFS, LABREF database, authors’ own analysis. + “Policy intensity” is the average number of policy measures enacted, adjusted for size of group (no. of countries) and number of years per sub-period. Country group averages are unweighted for population size. ++ Continental (AT, BE, FR, DE, LU), Central & Eastern (BG, CZ, EE, HU, LV, LT, PL, RO, SK, SI), Nordic (SE, NL, FI, DK), Mediterranean (EL, IT, IT, ES), Anglo-Saxon (IE, UK, MT, CY). See endnote 9 for details of country groupings.

austerity sub-period and was particularly strong among the four members of the Euro in the Mediterranean group. When we examined the object of policy activity, we found that the majority of the policies implemented linked to flexicurity were in the area of employment security followed closely by policies in the area of job security and then income security (Table 8.3). It is worth noting that while employment security measures were almost exclusively categorised as “increasing” (i.e., promoting employment security through changes in ALMP), both job and income security measured both increased and decreased security (even in the same year). This result holds across country groups and years. Meanwhile, income security measures (conventionally referred to as “passive measures,” that is, policies on unemployment benefits and other welfare benefits) also showed a rising intensity in all country groups but at a much lower level than for employment security measures (conventionally referred to as “active measures”). More detailed information on policy measures by policy field (not shown here) reveal important differences across countries (Smith and Villa, 2016). Again, we see not only that the striking level of policy making in the Mediterranean group is repeated across all three sub-periods but that the activity for “job protection” (EPL) and “wage-setting” is particularly marked during the austerity sub-period. The Anglo-Saxon and the Nordic countries show a greater focus on these policies during the austerity compare to earlier sub-periods. Labour taxation is another area where policy-making activity was generally increasing (except in the Nordic group) and also where there was the greatest focus during the crisis sub-period, particularly among the Continental group.

Table 8.3 Flexicurity policy measures: average “policy intensities” and direction of change in security (increasing, decreasing) by country group and subperiod, 2000–2013. Job security

Employment security

Income security

(+)

(–)

(+)

(–)

(+)

(–)

0.85 0.60 1.60

0.98 1.15 1.15

2.58 3.90 3.60

0.10 0.08 0.05

0.53 2.90 1.20

0.28 0.23 0.23

1.00 0.60 1.38

0.41 0.50 0.50

1.35 2.40 3.38

0.03 0.03 0.03

0.41 1.35 1.10

0.36 0.44 0.53

1.00 1.75 2.19

0.44 0.56 0.75

1.97 4.88 5.38

0.03 0.03 0.03

0.97 2.63 1.81

0.28 0.28 0.28

0.69 0.50 0.69

0.31 0.25 0.25

2.19 3.50 2.75

0.06 0.06 0.06

0.53 1.25 1.50

0.47 0.56 0.50

1.22 0.50 0.88

0.19 0.16 0.13

1.56 5.00 2.63

– – 0.03

0.44 0.75 0.38

0.06 0.09 0.22

0.96 0.74 1.36

0.47 0.54 0.56

1.82 3.59 3.51

0.04 0.04 0.04

0.54 1.72 1.18

0.31 0.34 0.38

Continental Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013) Central & Eastern Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013) Mediterranean Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013) Nordic Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013) Anglo-Saxon Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013) EU Pre-crisis (2000–2007) Crisis (2008–2009) Austerity (2010–2013)

Sources: LABREF database, authors’ own analysis. Notes: (+) policy measures increasing security; (–) policy measures decreasing security. See notes in Table 8.2 for the definition of “policy intensity” and country groups. See endnote 9 for details of country groupings.

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Conclusion The focus of this chapter was on the evolution of labour market policy making in the EU over the period 2000–2013; it analysed those policies that have been indirectly or directly targeted at youth. We contextualised these policy changes both for the turbulent labour market conditions for young people and for the influence of European-level policy guidance. Over this period, the EES, EC and ECB exercised their influence on member states’ labour market policies both directly, through the OMC of the EES (Heidenreich, 2009), and indirectly, through fiscal consolidation measures. Broadly speaking, these influences have encouraged member states to make their labour markets more flexible and have emphasised moving from “job security” to “employment security,” an emphasis underpinned by the assumption that greater flexibility should lead to higher employment. The emergence of flexicurity in the EU policy framework for labour market reforms was central to this aim. The consequences for young people of this flexibilisation in the face of the economic crisis are mirrored in the youth-specific labour market indicators. Our approach provides a lens through which we can consider the evolution of the quantity and focus of policies thanks to a comprehensive Europe-wide policy database. While we do not aim to substantiate the precise impact of European influences (in particular, the role of the OMC) or the specific labour market indicators on national policy making. However, we underline the importance of contextualising the environment in which both short- and longterm labour market reforms are made, and we are thus able to draw a number of tentative conclusions. First, policy making has been changing both in intensity and in policy focus throughout the pre-crisis, crisis and austerity sub-periods, but with differences across country groups. We identify a rising intensity of policy making across the whole period with a step change in activity with the first effects of the crisis and then again in the initial austerity phase. There was a markedly higher level of policy making among those countries most affected by the crisis and also under the close guidance of the troika – in particular the Mediterranean group of countries stand out with a much higher level of policy activity (both overall and youth focused). These countries were also marked by a dramatic deterioration of labour market indicators for young people. Second, policy making at the national level towards young people was rather limited over the entire period of our analysis (see Smith and Villa, 2016). As labour market conditions deteriorated, the intensity of youth policy making increased, peaking in 2011–2012. Again, the Mediterranean country group stands out with a greater level of policy activity for young people, but the CEE country group is notable in this regard as well. In line with the EUlevel recommendations, most policy activity was in the area of ALMP both overall and also for young people.

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Third, the nature of flexicurity measures evolved as the crisis unfolded. In the pre-crisis sub-period, there were few policies that could be classified as part of the flexicurity model (and mainly based on increasing employment security through ALMPs). During the crisis, we noted a rise in intensity in flexicurity policy making, which was also focused on youth, based on increasing employment security. A further shift occurred during the austerity sub-period with a greater diversity of policies, though employment security still dominated. During those years, there is evidence of a noticeable number of measures decreasing the security dimension: employment, income and job security. Overall, our analysis reveals that both European-level guidance and national policy activity only developed a focus on young people once the labour market indicators demonstrated the toll that the crisis was taking on youth labour markets. This reactive approach, while required politically, is evident in previous priorities focused on other labour supply groups – that is, women and older workers – but it also shows how policy making is subject to the tension between the structural goals of labour market institutions (i.e., equity and efficiency) and short-term responses to labour market conditions. Economic conditions and labour market performance are perhaps more important for policy making that is explicitly targeted at young people, particularly in those countries with weaker institutional arrangements concerning youth labour markets. Based on the analysis presented here, we tentatively suggest that the focus on young people and the intensity of policy making is linked to the institutional history around youth policy as well economic and labour market conditions. With labour markets facing major challenges associated with the management of the EMU and the deteriorating economic conditions, there were some countries that were able to develop policy incrementally and refine their “swimming technique” in the choppy waters of a changing policy environment. Meanwhile, other countries, which were faced with more turbulent waters related to a more severe economic situation and a weaker institutional history, were only able to “splash around” in the waves of the European economic and policy environment. Our analysis points to the need for a long-term and coordinated policy perspective to be adapted at the national level to institutional frameworks in order to address specific challenges faced by young people. It also points to the need to recognise the multiple influences on policy makers as they seek to respond to both demands for longer-term reforms and to shorter-term pressures created by labour market conditions.

Acknowledgements This chapter has benefitted from funding from the European Union’s Seventh Framework Programme for Research, Technological Development and Demonstration under Grant Agreement no. 613256 (www.style-research.eu).

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We would like to thank our colleagues from this project, especially Jacqueline O’Reilly, Helen Russell, Janine Leschke and Maria Jepsen for their comments on earlier research on which this chapter is based.

Notes 1 Flexibility would be increased by reducing EPL (i.e., reducing job security), while the security of employment (to be achieved on the labour market) was to be achieved by strengthening ALMP and combining the former with sufficiently generous (but conditional) unemployment benefits. 2 In other words, the EES proposed to member states a set of changes in their labour market institutions in order to improve the “efficiency” of the labour market, implicitly assuming that the main problem being faced was poor matching between available jobs (i.e., vacancies) and job seekers (i.e., unemployment), and putting aside the question of job creation. 3 The expansion of precarious forms of work and reforms offering additional ways to move away from the standard employment relationship reinforces the divides by age. Young people are concentrated in temporary and insecure jobs with fewer rights to protection in the short term (security) and the long term (pension rights). Meanwhile older and prime-age workers (mostly men but also women in permanent jobs) continue to benefit from the legacy of a more secure era. 4 These risks are exacerbated in the periphery of the EU, where the consequences of the financial and economic crisis, and the sovereign debt crisis, have been particularly severe (see de la Porte and Heins, 2016). 5 See https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Job_vacancy_a nd_unemployment_rates_-_Beveridge_curve&oldid=183602 [accessed 26 June 2019]. 6 The LABREF (Labour Market Reform) database is part of the EC’s monitoring duties, and it was initially developed by DG ECFIN (EC, 2015). The measures reported in LABREF refer to enacted legislation. A single labour market reform may cover several areas of policy intervention and therefore be recorded in LABREF several times. What matters is not the format of the measure itself, but rather the different policy actions that it involves. In other words, LABREF does permit the identification of individual measures that are part of a wider package of reform. See https://ec.europa.eu/social/main.jsp?catId=1143&intPageId=3193 [accessed 26 June 2019]. 7 LABREF data do not cover all policy themes of the EES, in particular, education and skills, poverty, and social exclusion. Education has been a central plank of the EES since its inception, and it is considered particularly important for young people. Since education is the responsibility of a separate ministry from those responsible for labour market regulations, this is a coherent position with an analysis of the labour market. 8 The actual impact of policies is beyond the focus of this chapter and would require detailed analysis over many years to capture the path-dependent nature of regulation within different policy regimes (e.g., Hall and Gingerich, 2009). Indeed, the impact of a policy may be subject to considerable time lag and the influence of a wider range of institutional forces in which they are implemented. 9 In 2007, the EC classified 22 EU countries into five groups (Nordic, Continental, Anglo-Saxon, Southern and Central and Eastern) on the basis of their flexicurity model (on the basis of principal component analysis). The same taxonomy was used to analyse unemployment benefit systems, but including all countries. These are the five country groups: Nordic (DK, FI, NL, SE), Continental (AT, BE, DE, FR, LU), Anglo-Saxon (IE, UK, CY, MT), Mediterranean (ES, IT, PT, EL), and Central and

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Eastern (BG, CR, CZ, EE, HU, LT, LV, PL, SI, SK, RO). A synthetic discussion of the five clusters is presented in EC (2012, p. 102). For Eurostat country codes, see http://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:Country_codes [accessed 26 June 2019].

References Berloffa, G., Matteazzi, E., Sandor, A. and Villa, P. (2016). Youth employment security and labour market institutions: a dynamic perspective. International Labour Review, 155(4), 651–678. de la Porte, C. and Heins, E. (2016). A new era of European integration? Governance of labour market and social policy since the sovereign debt crisis. In C. de la Porte and E. Heins (eds), The Sovereign Debt Crisis, the EU and Welfare State Reform. London: Palgrave Macmillan, 15–41. Dhéret, C. and Roden, J. (2016). Towards a Europeanisation of youth employment policies? A comparative analysis of regional youth guarantee policy designs. EPC Issue Paper, no. 81. Brussels: European Policy Centre. EC (2007). Towards common principles of flexicurity: more and better jobs through flexibility and security. 27 June. Brussels: European Commission. https://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri=COM%3A2007%3A0359%3AFIN% 3AEN%3APDF [accessed 26 June 2019]. EC (2012). Employment and Social Development in Europe 2012. Luxembourg: Publications Office of the European Union. EC (2015). Databases and Indicators – LABREF and its Use. Brussels: European Commission. http://ec.europa.eu/social/main.jsp?catId=1143&intPageId=3193&la ngId=en [accessed 26 June 2019]. Eichhorst, W. and Rinne, U. (2017). The European Youth Guarantee: a preliminary assessment and broader conceptual implications. CESifo Forum, 18(2), 34–38. Freeman, R.B. (2005). Labor market institutions without blinders: the debate over flexibility and labor market performance. International Economic Journal, 19(2), 129–145. Hall, P.A. and Gingerich, D.W. (2009). Varieties of capitalism and institutional complementarities in the political economy. British Journal of Political Science, 39(3), 449–482. Heidenreich, M. (2009). The Open Method of Coordination: A pathway to the gradual transformation of national employment and welfare regimes? In M. Heidenreich and J. Zeitlin (eds), Changing European Employment and Welfare Regimes: The Influence of the Open Method of Coordination on National Reforms. London: Routledge, 10–36. Leschke, J. (2012). Has the economic crisis contributed to more segmentation in labour market and welfare outcomes?ETUI Working Paper, no. 2012/02. Brussels: European Trade Union Institute. Madsen, P.K., Molina, O., Møller, J. and Lozano, M. (2013). Labour market transitions of young workers in Nordic and southern European countries: the role of flexisecurity. Transfer, 19(3), 325–343. OECD (1994). The OECD Jobs Study Facts, Analysis, Strategies. Paris: OECD Publishing. https://www.oecd.org/els/emp/1941679.pdf [accessed 26 June 2019]. O’Reilly, J., Eichhorst, W., Gábos, A., Hadjivassiliou, K., Lain, D., Leschke, J., McGuinness, S.L., Kureková, S., Nazio, T., Ortlieb, R., Russell, H. and Villa, P. (2015). Five characteristics of youth unemployment in Europe: flexibility, education,

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migration, family legacies, and EU policy. SAGE Open, 5(1), 1–19. https://doi.org/ 10.1177/2158244015574962 [accessed 26 June 2019]. O’Reilly, J., Leschke, J., Ortlieb, R., Seeleib-Kaiser, M. and Villa, P. (eds) (2019). Youth Labor in Transition: Inequalities, Mobility and Policies in Europe. New York: Oxford University Press. Russell, H., Leschke, J. and Smith, M. (2019). Balancing flexibility and security in Europe? The impact of unemployment on young peoples’ subjective well-being. European Journal of Industrial Relations. https://doi.org/10.1177/0959680119840570 [accessed 26 June 2019]. Simonazzi, A. and Villa, P. (1999). Flexibility and growth. International Review of Applied Economics, 13(3), 281–311. Simonazzi, A. and Villa, P. (2016). Europe at a crossroads: what kind of structural reforms? In G. Bäcker, S. Lehndorff and C. Weinkopf (eds), Den Arbeitsmarkt verstehen, um ihn zu gestalten. Wiesbaden: Springer VS, 273–282. Smith, M., Leschke, J., Russell, H. and Villa, P. (2019). Stressed economies, distressed policies and distraught young people: European policies and outcomes from a youth perspective. In J. O’Reilly, J. Leschke, R. Ortlieb, M. Seeleib-Kaiser and P. Villa (eds), Youth Labor in Transition: Inequalities, Mobility and Policies in Europe. New York: Oxford University Press, 104–131. Smith, M., and Villa, P. (2016). Flexicurity policies to integrate youth before and after the crisis. STYLE working papers, no. WP10.4. Brighton: University of Brighton, Strategic Transitions for Youth Labour in Europe. Solow, R. (1998). What is labour market flexibility? What is it good for? Keynes Lecture in Economics, Proceedings of the British Academy, 97, 189–211.

9

Prolonged austerity and gender equality The cases of Greece and the UK compared Maria Karamessini and Jill Rubery

Introduction This chapter compares the experience of prolonged austerity and its impact on gender equality in two countries, Greece and the UK, where austerity policies have prevailed for almost a decade.1 It draws on and extends the analysis of the impact of austerity on gender equality developed in our jointly edited book on women and austerity (Karamessini and Rubery, 2013). That volume was only able to consider the impact of austerity over a short time period from the first reactions to the sovereign debt crisis in the period 2010– 2012. The two countries chosen for comparison share the experience of severe austerity measures implemented over an extended period, but they differ in many other respects. Greece represents the most severe example of those European countries subjected to the imposed restructuring by the Troika as a consequence of the 2009 sovereign debt crisis and the only EU country to really experience a Great Depression. In contrast, the adoption of austerity measures in the UK was largely a voluntary decision by the coalition government formed in 2010 – even if it did try to legitimate the policy approach by suggesting that the UK might encounter similar problems to those faced by Greece if it did not act. These differences in the driving forces behind austerity were further reinforced by political changes, for, while Greece elected a left-wing government in 2015 opposed to austerity, UK voters in 2015 returned a majority Conservative government to power that was even more committed to shrinking the state. It is also the case that in both countries there have been recent announcements concerning the end of austerity: Greece exited from its Economic Adjustment Programme (EAP) in August 2018, and the Syriza government adopted an expansionary fiscal policy in 2019 for the first time since 2009. In the UK, the Conservative government announced an end to austerity in September 2018, although there have been no plans to reverse cuts or even reconsider those not yet implemented, and the still-present threat of Brexit makes a return to recession and even austerity possible. To make this comparison of the changes that have taken place since 2012, we organized the chapter into seven sections (including the Introduction and the Conclusions sections). In the second, we provide more detail on the

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political and macroeconomic context that led to prolonged austerity periods. In the third section, we take a brief look at the labour market outcomes for women and men since the financial crisis and particularly their evolution over the period 2012–2018. In the next three sections, we consider the policy initiatives in relation to labour market policy, gender equality policies and social care policies and outcomes. We conclude by reflecting on the contradictions and similarities in the experiences by gender in Greece and the UK under prolonged austerity.

The political and economic factors leading to prolonged austerity Prolonged austerity in Greece was externally imposed, while in the UK it was a voluntary choice by the state, which not only decided to initiate but also to prolong and intensify the policy. In the case of Greece, the European Union (EU) and the International Monetary Fund (IMF) imposed three EAPs from 2010 to 2018 on the country in return for its financial assistance. The harsh fiscal consolidation and internal (labour-cost) devaluation policies under the first two programmes generated an austerity–recession spiral with devastating economic and social effects as demonstrated by the rise in the unemployment rate from 10% in 2009 to 28% in 2013. In 2015, the left-wing party SYRIZA was elected on an anti-austerity platform but later had to agree to implement a third EAP in a context of financial suffocation and capital controls imposed on the country by its creditors and under the menace of a potential Grexit from the Eurozone. Overall, between 2008 and 2016 Greece experienced the most severe and prolonged crisis in its recent history – equivalent to a Great Depression – during which the country lost 26% of its GDP and 18% of the total number of jobs. These effects resulted in large part from “one of the biggest fiscal consolidations that any EU country has done over the past 30 years” (EC, 2012, p. 2). However, the negotiated third EAP provided for the attenuation of austerity and a different policy mix based on the stabilization of public spending and increases in tax and privatization revenues in order to reach the target of primary surpluses but with no further labour market flexibility measures to meet internal devaluation targets. The outcome was economic stagnation in 2015–2016 and economic recovery in 2017–2018 accompanied by an 8.5% rise in employment and a reduction in the unemployment rate by 7.3 percentage points between 2014 and 2018. The UK also adopted austerity policies in 2010 after a change from a Labour to a Conservative–Liberal coalition government that succeeded in changing the political narrative in the country such that its economic problems stemmed not from the financial crash in the private sector but from Labour government profligacy with respect to public expenditure. The UK action, in contrast, was largely voluntarily, as there was little evidence to support the government claims that, unless it adopted severe austerity policies, the UK would follow the fate of Greece and face a major loss of financial credibility in the financial markets (Skidelsky, 2015). The 2010–2015 coalition government

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led by Conservatives had the explicit ideological aim of shrinking the state, but this policy further intensified after the 2015 election of a Conservative government that planned to reduce state spending from around 43% to 36% of GDP through widespread cuts to welfare benefits and departmental expenditure except in health and overseas aid (Skidelsky, 2015).This policy framework is still in place in principle, but the main strategist, George Osborne, left the government after the Brexit vote and the policy has remained in place as much by default as intention, as all energies have been focused on Brexit. The impact of the financial measures has also been quite different in the UK compared to Greece. While the UK suffered a sharp recession in the financial crisis of 2008– 2009, which led to a rise in unemployment and a fall in the employment rate, under austerity from 2010 the employment rate fell slightly and then stagnated until 2012. However, since 2012 there has been steady growth in employment, which now far exceeds pre-crisis peaks. This employment boom, however, has been accompanied by a historically low rate of productivity growth and the longest squeeze on earnings and living standards since the nineteenth century (TUC, 2018).

Comparison of labour market trends by gender in Greece and the UK, 2008–2017 Greece and the UK have experienced very different employment trends. In Greece, dramatic falls in employment and rises in unemployment for both men and women under austerity were sustained up until 2014, when a slow recovery emerged that still left employment rates in 2017 below 2008 levels and unemployment still higher than 2008 by some 12 to 15 percentage points (Table 9.1). The UK, in contrast, experienced falls in employment for both men and women in the early phase of the financial crisis, but saw employment rates soon recover and by 2017 well exceed pre-crisis levels for both men and women. The initial austerity period led to a rise in part-time employment for both men and women in both countries, but while its incidence has continued to rise in Greece, in the UK the employment share has fallen back to below the pre-crisis share for women (Table 9.2). Nevertheless, part-time employment remains much more important for women in the UK than in Greece, where part-time employment was relatively marginal compared to the EU average before the crisis. Neither country recorded major changes in the temporary employment share due to its role as a buffer in the earlier phase of the crisis and its subsequent rise for new hires. The incidence is higher for women in Greece than in the UK, but it is still lower than the EU average in both countries (Table 9.2). These trends signify a fall in gender employment gaps in both countries from 2008 to 2017 (from 25.8 to 18.3 percentage points in Greece, and from 11.7 to 8.9 percentage points in the UK). However, while in Greece much of the fall was due to declining employment rates for men, in the UK both male and female employment rates have risen, though the rate of increase has been

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Table 9.1 Changes in employment and unemployment rates by gender. Employment rate

Unemployment rate

2008

2012

2017

2008

2012

2017

74.4 48.6

60.1 41.7

62.7 44.4

5.1 11.5

21.6 28.2

17.8 26.1

77.4 65.7

75.0 64.9

78.6 69.7

6.1 5.1

8.4 7.4

4.5 4.2

72.6 58.8

69.6 58.6

72.9 62.4

6.6 7.5

10.4 10.5

7.4 7.9

Greece Men Women UK Men Women EU-28 Men Women

Source: Eurostat, available at https://ec.europa.eu/eurostat/web/products-datasets/-/lfsa_ ergan and at https://ec.europa.eu/eurostat/web/products-datasets/-/lfsa_urgan.

Table 9.2 Trends in part-time and temporary employment as a share of overall employment. Part-time employment share

Temporary employment share

2008

2012

2017

2008

2012

2017

2.6 9.8

4.7 11.8

6.6 14.1

6.3 9.7

5.4 8.1

6.3 9.6

9.7 40.9

11.6 42.3

11.1 40.3

3.8 5.5

4.6 6.0

4.2 5.5

7.0 30.3

8.4 31.9

8.8 31.7

10.8 13.3

10.6 12.5

11.3 13.2

Greece Men Women UK Men Women EU-28 Men Women

Source: Eurostat, available at https://ec.europa.eu/eurostat/web/products-datasets/-/lfsi_pt_a.

faster for women. In Greece, there was also a substantial increase in the female activity rate and a parallel fall in the male activity rate during the crisis, which accounted for the rise in the gender gap in unemployment rates (Table 9.1 and Karamessini and Koutentakis, 2014). These aggregate employment trends disguise divergent effects for women by age, education level and motherhood status (Table 9.3). In both countries, young women (along with young men) bore the immediate brunt of the crisis, but by 2017 the employment rate for those aged 15 to 24 had returned to the

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Maria Karamessini and Jill Rubery Table 9.3 Changes in women’s employment rate by age, education level and motherhood status. Women

Greece

UK

EU-28

2008

2017

2008

2017

2008

2017

15–24 25–54 55–65

18.7 62.0 27.5

12.4 57.2 28.0

50.7 75.1 49.0

50.9 78.1 59.1

34.4 72.1 36.7

33.0 73.8 50.9

Education level Age 25–64 Higher Medium Low

78.2 55.7 39.2

66.4 46.5 35.4

82.4 72.6 58.8

82.0 73.9 55.1

81.5 67.5 45.2

82.0 69.3 44.9

55.7

57.2

62.4

70.4

61.2*

66.8

65.1

57.4

82.7

83.6

75.7*

77.5

Age

Motherhood status Age 25–54 Mothers (two children, youngest < six years old) Females with no children

Source: Eurostat, available at https://ec.europa.eu/eurostat/web/products-datasets/-/lfsi_ emp_a; at https://ec.europa.eu/eurostat/web/products-datasets/-/lfsa_ergaedn; and at https:// ec.europa.eu/eurostat/web/products-datasets/-/lfst_hheredch. Note: *2009.

2008 level in the UK, while in Greece the rate had declined by about onethird from an already low base – and this despite some improvement since 2013. The outcome is that the 15–24 female employment rate is over four times higher in the UK than in Greece. For the prime 25–54 age group, the employment rate declined during 2008–2017 by 4.8 percentage points in Greece while it increased by 3 percentage points in the UK, with the result that the UK female employment rate is now over 20 percentage points higher compared to a 13 percentage point margin in 2008. For women aged 55–64, the employment rate rose in both countries but only by 0.5 percentage points in Greece compared to over 10 percentage points in the UK, so that the UK employment rate for this group in 2017 was some 31 percentage points higher than the Greek employment rate for this same group. Experiences also varied according to education level. In Greece, it was the higher educated women who faced the largest decline in their employment rate; it fell over 12 percentage points, albeit from a higher initial rate than that for women with medium or low education. In the UK, the employment rate for those with medium education levels increased, but the employment rate for the lower educated fell and remained roughly stable for the higher educated. In both

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countries, the gap in the employment rates between mothers (aged 25–54 with two children, the youngest being under six years of age) and women aged 25– 54 with no children fell. In Greece, the gap was reduced from 9.4 percentage points to almost being non-existent at 0.2 percentage points, as the employment rate for mothers actually rose by 1.5 percentage points while that for non-mothers declined by 7.3 percentage points. In the UK, the gap fell from 20.3 percentage points to 13.2 percentage points due to the motherhood employment rate rising by 8 percentage points with that for non-mothers rising by only 0.9 percentage points, albeit from a higher initial level. Therefore, although the gap in the UK between the employment rates for mothers and non-mothers is much larger than that of Greece, the employment rates for both mothers and non-mothers are markedly higher in the UK.

Labour market reform and gender equality The labour market reforms under austerity also differed in part because of different starting points with respect to employment regulation. The overall aim of the Troika’s EAP reforms in Greece was internal wage devaluation as a means to restore competitiveness. Key components of the programme to achieve this objective included restriction on the protection of permanent employees from redundancies and more flexibility in non-standard labour contracts alongside measures to deregulate the wage determination system and bring wages down. These included the abolition of collective bargaining on wages in state-owned public enterprises and the erosion of national and sector collective bargaining in the private sector as well as a drastic reduction of the minimum wage and the establishment of a sub-minimum wage for those under 25 years by state intervention in 2012. These changes to employment protection facilitated widespread redundancies, leading to a net job destruction in the private sector between 2010 and 2014 (–21% of all male and –17% of all female jobs). At the same time, the increased flexibility in non-standard labour contracts stimulated the rise in parttime jobs between 2010 and 2017, 59% among men and 20% among women, but from a low starting point (see Table 9.2) and with most of the part-time work taken on an involuntary basis. Temporary jobs also increased from the start of employment recovery in 2014: between 2013 and 2017, the number of such jobs among men increased by 18% and among women by 33%. The abolition and erosion of collective bargaining had the most impact on medium- and highly paid employees, where men are overrepresented, while the reduction in the minimum wage disproportionately impacted low-paid employees, where women are overrepresented (Council of Economic Advisors et al., 2018). Both institutional changes have influenced the gender pay gap, whose size and trend are also determined by the sex segregation of employment by sector and the sectoral restructuring of employment. The joint outcome of all these determining factors was to narrow the gender pay gap under the first two EAPs, when nominal wages were falling – dropping from 15% of

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the male wage in 2010 to 12.5% in 2014. Given women’s overrepresentation among low-paid employees, the rise of the minimum wage by 11% from 1 February 2019 through ministerial decision is expected to push the gender pay gap further downwards. Downsizing public sector employment was one of the main fiscal consolidation measures in Greece. Strict rules for hires relative to exits were thus applied to the sector from 2010 to this end. By providing incentives to public sector employees to retire earlier, the pension reform of 2010 has also contributed to the downsizing of the sector. For the austerity period taken as a whole, public sector employment was reduced by 18% between 2010 and 2018, with men having suffered a greater decrease than women, namely 19% against 16.5%. Last but not least, an important structural measure of the EAP reforms was the removal of restrictions on competition in regulated professions and services. Although this was promoted in the name of freedom of market entry and lowering fees, prices and remuneration, the real expected outcome was the reduction in the number of self-employed persons and micro-businesses and the entry of larger firms leading to capital concentration in these activities. During the austerity phase of the crisis, market deregulation together with shrinking demand and the credit crunch contributed to the net mass destruction of thousands of own-account self-employed persons and microbusinesses. Between 2010 and 2017, the number of self-employed persons fell by 16.5% for men and 9% for women. The lower figure for women can be attributed to the earlier recovery of female self-employment from 2015 compared to 2017 for men. In the UK, the changes to the labour market institutions and regulations has been less intense, in large part because much of the destruction of collective bargaining and employment protection rights had already occurred in earlier decades. Moreover, in contrast to Greece, the UK’s employment rate has not only recovered from the crisis but is now the highest employment rate recorded for both genders and also for mothers (74% for all women and 66.9% for mothers in 2018; ONS, 2018). More recently, there has been a trend towards more full-time work for women and reduced involuntary part-time work, in contrast to the earlier years of austerity, indicating the greater available volume of employment (Resolution Foundation, 2019a). Women have also been the beneficiaries of the introduction of a higher national minimum wage – renamed the national living wage – for those aged over 25, which has resulted in a significant boost to earnings at around 7.4% at the tenth wage percentile for 2015–2017 (IFS, 2018a). This is in stark contrast to the reduced nominal minimum wage in Greece. However, this upbeat assessment of recent trends, frequently quoted by the government, hides many downsides. Real-wage declines have been prolonged and have affected both men and women (falling 6% for women and 9% for men between 2008 and 2014), and even in 2017 real wages remained 2%–3% below their 2008 level (IFS, 2018a). Women’s wages have benefitted recently from the higher minimum wage, and the overall hourly gender pay gap has

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fallen from 22.5% to 17.9% over the decade 2008–2018. Household living standards have declined but have been partially protected by more employment hours, which have primarily been provided by women (IFS, 2018a). However, the rise in female employment has also involved a major increase in female self-employment, which has been disproportionately concentrated in lower-paid self-employment compared to the picture for men. Real median earnings from self-employment for women fell by over 22% between 2008–2009 and 2012–2013 (TUC, 2015), which is markedly higher than the real income fall for employees. Zero-hours contracts and other forms of flexible employment have also been increasing until recently (Resolution Foundation, 2019a), which has particularly affected women in various sectors including social care. The rapid increase in the pension age caused by the acceleration of the equalization of retirement ages with men and by raises in the retirement age for both sexes has itself been one cause of the 10 percentage point rise in the 55–65 age group employment rate between 2008 and 2017 (Table 9.3). Women have also suffered from the negative impact of austerity policies on employment in the public sector, a sector which has traditionally employed a high share of women – especially women with tertiary education (Rubery, 2013). The impact on employment numbers has been mixed with huge losses in local government – around 22% (Bach, 2016) – while employment in health has grown due to an ageing and rapidly growing population. All public sector workers have faced long-term pay restraints: two initial years of pay freezes followed by seven to eight years of a 1% cap which was only broken last year for some key groups such as nurses (House of Commons, 2018). For this group, pay restraint has been combined with increased work intensity and a staffing shortage due both to declining numbers of EU workers in the National Health Service (NHS) and to decreasing applications for training, as nurse trainees have lost their fee bursaries and are now faced with fees of £9,000 per year.2 Thus, the apparent boom in female employment may be both fragile and costly in relation to both job quality and the quality of life, with many women coming to rely on food banks to feed the family. Cuts to real wages have been exacerbated by major cutbacks on benefits that have affected low-income households and especially lone parents (mainly women). Changes to the benefits regime are a major factor in current and future predicted changes in the UK labour market. Even the higher national minimum wage was introduced to facilitate benefit cuts by reducing the need for in-work benefits and in the hope of distracting attention from the swingeing cuts to these benefits. As inwork benefits are household-means-tested, many women in low-paid jobs but in middle-income households benefitted from the rise in the minimum wage, while those in low-income households were more likely to see their gains in wages wiped out by cuts to benefits (IFS, 2018a). Likewise, the intensified sanctions for benefit claimants and the availability of some state support from in-work benefits for self-employment may provide part of the explanation for

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the growth of low-paid self-employment. In-work benefit support for the selfemployed is set to be reduced drastically under the new in-work benefit known as the “Universal Credit” (UC), so self-employment may fall again (Rubery et al., 2016). Predicting the impact of the new UC benefit system has in fact become very complex because of major delays in its implementation and changes to its design. In 2015 the planned incentives to work for main breadwinners, including lone parents, were cut, and they were only partially restored in 2018. Second income earners in households, mainly women, however, faced major work disincentives from the outset, and these have yet to be changed. According to Women’s Budget Group (WBG, 2017a) estimates, women and especially women from ethnic minority backgrounds, and in the poorest families, are set to lose the most from changes to the benefit system: by 2020, Asian women in the poorest third of households could lose 19% of their annual net individual income compared to 12% for White women in the same income group (compared to 10% for Asian men and just over 8% for White men in these poorest households). The consequence could be a major increase in child poverty: a rise of 1 to 1.5 million by 2022 (Resolution Foundation, 2019b, Just Fair, 2018) with a predicted 62% (up from 37%) of children of lone parents living in poverty (Just Fair, 2018). The current minister has undertaken to try to moderate some of the negative impacts on women. For example, in January 2019 she stopped the plan to apply, retrospectively, a controversial cap on family benefits at two children (unless the third could be proved to be due to rape). This was introduced explicitly to discourage low-income households from having more than two children at the expense of the state. This will now not apply to children born before 2017, which may reduce the impact on women from ethnic minorities, but the two-child cap will continue for children born after 2017. To summarize, the measures implemented in Greece had major negative implications for both middle-level jobs (employees and self-employed) and lowlevel jobs (reductions in the minimum wage) so that overall the impact was greater for men than for women, causing reductions in gender employment and pay gaps. This occurred through the downgrading of men’s employment opportunities, with women also suffering but to a lesser extent than men. Likewise, in the UK the narrowing pay gap has reflected declines in men’s pay but also some efforts to raise the wage floor to reduce the costs of in-work benefits. Both men and women have seen increased employment over recent years, although this has been partly fuelled by low-income self-employment among women. This employment growth has occurred alongside a highly sustained squeeze on living standards stemming both from lower real wages and from cuts in benefits.

Gender equality policies The evolution of gender equality policy has also varied between the two countries. Despite austerity, Greece has succeeded in developing gender equality policy in a positive direction, with governments making full use of

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European legal instruments and the EU Structural Funds to further this goal. These efforts, however, were still totally inadequate to compensate for the disruptive effects on women’s lives and those of their families stemming from massive destruction of jobs, the unrestrained rise of unemployment, the loss of income and the spread of poverty. The UK’s policy with respect to gender equality has been characterised by inconsistency and incoherence, at times involving implicit and even explicit policies to reduce support for gender equality and at other times new initiatives to compensate for previous cuts or to adopt new gender equality policies. Ironically, in Greece the 2010 commencement of the austerity phase of the crisis coincided with the launch of an ambitious National Programme for Substantive Gender Equality 2010–2013 (General Secretariat for Gender Equality, 2010) aiming to foster important equality-enhancing interventions in most policy fields and to create the pre-requisites for a fully fledged gender mainstreaming strategy in all policy fields and at all levels of government. Although the programme failed to deliver on its gender-mainstreaming pillar, notwithstanding the preparation of some important necessary tools, it succeeded in creating – for the first time in Greece – a wide network of counselling centres for women and shelters for domestic violence victims over the whole country using resources from the European Social Fund. Moreover, a series of measures were implemented in 2010–2014 to facilitate women’s participation and advancement in employment including free childcare service vouchers to employed/unemployed mothers, positive action schemes to encourage female entrepreneurship, and policies to promote the social integration of vulnerable groups of women – namely, women working in precarious employment. The same ambition for all-embracing gender equality policy is reflected in the current National Programme for Gender Equality 2016–2020 (General Secretariat for Gender Equality, 2016), which builds upon the 2010–2013 Programme with more equality-promoting initiatives and measures in nearly all policy fields. It has also delivered so far two important laws. First, the Prevention and Combatting of Violence against Women and Domestic Violence law goes beyond ratification of the Istanbul Convention to include a thorough amendment of national legislation and upgrading of institutions responsible for combatting gender-based violence. And second, the Promotion of Substantive Gender Equality law considerably improves the legal and institutional framework by increasing the competences and obligations of public bodies for combatting gender discrimination, for applying the gender mainstreaming principle in policy design, and for eradicating/changing gender-based prejudices and stereotypes. It also provides prizes to private firms that develop equality-promoting actions. In the UK, the pursuit of a coherent gender equality policy would have required acknowledgement that austerity is having negative impacts on gender equality, particularly for low-income women, single parents, and women in the public sector. One way for the government to avoid this problem has been to delegate decisions over which services will be cut; local

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government has faced major budget cuts, with spending on non-social care declining by an average of 32% per person since 2009–2010 (WBG, 2019). As a consequence, 17% of women’s refuges have closed since 2010 and one-third of referrals are now turned away (WBG, 2019), but this is attributed by the government to local authorities’ budget decisions. At the national level, the most cynical anti-equality policy adopted was to raise the fees for taking cases to employment tribunals to enforce the law with respect to gender equality and other employment rights to up to £1,200, with exemptions from fees based on family means-testing. This effectively left those in low-paid jobs with no redress from discrimination, as the fees made taking a case very risky relative to the income from low-paid work. The policy led to an 80% drop in tribunal cases, but it has now been ruled by the British Supreme Court to be unlawful and indirectly discriminatory (BBC, 2017). Alongside these very negative policies for gender equality, the government has from time to time introduced policies to attract the women’s vote. Childcare issues are discussed below, but other examples include the decision to introduce gender pay gap reporting for firms with over 250 employees. This was supposed to eliminate the gender pay gap even though the government persisted with its public sector pay squeeze affecting the majority of higherqualified women in employment. The high pay gaps revealed by the reporting policy have, however, kept issues of gender pay inequality in the public realm. Another policy was to introduce shared parental level but, without any increase in the very low pay for parental leave, the policy is not having much take-up by men (BBC, 2018).

Care policies One of the main risks under austerity is that care services will be cut back with detrimental impacts on women’s opportunities to work and on their care burdens in addition to the costs for care recipients. Both the Greek and the UK cases partly confirm this forecast as applied to healthcare for Greece and care for the elderly and the disabled in both cases, but both offer a more positive story with respect to childcare. The severe and prolonged austerity period in Greece has impoverished not only the most vulnerable social groups but also a great proportion of middleclass households which, before the crisis, covered the care needs of their dependent family members by purchasing private domestic or out-door care services. In addition, mass unemployment deprived one-third of the population of health insurance and, consequently, access to healthcare. Meanwhile, cuts in public spending under the fiscal consolidation programmes have led the country’s national health system to the brink of collapse, seriously limiting the amount of public funds available for structures and schemes for drug addicts and nursing homes for those with chronic diseases, and resulting in staffing problems at municipal nurseries, elderly open-care centres, and healthcare practices. Moreover, the home help programme for the care of the

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elderly and disabled implemented by Greece’s municipalities was suspended in 2009 and then re-opened in 2010 with different eligibility criteria that have left 30% to 40% of the ex-beneficiaries uncovered (Matsaganis, 2013; Petmesidou, 2013). Thus, the recession and austerity measures in Greece have imposed the transfer of a significant proportion of previously “de-familialized” care performed by professionals back to families and their adult female members. One of the first measures implemented by the newly elected left-wing government in 2015 was to allow free access for all the uninsured population to the national health system, to provide emergency funds and later on to allow the hiring of nursing and auxiliary personnel in order to put an end to vast social exclusion from healthcare and prevent the collapse of the national health system. Since 2018, efforts have been made to meet the need for permanent doctors and to improve primary public healthcare. As regards elderly care, the government in 2018–19 started a process of hiring an important number of permanent doctors care professionals to support the nation-wide home help programme for the elderly and the disabled, which is organised and delivered by the country’s municipalities. The UK has so far maintained its universal health service, even though pressure on the service has increased much more than the resources available to support it. However, when it comes to social care for the elderly, a similar story to that in Greece emerges, albeit from the position of a higher level of provision. Even before austerity, almost all provision was outsourced to the private sector, though much is still paid for or organised by the state, and low-price commissioning had led to poor employment conditions (zero-hours contracts and wages often below the minimum wage as travel time between clients is not paid). Nevertheless, the situation has deteriorated markedly since the crisis, as the local authorities have decreased spending per person by 9% in real terms since 2009–2010 (IFS, 2018b) despite protecting social care relative to other activities, leading to even lower commissioning prices and services restricted to only the more critical cases (the number receiving care was thus reduced by one-third between 2008–2009 and 2013–2014 (WBG, 2017c)). Provision has also declined in the more deprived areas, as these faced the highest budget cuts. The consequences are four-fold: (a) poor quality of life for older people, most of whom are female; (b) even poorer employment conditions and greater work intensity for the mainly female workforce, intensifying the labour shortage; (c) increased burdens on families, especially women (unpaid care was up by 25% in 2005–2014, WBG, 2017c); and (d) increased “bed-blocking” in the NHS, as older people cannot be sent home because of a shortage of care. The austerity policy in the UK, as in Greece, implicitly assumed that where the state does not provide care the family will step in, but this expectation does not take into account either the high share of women in employment, or the geographically dispersed family structure. For both countries, a more positive tale can be told with respect to childcare. In Greece, a series of positive developments in childcare during the austerity period of the crisis were triggered by escalating poverty and its impact on families and children (Hatzivarnava-Kazassi and Karamessini,

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2018). A care deficit was generated during the crisis by two distinct processes. Due to mass unemployment and the important individual and family income reductions experienced by the entire population, lower-income groups became unable to pay fees to municipal nurseries and the large middle-class was unable to afford private care services. The combination of the care deficit with skyrocketing child poverty – that reached its peak of 38% in 2013 – led to a revival of family and child policy which proved beneficial for the survival and, recently, the extension of childcare services. A special scheme was put in place in 2009 offering working and unemployed mothers with low or medium family income free access to municipal or private childcare services. Free places in crèches, nurseries and after-school centres rose from 17,789 in 2009– 2010 to 80,326 in 2014–2015 and 127,632 in 2018–2019. The following paradox was thus observed: under extremely harsh austerity conditions, between 2009 and 2017, the coverage rate by formal childcare arrangements rose from 8% to 21% for children aged 0 to 3 years and from 69% to 84% for children aged 3 to 6 years. In the same period, the parental leave system was improved and self-employed mothers were granted a maternity benefit. Finally, the recently adopted National Action Plan for the Child 2018–2021 has incorporated important improvements in formal childcare that have taken place over the past three years including free school meals to primary school pupils (initiated in 2016 and due to be gradually extended to all primary schools by 2021); a 70% rise in child benefits in 2018 (in contrast to the 25% cut in public expenditure on child benefits in 2012 and the freeze on the level of benefit up till 2018); and the extension also in 2018 of compulsory pre-school education from one to two years. This measure, first enacted by a group of municipalities, will gradually expand to more localities with the full coverage of four-year-old children scheduled for 2021. Last, but not least, a programme launched in 2018 is currently providing subsidies to municipalities to create additional places in public crèches and nurseries and improve the quality of infrastructure to meet the national target: the full coverage of children under three years old by formal care services by 2021. Although developments in the UK have been both less dramatic and, in many ways, more flawed than the developments in Greece, the overall thrust of childcare policy in England has also been towards more widespread support but at the cost of reduced support for those most in need of help. In the early austerity phase, cuts were applied both to childcare support for families at risk and for childcare for middle-income couples. However, the Conservatives have intermittently become concerned to woo women voters. First, they introduced a scheme to subsidise formal childcare costs, but this proved too complex, resulting in a low take-up. In the 2015 election, the Conservatives explicitly chose to trump the Labour Party’s policy offer of 25 hours of free childcare to three-year-olds (up from the existing 15 hours) by offering 30 hours. However, entitlement for the extra 15 hours required both parents to be in work for a minimum of 16 hours with the consequence that only about 50% of those households eligible for 15 hours were entitled to the

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extra 15 hours (WBG, 2017b). Thus, the childcare system has increasingly focused support on women in regular work and has reduced support for children from the most vulnerable families. The additional free hours policy is also underfunded, which has caused some nurseries providing higher quality care to close. Due to reliance on private provision, shortages of places apply in many areas, and those out of the labour market who find a job might have long waits before being able to secure a place. These are all serious problems, particularly for those children from deprived households, but the effect of the competition for women’s votes has been to put more comprehensive childcare support on the UK’s welfare state agenda such that it may be more difficult in the future for this provision to be withdrawn. Overall, in Greece the ambitious National Action Plan for the Child 2018–2021 as well as government decisions in early 2019 to hire significant numbers of permanent teachers for the special schools for disabled children and permanent care professionals for the home help programme for the elderly and the disabled did provide some optimism that a “new care economy” was gradually emerging out of the Greek Great Depression until the change of government in July 2019. This involved moving further away from the traditional Southern European familial-based care system which has relied on family members supported by informal care workers (Simonazzi, 2009) towards a more formal system. A gender equality perspective could have positively contributed to the shaping of its form. In contrast, the UK is eroding its care services for the elderly and endangering its flagship NHS while making on-the-hoof decisions to expand childcare services primarily as an election bribe rather than on the basis of a carefully planned policy.

Conclusion Austerity has lasted more than eight years in both Greece and the UK, extending across the 2012–2018 period since we completed the Women and Austerity book. In Greece, the ending of the EAP in 2018 did offer scope for moving beyond austerity, albeit from a significantly weakened economic base. However, even without a change of government this may only have provided a temporary window of opportunity, as long-term escape from the austerity trap may require more fundamental change in the orientation of Eurozone policy that allows the southern peripheral countries to rebalance their economies and catch up with the core (Celi et al., 2019). Meanwhile, the UK is plunging into the Brexit crisis, which could even lead to intensified austerity. In considering the experiences of austerity in the two countries, there are more differences than there are similarities. Both countries have faced declining living standards, growing insecure employment, and cuts in both public sector employment and in many public services, especially social care for the elderly. Both, perhaps surprisingly, have also seen an expansion of childcare. However, these similarities have occurred alongside major declines in employment in Greece and record-high employment in the UK, although the latter was accompanied by

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record-low rates of productivity growth. Greece has also experienced much more radical institutional change, which is in part a reflection of different starting points. Labour market reforms imposed by the Troika have had gendered effects, but they have generally served to assist in the destruction of large shares of employment for both genders. The UK has been spared some of these changes largely because of the reforms implemented in the UK in the 1980s. Instead, the austerity period in the UK has been focused on welfare cuts and reforms, the effects of which are largely borne by women, albeit by specific groups such as women from low-income households, ethnic minorities, or single parents. Greece has also experienced a severe degradation of its welfare state during the austerity period, but it has protected and even expanded formal childcare provision thus laying the foundations for a welfare system less dependent upon familial care. The UK has also moved towards more universal childcare provision while at the same time eroding its care system for the elderly and support for vulnerable women and children. What does all this tell us about the relationship between austerity and gender equality? First of all, the experiences in both countries provide further support for the non-reversibility of female integration into wage employment; both have seen major increases in engagement in the wage labour market, especially among mothers and, in the UK, among older women (albeit driven by policy reforms). Second, this comparison has also demonstrated that there are problems in the state withdrawal from provision of care, as the family is no longer able to provide sufficient care due to both women’s changing roles and the changing labour market which is reducing the viability of a male-breadwinner–female-carer model. And third, this comparison has told us about the importance of politics. While both countries have pursued austerity, in Greece opportunities were taken to mitigate its effects on women and on gender equality and to lay the foundations for a new care economy. In the UK the impoverishment of the poor has been an objective of successive governments including the current government, which is continuing with the policy of further drastic cuts to welfare support with major impacts on the poorest women in society.

Notes 1 In the case of Greece, we cover policy measures and developments from the beginning of 2010 until the July 2019 elections that ended the left-wing government period (2015–2019). 2 These fees are paid as a loan by the government and have to be repaid at 9% of earnings above c.£21,000. Nurses are unlikely to ever pay back the full amount due to their relatively low annual earnings.

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Europe”. In A. Triantafyllidou, R. Gropas and H. Kouki (eds), The Greek Crisis and European Modernity. Basingstoke, UK: Palgrave Macmillan, 178–207. Resolution Foundation (2019a). Setting the Record Straight: How Record Employment Has Changed the UK. London: Resolution Foundation. https://www.resolu tionfoundation.org/publications/setting-the-record-straight-how-record-employmenthas-changed-the-uk/ [accessed 20 June 2019]. Resolution Foundation (2019b). The Living Standards Outlook 2019. London: Resolution Foundation. https://www.resolutionfoundation.org/publications/the-living-sta ndards-outlook-2019/ [accessed 20 June 2019]. Rubery, J. (2013). Public sector adjustment and the threat to gender equality. In D. Vaughan-Whitehead (ed.), Public Sector Shock: The Impact of Policy Retrenchment in Europe. Cheltenham, UK: Edward Elgar, 43–83. Rubery, J., Keizer, A. and Grimshaw, D. (2016). Flexibility bites back: the multiple and hidden costs of flexible employment policies. Human Resource Management Journal, 26(3), 235–251. Simonazzi, A. (2009). Care regimes and national employment models. Cambridge Journal of Economics, 33(2), 211–232. Skidelsky, R. (2015). Austerity: the wrong story. Economic and Labour Relations Review, 26(3), 377–383. TUC (2015). The Impact on Women of Recession and Austerity. London: Trades Union Congress. https://www.tuc.org.uk/research-analysis/reports/impact-women-re cession-and-austerity [accessed 20 June 2019]. TUC (2018). 17-year wage squeeze the worst in two hundred years. TUC blog, 11 May. London: Trades Union Congress. https://www.tuc.org.uk/blogs/17-year-wa ge-squeeze-worst-two-hundred-years [accessed 20 June 2019]. WBG (2017a). Intersecting Inequality: The Impact of Austerity on Black and Minority Ethnic Women in the UK. London: Women’s Budget Group. http://wbg.org.uk/ wp-content/uploads/2018/08/Intersecting-Inequalities-October-2017-Full-Report.pdf [accessed 20 June 2019]. WBG (2017b). Childcare: Key Policy Issues. London: Women’s Budget Group. https://wbg. org.uk/wp-content/uploads/2017/11/childcare-pre-budget-nov-2017-final.pdf [accessed 20 June 2019]. WBG (2017c). Social Care: A System in Crisis. London: Women’s Budget Group. http s://wbg.org.uk/wp-content/uploads/2017/11/social-care-pre-budget-nov-2017-final-1. pdf [accessed 20 June 2019]. WBG (2019). Triple Whammy: The Impact of Local Government Cuts on Women. London: Women’s Budget Group. https://wbg.org.uk/wp-content/uploads/2019/03/Trip le-Whammy-the-impact-of-local-government-cuts-on-women-March-19.pdf [accessed 20 June 2019].

10 Disseminating expertise on gender and economics The experience of inGenere.it Francesca Bettio, Roberta Carlini and Marcella Corsi Introduction inGenere.it is the first Italian web-magazine focusing on economic, political and social policy issues from a gender perspective. Gender-based differences are considered when examining any social phenomenon, policy or process. From the outset, the main goals of this web-magazine have been (a) to promote greater gender equality in society through rigorous analysis of socio-economic issues; (b) to advance policy proposals aimed at furthering the economic integration of women while contributing to economic prosperity for all; and finally (c) to disseminate knowledge about innovative political experiences geared towards promoting gender equality in Italian society. The web-magazine inGenere.it was first launched in 2009 in Italian, but an English section was added after a few years. Inevitably, the English section is more limited in scope, since the target audience is Italian. However, this does not reflect the international breadth of inGenere.it. Being able to draw from the European networks managed by the publisher – the Brodolini Foundation – and featuring the founding members of inGenere.it, the magazine has always had an international outlook and has very frequently published contributions from researchers, policy makers, unionists, Non-governmental Organization (NGO) members and representatives of civil society organizations from foreign countries, many of which are European. In this chapter, we briefly recount the experience of inGenere.it since its foundation, as well as its goals and achievements, against a backdrop of media communication lacking a gender perspective, especially in economics. We then consider the specific contribution of inGenere.it to the analysis of the gendered impact of the economic crisis and then look at how to design and implement policy in a gender-sensitive manner from this experience. We finally move to an innovative menu of policy interventions pivoting on investment in social infrastructure, which can be viewed as the hallmark of inGenere.it’s economic policy stance.

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The experience of inGenere.it In 2009, a group of Italian female economists founded inGenere.it, a webmagazine that takes a gender perspective on economic, social and political issues (Francesca Bettio, Marcella Corsi, Annalisa Rosselli, Annamaria Simonazzi and Paola Villa). The magazine, designed and launched in the second year of the Great Recession, is the outcome of longer-term interaction between members of the founding group and responds to unmet policy demands. First, there is the need, already acknowledged in the United Nations’ (UN) Fourth World Conference on Women, Beijing 1995,1 and reiterated in the Council of Europe Recommendation of 10 July 1993, to address the issue of the presence of women in the media and to strengthen the female perspective therein.2 Second, there is the need to overcome communication barriers between the world of the social sciences, on the one hand, and politics and public opinion, on the other. While many interesting studies on gender inequalities are carried out by academics, gender experts, NGOs and other institutions, the results of these studies often do not circulate; they remain unknown even to those who would benefit from them. Third, in order to fill this gap, there is the need to provide a discussion space characterized by analytical rigour, accessible language, and topics of public interest, with all three characteristics being aimed at policy proposals. In the discussions that preceded the launch of the web-magazine in 2009, the first proposal for the journal’s name was Gender and Numbers. Eventually, a shorter and more effective name was chosen, inGenere.it, but the initial reference to the goal of a quantitatively grounded approach to gender issues is still a strong part of the identity of the magazine. In line with the gendermainstreaming approach,3 the magazine’s footer, “gender, data, policies,” summarizes a wide-ranging agenda with analyses and proposals that are not limited to issues traditionally considered “female.”4 The magazine was initially able to count on engagement of the founders, journalists and communication experts, as well as on commitment of the publisher, the Brodolini Foundation (FGB). Since 2003, under the direction of Annamaria Simonazzi, the Foundation has chosen gender issues as one of the main strands of its research activity,5 devoting many staff members to it. On its tenth anniversary, the web-magazine counted 330,000 users per year and published about 1,200 articles written by 650 contributors. Since the first decade of activity of inGenere.it largely overlapped with the long deep economic crisis that sapped the Italian economy (and that of other Southern and Eastern European countries), the magazine’s activity offered a good vantage point to advance a critical understanding of conventional macroeconomic creeds and policies from a gender perspective. In the panorama of Italian economic thought, many critical approaches to economic policy have characterized the European response to the crisis and the latter’s economic and social effects, although contributions that emphasize gender differences in the assessment of the impact of the crisis and above all in the search for alternative policies have

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been few. However, before turning to the specific contributions of inGenere.it to alternative visions of the economy and how it can be governed, it is worth assessing the reasons for and magnitude of the challenge that a magazine like inGenere.it continues to face. We will do so by giving a brief overview of the status of women in the media in Italy, with special reference to their role in the communication and dissemination economic news and in the public debate on economic issues. Women in the media According to the Council of Europe’s Recommendation on Gender Equality and the Media, “the media can either hinder or hasten structural change towards gender equality. Inequalities in society are reproduced in the media” (CoE, 2013). The case of Italy suggests that inequality in the media is even greater than it is in society as a whole. The gender employment gap was still more than 18 percentage points in 2017, which was among the highest in Europe, despite a decrease that was due to the collapse of male employment during the crisis.6 The female employment rate is below 50%, which is among the lowest in the EU-28.7 The gender pay gap seems lower for Italian women than for women in other countries, but this is partly a by-product of stronger exclusion of lesseducated women from the labour market. On average, period earnings (weekly, monthly or yearly) in Italy are considerably lower for women than they are for men, with women pursuing more discontinuous careers, populating more widespread involuntary part-time occupations and receiving lower pensions. Notwithstanding the above, there have been many structural changes in the economy and society, and these have helped Italian women progress towards equality; indeed, in some areas women have even gone beyond parity, overtaking men. This has happened in education: the gender gap in secondary education is in favour of women (by more than 4.1 percentage points), and the same holds true for the share of those known as “NEET” (Not in Employment, Education or Training): 4.8 percentage points less among young women than young men. In tertiary education, women overtook men in 1990, and today 30–34-year-old female graduates outnumber male graduates by 12.6 percentage points. Women are also more frequent readers and buyers of books: in Italy, 47.1% of women read at least one book in 2017, against 34.5% of men (Istat, 2018). The data on education and culture are in contrast with that on women in the media, both as authors (i.e., reporting the news) and as subjects (protagonists of the news). The Global Media Monitoring Project (GMMP)8 is the world’s most extensive research initiative on gender in the news media. It collects information on journalists (broken down by sex) who present and comment on the news and those who collect the news for traditional media and the internet. Here are some data for Italy:9 the number of women journalists has grown, and on a typical day women journalists deliver 39% of the news; the share is slightly

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lower (37%) for news on economics, politics and government. However, the most worrying indicators regard news content. Not only are women mentioned much less frequently than men (21% on average, down to 15% for politics and 10% for economics), they are also more often referred to as mothers, daughters or lay people than they are referred to in relation to their professional capacity. In one case out of four, moreover, they appear in the news in the role of victims (compared to 9% for men). Under-representation is especially sharp among experts called on to comment or explain the news. On a typical day, women are heard in only 18% of cases when an “authoritative” opinion is sought. It is interesting to view these results in light of the media pluralism rankings drawn up annually by the Centre for Media Pluralism and Media Freedom (CMPF) of the European University Institute. Italy is in the “high-risk” segment of the Social Inclusiveness Area indicator (which rates Italy among medium-risk countries), due to women’s limited access to the media. The report reads as follows: The high [risk] score for access to the media for women (71%) arises from the low proportion of women as news subjects and sources, and this covers newspapers, radio and television news, as subjects and sources of Internet news websites and news media tweets, and as news reporters. According to Law 120/2011, at least a third of the members of the executive board of public companies should be women. Although the Italian Public Service Media, RAI, seems willing to introduce “female quotas”, women make up less than a third of the members of RAI’s Executive Board. The average proportion of women in board and executive roles in commercial media is even lower (Brogi, 2018, p. 13). In the GMMP and CMPF reports, we note that the advent of digital media has led to a greater presence of women in newsrooms without, however, affecting the quality of women’s roles in the news and female representation. In Italy, the glass ceiling in the media is comparable to that which existed in listed companies and banks until the introduction of the law on board quotas in 2011.10 And it is just as strong for political representation: from 2009 to 2018, the proportion of women in the Chamber of Deputies rose from 20.4% to 34.6%, but in government it has only increased from 15.25% to the current 17% (it rose temporarily, being 28%–30% in the three centre-left governments of the years 2013–2017).11 Returning to the media, a word is in order regarding the question of “experts,” especially in the field of economics. If the topic is the government budget, on websites, radio, TV or in newspapers we may find women as public employees (perhaps affected by cuts or renovations), as mothers unable to enrol children in nursery school, or as passers-by interviewed while shopping at the supermarket. It is rare to have a woman as an expert on quantitative easing, reform of the labour market, or infrastructure spending. The problem is not only Italian. Elsewhere, it has been put under the magnifying glass and

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been subject to remedial various measures: the BBC has been building a database of expert women since 2017,12 and recently Bloomberg13 launched a programme to have more women on air.14 The decision of the founding group of inGenere.it to focus on economic matters from a gender perspective was also made in response to their dissatisfaction with the Italian information landscape. In addition to being at odds with the equality goals solemnly proclaimed on several official occasions since Beijing 1995, it impoverishes public debate, erases differences and is currently preventing a new strand of thought, which has been developed in scientific research and non-institutional politics, from entering the arena of domestic and international politics. By the time the magazine was launched in 2009, there were already independent websites dedicated to providing economic information: the first and most mainstream of these, lavoce.info, was concerned with the contribution of the world of research and universities. Many others subsequently appeared in different settings, all however with the aim of using the web to disseminate in-depth content, to subject policy proposals to fact-checking and to democratize economic information. But none of these had a gender perspective, although they were occasionally concerned with topics touching on the role of women in relation to the labour market, welfare and family. Thanks to the commitment and professional networks of its promoters, inGenere.it has often developed collaborations and connections with other financial and economic information websites. Over the years, online and offline debate involving institutions, associations, trade unions and women’s and feminist networks has dealt with many topics often addressed by economic analysis such as violence, cultural production, women’s leadership, family roles, demographic decline, migration, science, research, university policy, employment, social security, health, art and cinema. If we exclude gender violence, the topics most read and commented on had to do with the core of inGenere.it’s activity: work, equal opportunity, welfare and generations. In addition to the individual contributions by members of the editorial staff and external authors, the editors employ “collective articles,” especially when policy proposals are about to be put forward. As noted, inGenere.it was launched in the throes of a double-dip recession, which, in Italy, lasted about seven years. Issues related to the economic downturn and its consequences were naturally given centre stage for quite some time within the magazine and were viewed from two complementary perspectives: a critical macroeconomic perspective and a social and labour market perspective. Discussions around the macroeconomic analyses that Annalisa Rosselli and Annamaria Simonazzi put forward from a neo-Keynesian standpoint were systematically filtered through a gender viewpoint by, for example, merging criticism of neoliberal analyses of the crisis with feminist views of the role played by male overconfidence in “testosterone finance.” At the same time, discussions on micro-level policies like raising the participation rate of women in the labour market were integrated into the macroeconomic perspective of “investment in

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social infrastructure” (see below). The synergy created by the dialogue between the two perspectives resulted in a policy package proposal which was dubbed the “pink new deal,”15 whose aim was to facilitate the economic recovery while furthering women’s integration into the economy. This initial package proposal is constantly being reviewed and updated in the light of novel research and changes in the social and economic scenario. It is well understood that, for any given policy provision, the actual policy content – call it the “what” – is not independent from the way priorities are set and gaps, obstacles and resources are identified – the “how” of policy making. The paragraph that follows recounts the contribution of inGenere.it to the policy discussion in Italy and in Europe by casting gender mainstreaming in a crisis context as an example of “how” policies can be developed from a gender perspective. The concluding paragraph considers the “pink new deal” as an example of “what” such policies might implement.

Gender mainstreaming in times of crisis at inGenere.it Since its establishment, articles published by inGenere.it have stressed that austerity measures, adopted in response to the crisis, may disproportionately affect vulnerable groups in society with a substantial unintended gendered impact. While in some countries men have been hit relatively harder by the economic crisis in the short run, in terms of loss of jobs in male-dominated job sectors women have been increasingly affected by the implementation of austerity policies (i.e., budget cuts and social policy reforms). Many contributions have been published by inGenere.it on these issues, covering diversified areas of policy intervention. These contributions share some strong ideas with the international academic debate that has developed among feminist economists in Europe. In particular, it is assumed that neither macroeconomic policies nor the economic downturn itself are gender-neutral. As the following paragraphs will illustrate, various articles published in inGenere.it have focused on policy recommendations that can be grouped under three main headings:   

adopting a gender perspective through systematic, in-depth, genderresponsive budgeting; gender-mainstreaming income-support schemes; and prioritizing investment in social infrastructure.

The importance of gender budgeting in times of crisis European governments have not been idle in the face of the crisis. Policy responses have varied from stimulus and recovery measures to fiscal retrenchment and budget consolidation (O’Hagan and Klatzer, 2018). Expansive policies during recession and restrictive measures in austerity years both have large gender impacts. In some European countries, recovery

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measures stimulating the labour market were mainly directed at male employment sectors, while tax reforms brought greater relief to men than to women. In others, reduction of employment or wages in the female-dominated public sector, or of social expenditure, imposed a greater burden on women than on men. Several articles published by inGenere.it 16 have stressed that gender impact assessments of government economic policies and measures used to tackle the crisis are necessary in order to ensure that the needs of women and men are both met. Without proper gender equality objectives, targets, indicators and gender-disaggregated data, it is not possible to know whether publicly financed projects and activities are successful in their specific aims and whether they contribute to greater gender equality or perpetuate gender inequalities. In times of economic crisis and fiscal consolidation, gender budgeting is an effective tool to make the limited public budget more efficient and give to it a real impact. With respect to gender-responsive budgeting, one should aim for the following five priorities:  

 



devoting sufficient resources to gender mainstreaming and gender-budgeting processes;17 monitoring the impact of the crisis, in particular concerning gender and the most vulnerable groups, and implementing gender mainstreaming and gender-responsive budgeting in the reforms and strategies planned to cope with the crisis;18 developing the production of data, statistics and evaluations, and securing a proper sophisticated monitoring system of the gender outcomes of the measures taken;19 fostering a rethinking of men’s position in the family and society through actively promoting men’s involvement in household responsibilities, which should be supported by policies that require changes in men’s lifestyles;20 and increasing women’s participation in economic decision-making, including in the design, implementation and monitoring of fiscal consolidation measures and stimulus packages.21

When the policy response to a crisis is strong, as it has been in Europe due to the financial debt crisis, gender budgeting must also aim at ensuring that the initiatives (including monetary, fiscal, etc.) boosted by the crisis do not contradict member state efforts towards social inclusion and the elimination of poverty (Corsi, Botti and D’Ippoliti, 2016). As repeatedly noted in a recent debate within inGenere.it, 22 in Italy, as in several European countries, there is a perceived contradiction between the effects of fiscal consolidation policies and the goals of social policies, especially from a gender perspective. Examples of policies being adopted or planned by European countries which may deserve thorough investigation from a gender perspective are (a) broadening the tax base, often by increasing taxes on assets, property and capital; (b) creating “green jobs” in energy-saving reconstruction or the professionalization of care services;

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(c) subsidizing and strengthening the so-called “social economy”; (d) and reforming the pension and social benefit system.23 Modifications in budget allocations, deliberated or planned, make it a central concern to undertake a proper socio-economic analysis of the distributional outcomes of such changes if the recession is to be managed with minimum impact on social inclusion and gender equality.24 Concerning the third priority, the availability of timely and accurate data varies across European countries, yet overall social statistics are less frequently released than, for example, economic data on prices or aggregate activity. Thus, there seems to be room for improvement at the European level. In social statistics and through gender budgets, gender mainstreaming should be made very concrete and understandable to a wide audience. Concerning the fourth priority, all of social and economic policy needs to be informed by the process of gender monitoring and budgeting in order to sustain the efficacy of such instruments. The effort necessarily relies on addressing the cultural and economic roots of gender inequality by, for example, increasing collective support for care and thereby eliminating freeriding on women’s unpaid labour. Publicity and awareness campaigns without adequate support structures are not enough. Finally, concerning the fifth priority, the increase in women’s participation, a crucial policy may be to support and strengthen civil society and women’s NGOs at the national and European levels. The role of women’s NGOs is particularly important in times of crisis, as they can inform policy makers on how the recession is impacting women’s lives. Women’s NGOs are also crucial for providing support and assistance to women from vulnerable communities, who are disproportionately hit by crises. Gender mainstreaming monetary benefit schemes Considering the impact of the crisis on the living conditions of men and women in Italy as well as in other European countries, instruments of social expenditure and tax expenditure especially aimed at lifting men and women out of poverty must be given a specific focus.25 Among these measures, income support schemes and cash benefit systems in general are particularly relevant from a gender perspective. Indeed, to sustain women’s welfare and restore the gender power balance at home and in society it is crucial to aim at women’s financial independence. In countries where increasing women’s employment and activity rates is the key to pursuing a social inclusion strategy, adequate provisions need to be in place for the working poor and for working conditions, particularly in small companies and the grey market. Furthermore, in countries where the social safety net is based on universal monetary benefits, it is necessary to monitor and improve take-up rates and eligibility requirements.26 In countries where an insurance system prevails, it is crucial to ensure that work intermittence, smaller career advancements and employment in low-income jobs in these

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schemes do not result in insufficient benefits for women and in particular that they do not result in the social exclusion of vulnerable groups such as the elderly and unemployed.27 The many contributions published by inGenere.it on these issues focus on policy measures enacted in Italy in recent years and highlight three crucial issues. First, income support schemes and unemployment benefits should effectively lift the recipients out of poverty – that is, they should include a monetary allowance above the poverty line or be sufficient for recipients to reach the poverty line with their other possible incomes.28 At the same time, benefits should not be so high as to discourage labour market participation. From a gender perspective, this is especially relevant to cash benefits paid to those in need of long-term care or eldercare, which may actually result in the state subsidizing the traditional gendered division of unpaid labour. Second, benefit schemes should be individualized as much as possible.29 Derived benefits and those linked to family status should be reformed in order to grant women’s financial autonomy from their partners while not jeopardizing the incentive structure aimed at “making work pay” that is embedded in such benefits. Economic incentives may not be as effective in a household-based benefit scheme because they do not take the gender division of social roles into account, and in some countries such schemes – as in the case of joint taxation – especially encourage one-earner households. Third, labour market regulatory systems based on the so-called “flexicurity” principle should indeed match higher labour flexibility (i.e., higher job insecurity resulting from lower employment protection) with efficient active policies and adequate income security provisions (i.e., unemployment benefits). But in a number of European countries, fiscal austerity measures are going in the direction of a reduction of resources available for improving active labour market policies and less economic support for those (temporarily) out of work. The issue is relevant from a gender perspective, since several European countries (including Italy) are facing a rising dualization of the labour market, in which women are disproportionately represented in low-paid, highly flexible jobs.30 Investing in social infrastructure Investment in social infrastructure is the last set of policy recommendations that inGenere.it has contributed to disseminating. It is, in fact, one of the hallmarks of this web-magazine’s economic policy stance.31 In the aftermath of austerity policies that crippled the financing of social investment in precisely those countries that needed it most, the expediency of boosting investment in social infrastructure is currently gaining momentum in European Union (EU) policy circles (Fransen et al., 2018). However, inGenere.it adheres to a much broader view of this type of investment than that which is being proposed to private investors or bring upheld in EU policy circles. For example, the report by the High-Level Task Force on Investing in Social Infrastructure sees investment in social infrastructure as referring to

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The key term here is “physical assets.” The broader understanding of the term that inGenere.it favours, however, encompasses investment in the service provisions for which the physical assets are built – that is, health and long-term care provisions, schooling and so on. A clear example of this broader understanding is a study simulating the net financial returns of expanding childcare places in kindergartens as well as hours of childcare services in Italy (Bettio and Gentili, 2016). In this study, which was carried out by regular contributors to inGenere.it and published by the FGB under the web-magazine’s auspices, the construction of additional kindergarten facilities is just one of the investment components. The remaining components are the childcare services provided by the staff and everything that is needed to actually run a kindergarten. The attention devoted to a social investment perspective has both historical and theoretical roots. When inGenere.it was founded, the research portfolio of FGB had already included a few EU-funded projects focusing on gender issues. Most of the founding members of inGenere.it were involved in these projects. Unsurprisingly, one of the early articles featured in inGenere.it was a research offshoot of the so-called “GALCA project” (Gender Analysis of Long-Term Care), which proposed to “cure” unemployment in Italy by investing in formal employment in elderly care.32 At that time, rapid growth in the demand for elderly care services was planting the seeds of the “immigrant in the family” model of elderly care (Bettio, Simonazzi and Villa, 2006), which features migrant female care workers being directly hired by households as an alternative to market or public provision of services. Contrary to what was advocated in the article, the migrant in the family solution eventually crowded out market and public provisions. However, reconsidering investment in formal provisions is becoming increasingly expedient for a variety of reasons, including the desirability of upskilling care work. “Cure unemployment with elderly care” was in fact a forerunner of the idea that investment in social infrastructure yields high pay-offs in terms of employment. At about the same time – but across the Atlantic at the Levy Economics Institute – this very idea was opening up a new strand of research, with the first papers published at the Institute showing that one dollar invested in “social infrastructure” would result in higher job creation and stronger poverty reduction than one dollar invested in physical infrastructure (e.g., roads, bridges, houses) (Antonopoulos et al., 2011). Since then, inGenere.it has been very active in disseminating and even expanding this idea, which eventually became the cornerstone of the so-called “pink new deal.”33

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Towards a “pink new deal” Under the “pink new deal” label, the inGenere.it team gathered an ambitious package of policy proposals aimed at furthering the economic integration of women while also contributing to economic prosperity for all.34 The theoretical underpinnings of the idea that investment in social infrastructure should be at the core of current macro-policies stem from two momentous developments affecting market economies: (a) the advancing shift to service activities, and (b) progressive “outsourcing” or “marketization” of unpaid household work. With the service sector becoming the leading sector in the economy, it is almost inevitable that public and private investment should rebalance towards the provision of services rather than goods. Hence, the importance of a social investment perspective began to grow. Investment in social infrastructure targets individuals (and households) directly – for example, health, care and schooling provisions – but it also indirectly affects firms and organizations because the level of education sustains technological and social innovation, because better health sustains productivity, and because care services allow women (and some men) with care responsibilities to take up paid employment. The shift towards the service economy is not simply a change in the mix of goods and services for a given amount of GDP (gross domestic product), but it is generally associated with households outsourcing unpaid work to the public sector or the market sector. From a Keynesian perspective, drawing unpaid household work out into the market (or the public sector) is likely to boost employment beyond the usual multiplier effect of (public) investment. To see this, compare devoting one million dollars of public money to financing longer service hours in kindergartens with giving households cash of the same amount in order to subsidize home-based childcare. The former option (more care hours) is likely to expand employment directly because more teachers are drawn into employment from the ranks of the unemployed or the inactive population, but also indirectly when the additional income spent by the newly hired teachers activates the usual consumption multiplier. When cash payments are provided in lieu of publicly provided care hours, only the consumption multiplier effect is at work if households use the cash they receive in order to “produce” childcare at home. From a feminist economic perspective, outsourcing unpaid work (care work in particular) has further advantages over home production: it frees up the supply of women and creates paid job opportunities at the same time. In fact, when the care, health and education sectors are highly feminized, outsourcing unpaid work mainly expands female employment. Finally, outsourcing is known to offer a non-conflictual option to rebalance the current gender disparities in unpaid work between men and women within households, with this imbalance sitting at the root of most economic disparities between men and women. For all these reasons, feminist social scholars are the staunchest advocates of investment in social infrastructure, which they place at the centre of a larger and more ambitious attempt to “engender macroeconomics.” This

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is attested by a small but growing body of research carried out by UN Women, the Women’s Budget Group (WBG) and the Levy Economics Institute, among other organizations.35 Yet the advantage of investment in social infrastructure need not accrue primarily or disproportionately to women. The specific example of elderly care shows how the social infrastructure perspective can be fertile for formulating sound policy in areas that are often perceived as “gender-neutral,” like innovation policy.36 For example, assistive technology is fairly common in homecare of the elderly in the Nordic countries and Japan (EC, 2008; Mostaghel, 2016). The experience of these countries suggests that the activities of care workers can be considerably rationalized but are far from being replaced by assistive devices (Ishiguro, 2017; Van Aerschot and Parviainen, 2017). The introduction of more sophisticated robots is not yet out of the experimental stage even in “frontier” countries like Japan, but what we have learnt up to now is that robots and care workers tend to complement each other and that it is not a matter of the former replacing the latter altogether (Ishiguro, 2017; Mostaghel, 2016). If, then, care and technology can complement one another to a significant extent, investment in formal eldercare offers an opportunity to match higher-quality, higher-skill and better paid care services with technological innovation. Hence, investment in the care sector can be seen as a two-pronged strategy involving the service and the industrial sectors at the same time, an “industrial policy of the service sector” with positive spillovers across the economy. Admittedly, the overall response from readers of the newsletter that inGenere. it devoted to care and technology37 has revealed mixed feelings towards combining the two, which is in line with what emerges from scholarly research. However, it was encouraging to learn from some readers that their reservations about combining technology and care had weakened after reading the various contributions included in the newsletter. This is an example of how the agenda of inGenere.it can contribute to shaping attitudes towards economic and social policy.

Notes 1 See http://www.un.org/womenwatch/daw/beijing/ [accessed 30 June 2019]. 2 See https://search.coe.int/cm/Pages/result_details.aspx?ObjectID=09000016805c7c7e [accessed 30 June 2019]. 3 The concept of gender mainstreaming was adopted at the UN Fourth World Conference on Women (Beijing, 1995), and it was seen as the lynchpin to successfully enacting a gender equality strategy. It involves integrating a gender perspective into the preparation, design, implementation, monitoring and evaluation of policies, regulatory measures and spending programmes with a view to promoting equality between women and men. 4 See http://www.ingenere.it/articoli/se-diciamo-gender-mainstreaming [accessed 30 June 2019]. 5 The FGB was established in 1971 in the name of the former Minister of Labour Giacomo Brodolini, who was responsible for the approval of the Workers’ Statute

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in Italy. Anna Simonazzi was the first woman to hold the position of general secretary and with her began the research activity of the Foundation in the field of gender studies. Now the FGB is one of the leading European research centres on gender equality, a subject on which it provides technical assistance to the European Commission (DG Employment and DG Justice). See http://www.ingenere.it/news/occupazione-femminile-italia-penultima-europa [accessed 30 June 2019]. See https://ec.europa.eu/eurostat/data/database. The GMMP was founded just after the Beijing platform, and monitors the gender gap in the media in 70 countries (http://whomakesthenews.org/gmmp). See http://cdn.agilitycms.com/who-makes-the-news/Imported/reports_2015/nationa l/Italy.pdf [accessed 30 June 2019]. See https://www.lavoce.info/archives/57194/piu-donne-nei-cda-ma-per-le-lavoratricinulla-e-cambiato/ [accessed 30 June 2019]. For the Parliament, see https://www.openpolis.it/numeri/crescono-le-donne-nel-pa rlamento-italiano/ [accessed 30 June 2019]. For the government, see https://www.op enpolis.it/governo-conte-giovane-ma-con-poche-donne/ [accessed 30 June 2019]. See https://www.bbc.co.uk/academy/en/collections/expert-women [accessed 30 June 2019]. See https://www.poynter.org/business-work/2019/journalism-has-a-gender-representa tion-problem-bloomberg-is-looking-for-a-solution/ [accessed 30 June 2019]. In Italy, a similar project has been set up not by mainstream media but by the coalition “100 donne contro gli stereotipi” (“100 Women against Stereotypes”). See https://100esperte.it [accessed 30 June 2019]. See http://www.ingenere.it/articoli/le-nostre-proposte-il-pink-new-deal [accessed 30 June 2019]. See http://www.ingenere.it/dossier/donne-e-crisi-europa [accessed 30 June 2019]. See http://www.ingenere.it/articoli/se-diciamo-gender-mainstreaming [accessed 30 June 2019]. See http://www.ingenere.it/articoli/tutti-vogliono-la-crescita-ma-quale-e-come [accessed 30 June 2019]. See the EIGE (European Institute for Gender Equality) website, an important source of gender statistics and indicators, at https://eige.europa.eu/gender-statistics/dgs. See http://www.ingenere.it/dossier/i-congedi-di-paternita [accessed 30 June 2019]. See http://www.ingenere.it/dossier/le-quote-di-genere [accessed 30 June 2019]. See http://www.ingenere.it/dossier/donne-e-crisi-europa [accessed 30 June 2019]. See http://www.ingenere.it/dossier/quale-pensione [accessed 30 June 2019]. To elaborate further on points 3 to 5, the availability of timely and accurate data varies across European countries, yet overall social statistics are less frequently released than, for example, economic data on prices or aggregate activity. Thus, there seems to be room for improvement at the European level. In social statistics and through gender budgets, gender mainstreaming should be made very concrete and understandable to a wide audience. Concerning the fourth point, all of social and economic policy needs to be informed by the process of gender monitoring and budgeting in order to sustain the efficacy of such instruments. The effort necessarily relies on addressing the cultural and economic roots of gender inequality by, for example, increasing collective support for care and thereby eliminating free-riding on women’s unpaid labour. Publicity and awareness campaigns without adequate support structures are not enough. Finally, concerning the aim of increasing women’s participation, a crucial policy may be the support and strengthening of civil society and women’s NGOs at the national and European levels. The role of women’s NGOs is particularly important in times of crisis, as they can inform policy makers on how the recession is impacting women’s lives. Women’s NGOs are also crucial for providing support and assistance to women from vulnerable communities, who are disproportionately hit by crisis.

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25 See http://www.ingenere.it/dossier/donne-e-tasse [accessed 30 June 2019]. 26 In this respect, the Finnish experiment of Universal Basic Income (UBI) is quite crucial. See http://www.ingenere.it/en/articles/finnish-basic-income-debate-genderperspective [accessed 30 June 2019]. 27 See http://www.ingenere.it/articoli/il-futuro-che-non-ci-aspetta [accessed 30 June 2019]. 28 See http://www.ingenere.it/articoli/donne-lavoratrici-e-mamme-le-nuove-facce-della -poverta [accessed 30 June 2019]. 29 See http://www.ingenere.it/articoli/donne-europa-piu-caute-meno-ricche [accessed 30 June 2019]. 30 See http://www.ingenere.it/articoli/quale-lavoro [accessed 30 June 2019]. 31 See http://www.ingenere.it/articoli/le-infrastrutture-che-vogliamo [accessed 30 June 2019]. 32 See http://www.ingenere.it/articoli/curiamo-la-disoccupazione-con-i-lavori-di-cura [accessed 30 June 2019]. 33 See http://www.ingenere.it/articoli/ricetta-contro-crisi-si-chiama-infrastrutture-socia li and http://www.ingenere.it/articoli/investire-nella-cura-conviene-non-solo-donnestudio-turchia [accessed 30 June 2019]. 34 See http://www.ingenere.it/articoli/per-un-pink-new-deal [accessed 30 June 2019]. 35 See, for example, Antonopoulos et. al. (2011), Ilkkaracan et al. (2015), and WBG (2016). 36 The current debate on the employment effects of technical innovation, especially automation, is relevant in this respect. According to a view that is becoming mainstream in scholarly economic circles, automation is reducing middle-skilled, routine jobs to the advantage of a small share of highly skilled but low-routine jobs and a large share of low-skilled jobs that are both equally difficult to routinize (Goos and Manning, 2003). Homecare for the elderly is often cited as an example of a low-skilled activity which is not easily subject to automation. If this hypothesis were to be taken literally, it would imply that workers in eldercare may pay for a low risk of automation with stagnating productivity and hence wages. However, there is plenty of evidence that this trade-off between risk of automation and stagnating productivity and wages has not been so sharp in the past and need not become sharper any time soon. 37 See the articles on care of the elderly, automation and assistive technology included in the dossier “Come cambia il lavoro di cura”: http://www.ingenere.it/dossier/ come-cambia-lavoro-di-cura [accessed 30 June 2019].

References Antonopoulos, R., Kim, K., Masterson, T. and Zacharias, A. (2011). Investing in care: a strategy for effective and equitable job creation. Levy Economics Institute of Bard College Working Paper, no. 610. Annandale-on-Hudson, NY: Levy Economics Institute. http://www.levyinstitute.org/pubs/wp_610.pdf [accessed 30 June 2019]. Bettio, F. and Gentili, E. (2016). Asili nido e sostenibilità finanziaria: una simulazione per l’Italia. Fondazione Giacomo Brodolini Working Paper, no. 11. Rome: Fondazione G. Brodolini. http://www.fondazionebrodolini.it/sites/default/files/pubblica zioni/file/wp11_x_web.pdf [accessed 30 June 2019]. Bettio, F., Simonazzi, A. and Villa, P. (2006). Change in care regimes and female migration: the “care drain” in the Mediterranean. Journal of European Social Policy, 16(3), 271–285. Brogi, E. (2018). Monitoring Media Pluralism in Europe: Application of the Media Pluralism Monitor 2017 in the European Union, FYROM, Serbia & Turkey, Country

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Report: Italy. Fiesole, Italy: Centre for Media Pluralism and Media Freedom. http:// cmpf.eui.eu/wp-content/uploads/2018/11/Italy_MPM2017_country-report-1.pdf [accessed 30 June 2019]. CoE (2013). Recommendation CM/Rec(2013)1 of the Committee of Ministers to member States on gender equality and media. Brussels: Council of Europe. https://search.coe. int/cm/Pages/result_details.aspx?ObjectID=09000016805c7c7e [accessed 30 June 2019]. Corsi, M., Botti, F. and D’Ippoliti, C. (2016). The gendered nature of poverty in the EU: individualized versus collective poverty measures. Feminist Economics, 22(4), 82–100. EC (2008). ICT and Ageing. Report prepared by Empirica and WRC on behalf of the European Commission, Directorate General for Information Society and Media. Brussels. European Commission. http://www.rcc.gov.pt/SiteCollectionDocuments/ ICT-ageing_vienna_handout08.pdf [accessed 30 June 2019]. Fransen, L., Del Bufalo, G. and Reviglio, E. (2018). Boosting investment in social infrastructure in Europe: Report of the high-level task force on investing in social infrastructure in Europe. European Economy Discussion Paper, no. 74. Luxembourg: Publications Office of the European Union. https://ec.europa.eu/info/sites/info/files/ economy-finance/dp074_en.pdf [accessed 30 June 2019]. Goos, M. and Manning, A. (2003). Lousy and lovely jobs: the rising polarization of work in Britain. CEP Discussion Paper, no. dp0604. London: Centre for Economic Performance, London School of Economics and Political Science. http://cep.lse.ac. uk/pubs/download/dp0604.pdf [accessed 30 June 2019]. Ilkkaracan, I., Kim, K. and Kaya, T. (2015). The impact of public investment in social care services on employment, gender equality and poverty: the Turkish case. Research Project Report, no. 8–2015. Istanbul: Istanbul Technical University Women’s Studies Centre in Science, Engineering and Technology. http://www.levyin stitute.org/pubs/rpr_8_15.pdf [accessed 30 June 2019]. Ishiguro, N. (2017). Technological solutions to Japanese elderly care? Paper presented to the 3rd Transforming Care Conference, Milan: Polytechnic of Milan, 26–28 June. http://www.transforming-care.net/wp-content/uploads/2017/06/TP9_d-Ishiguropdf-1. pdf [accessed 30 June 2019]. Istat (2018). La Produzione e la Lettura dei Libri in Italia. Rome: Istituto Nazionale di Statistica. https://www.istat.it/it/files//2018/12/Report-Editoria-Lettura.pdf [accessed 30 June 2019]. Mostaghel, R. (2016). Innovation and technology for the elderly: systematic literature review. Journal of Business Research, 69(11), 4896–4900. O’Hagan, A. and Klatzer, E. (eds) (2018). Gender Budgeting in Europe: Developments and Challenges. London: Palgrave Macmillan. Van Aerschot, L. and Parviainen, J. (2017). Robots responding to care needs? Analyzing design strategies behind the new generation of care robots. Paper presented to the 3rd Transforming Care Conference, Milan: Polytechnic of Milan, 26–28 June. http://www.transforming-care.net/wp-content/uploads/2017/06/TP9_a-Van-Aerschot. pdf [accessed 30 June 2019]. WBG (2016). Investing in the Care Economy. Report commissioned by the International Trade Union Confederation. London: Women’s Budget Group. https://www. ituc-csi.org/IMG/pdf/care_economy_en.pdf [accessed 30 June 2019].

Part IV

Technological challenge and policy

11 Is automation beneficial for society as a whole? What we can learn re-reading Ricardo and Marx on machinery and labour Giovanni Bonifati Introduction Does the use of machines in the production process, and technological progress in general, bring benefits for society as a whole? This question, which is extremely topical today, has actually run through the entire history of economic thought since the beginnings of political economy (Berg, 1980). Until the publication in 1821 of the third edition of Principles (Ricardo, [1821] 1951) in which David Ricardo introduced the celebrated chapter “On Machinery,” the idea that the use of machines would bring benefits for the whole of society was widely shared. In chapter XXXI, Ricardo argues that there are reasons to believe that the use of machines could reduce employment, thus damaging the interests of workers, and that these reasons are grounded in the principles of political economy. The compensation theory, which held that capitalists would invest elsewhere the capital made available by the reduced need for labour, was not well founded. Schumpeter (1954) deemed Ricardo’s position, and the controversy that followed (Berg, 1980), to be the result of theories that did not possess sufficient techniques to approach the issue in all its interdependent facets. Demonstration of this, asserts Schumpeter (1954, p. 684), is that after the affirmation of a technically better equipped theory, the controversy could be considered “dead and buried.” We know that it is not a question of better techniques of analysis, but of the affirmation of a different theory of wages and income distribution based on the notions of marginal utility and productivity (Montani, 1985). Keynes ([1930] 1932) argues that technological unemployment is a phase of transitory imbalance and that in the longer term (he foresees within a century) the potentialities of technology would solve the “economic problem” of society (the satisfaction of primary or absolute needs). Once this is realized, it would be sufficient to work with three-hour shifts per day and a working week of 15 hours to keep people occupied. Today, in a radically different context, the concern about technological unemployment is once again of dramatic relevance. Advances in artificial intelligence, neural networks, and robotics and the automation of certain product categories (McKinsey Global Institute, 2017) have transformed the field of

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action of computerization in automation processes. While the computerization already underway since the 1980s has essentially concerned the replacement of rule-based routine tasks with computer-controlled systems, big data algorithm systems at the heart of artificial intelligence are capable of replacing a potentially wide range of non-routine cognitive tasks (Brynjolfsson and McAfee, 2014; Autor, 2015). Frey and Osborne (2013) estimate that 47 per cent of total US employment has a high probability of being computerized (particularly in the areas of Service Sales and Related Office and Administrative Support). In a subsequent study, the McKinsey Global Institute (2017) estimates that in the US 60 per cent of occupations have at least 30 per cent of their activities that could be automated. These trends have widely documented effects (Autor and Dorn, 2013) on “labour market polarization, with growing employment in high-income cognitive jobs and low-income manual occupations, accompanied by a hollowing-out of middle-income routine jobs” (Frey and Osborne, 2013, p. 4). What is the theoretical background to the discussion on technological unemployment? With the rise of the marginalist theory of distribution, the theoretical analysis of the effects of automation is conducted in terms of adjustments of relative prices that bring the economic system back to a “balanced growth path.” Technological unemployment is thus a transitory adjustment phase. Wicksell ([1926] 1934, pp. 133–144) had already argued, criticizing Ricardo, that the introduction of a technical labour-saving innovation makes, at first, more profitable the investment in sectors that use the new methods, generating a reduction of the total product and an excess of labour supply. This cannot, however, leave wages unaltered. Unemployment will reduce wages, making the old, more labour-intensive methods more profitable. Production will grow in sectors that use the old methods, thus absorbing the excess labour supply. The contemporary discussion about the consequences of automation on wages and employment, albeit in much more articulated models, maintain two complementary characteristics typical of the neoclassical paradigm: (a) the variation of the relative prices of goods and factors of production continues to be the rebalancing mechanism of last resort bringing the system back to a path of balanced growth; (b) in this way, the economic system – albeit with frictions and delays – ultimately adapts to new technologies whose emergence is not taken into account. According to Acemoglu and Restrepo (2019), for example, in response to the effects of automation on employment, the central force bringing the system back to a path of balanced growth is the creation of new tasks for which labour has a comparative advantage over capital. This force is considered endogenous: “automation running ahead of the creation of new tasks reduces the labor share and possibly wages, making further automation less profitable and new tasks generating employment opportunities for labor more profitable for firms.”1 In this chapter I propose to draw attention to a different critical reasoning. There are two premises for such a proposal. The first is that the neoclassical

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adjustment mechanism is based on a theory of income distribution whose critique I believe is convincing.2 The second premise concerns the need to start a reflection about the social effects of the current automation phase. In particular, such a reflection seems indispensable in order to address its effects on employment, which are today so quantitatively significant and socially worrying because they are associated with growing inequalities in the distribution of income and wealth. In this perspective, in the second and third sections of this chapter, respectively, I propose a re-reading of the reflections on the effects of mechanization on labour by two great economists, Ricardo and Marx, who have common ideas about the role of production prices, but a very different concern towards the critique of political economy and the working of the capitalist system of production. In the fourth section, I will synthesize the main results of this re-reading and I will highlight a general implication about the machinery question. My re-reading of Ricardo and Marx has benefitted from the rich literature on the subject.3 However, for the purposes of this chapter and for simplicity of exposition, in the following sections I will mainly refer to the original texts of these two scholars.

Ricardo on machinery and on his change of mind In the third edition of Principles, Ricardo ([1821] 1951) introduced the celebrated chapter XXXI, “On Machinery,” in which he claims to have changed his mind on the effects of mechanization. In his own critical evaluation of his position about the effects of the introduction of machinery on the different social classes, Ricardo continues to accept Say’s law in the form of the identification of saving and investment and Smith’s thesis, according to which the demand for necessaries is limited while the one for non-necessaries is practically unlimited. Instead, he abandons the hypothesis, previously accepted, that aggregate wages would remain unchanged even after the introduction of machines, a hypothesis based on the identification of wages as funds taken from the capital anticipated by capitalists. The reasons why this hypothesis is abandoned and the implications resulting from it will be briefly examined by considering three aspects of Ricardo’s analysis: (1) the introduction of machines is compatible with an increase in net income (profits) and a decrease in gross income (the sum of profits and wages); (2) the possibility that the reduction of costs and prices resulting from the introduction of machinery allows for the reabsorption of workers forced out by mechanization depends on how net income is spent; and (3) the increase in demand for labour connected with accumulation is in a necessarily decreasing relation with respect to investment. (1) The introduction of machines is compatible with a decrease in gross income. Ricardo uses a numerical example, the meaning of which is as follows. With the same capital used, the capitalist can transform part of the working capital into fixed capital in the form of machines and obtain the

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same net product (profit) and the same rate of profit as before. In this case, the capitalist has no reason to change his behaviour, and the result is the following:    

the composition of the capital changes: fixed capital increases compared to working capital; with the help of machines, fewer workers than before produce a gross income equal to the sum of the same monetary profits as before and of less wages than before; it follows that net income has remained unchanged and that gross income has decreased; and since the level of employment depends on gross income, and not on net income, employment decreases steadily.

(2) Employment and the spending of net income. In a free competition economy, the introduction of machines reduces costs and the prices of goods. This implies that with the same monetary profits as before, the capitalist can obtain a greater quantity of goods (profits increase in real terms). With the same needs as before, the capitalist can spend the greater real profits: (a) on luxuries; (b) to buy the services of servants and increase his standard of living; or (c) to start a manufacturing business or become a partner in one. In the first case, the consumption of luxuries by the capitalist increases with little or no effect on employment. In the second case, the contribution to the increase in profits in real terms is, in contrast, positive because it involves the employment of new “menial servants.” Lastly, in the third case, the partial reabsorption of workers forced out by mechanization is the result of the increased saving capacity of the capitalist in real terms. In this case, the increase in employment is connected to accumulation in existing or new sectors. (3) Investments and employment. Ricardo is perfectly aware that the effects of the introduction of machines cannot be examined supposing that the capital invested does not change. In reality, observes Ricardo, machines are not invented and used all of a sudden. Inventions are gradual and influence the uses of new savings. The use of machines, adds Ricardo, is encouraged by increases in wages, which lead, for every increase in capital, to a greater proportion being used in machines (rather than in working capital).4 It follows that, with the accumulation of capital, the demand for labour will increase, but not in proportion to that increased accumulation:5 “the ratio will necessarily be a diminishing ratio” (Ricardo [1821] 1951, p. 395). Ricardo’s conclusions On the basis of his analysis of the effects of the use of machines in production, Ricardo criticizes the idea, which he himself had initially accepted, according to which the introduction of machines to substitute for labour would free up (working) capital that would necessarily be used in some other

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way, leaving overall employment unchanged. This idea now seems fallacious because it is founded on the implicit assumption that the introduction of machines cannot entail a reduction of gross income (on which the level of employment depends). Whereas the compensation theory concluded that the introduction of machines, by leaving the level of employment unchanged and reducing the price of goods, benefitted both workers and capitalists, Ricardo now concludes that the opinion according to which the use of machines is often damaging for the interests of the working classes is consistent with the correct principles of political economy (Ricardo, [1821] 1951, p. 392). Of particular interest is a general conclusion reached and discussed by Ricardo ([1821] 1951). The necessary condition for the introduction of machines not to be detrimental to the conditions of the labouring classes is that the increases in productivity granted by the use of machines make net income (the profits) increase to such an extent as to not make gross income (the sum of wages and profits) decrease in real terms. This condition is not, however, sufficient because the effects of the increase of net income on employment depend on how profits are spent. Ricardo underlines a conclusion of his analysis that he considers general. Irrespective of questions concerning the invention and use of machines, Ricardo points out that “the labouring class have no small interest in the manner in which the net income of the country is expended” (Ricardo, [1821] 1951, p. 392). If the net income is spent on luxury goods, the spender would enjoy the benefits but after that more work would not be created. If, on the other hand, the net income is spent on food and clothes and “menial servants” are employed, all the people thus employed with the net income, or with the food and clothes it is possible to buy with it, would be added to the preceding demand for labour and this would be the case for the sole reason that the net income was spent in this way and not on luxury goods (Ricardo, [1821] 1951, p. 393). It follows, concludes Ricardo, that labourers “must naturally desire that as much of the revenue as possible should be diverted from expenditure on luxuries, to be expended in the support of menial servants” (Ricardo, [1821] 1951, p. 393). In Ricardo’s analysis, net income increases in terms of the quantity of goods that the profits in monetary terms are able to buy. This is the consequence of competition, which reduces prices and brings them into line with the reduced costs of production. What happens to wages? If the cost of producing wage goods decreases, this should lead to a redistribution of income in favour of profits. In chapter XXXI, Ricardo does not discuss this effect. His concern is to show that aggregate wages can decrease as a result of the reduction in the number of people employed. If the monetary wage remained unchanged, then we would have only partial positive effects on the class of workers: only the employed people would benefit from the effects of mechanization in the form of greater purchasing power deriving from the reduction in the prices of wage goods. Also on the basis of this consideration, we return to Ricardo’s conclusion. If we want mechanization to have general

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positive effects (or less partial ones) for workers, then it is necessary for the profits that are not invested to be spent on non-luxury goods and/or on what today we call “services.” It is well known that Ricardo did not have a theory of effective demand. However, in examining the effects of mechanization he shows the awareness that maintaining levels of employment depends on how the surplus is generated and absorbed.

Marx: the complexity of the relationship between machinery and labour Marx has been a careful scholar of technology (Rosenberg, 1976; MacKenzie, 1984). In the chapters of Part Four of the First Book of Capital (Marx, [1890] 1990), we find a deep analysis of the complex interaction between technological changes and the transformation of the systems of division of labour, from the craft system of production to modern industry. In what follows, I will dwell on a central aspect of this analysis: the complexity of the relationship between machinery and labour. I will refer in particular to Marx’s reflections on this relationship in Grundrisse (Marx, [1857–1858] 1973). Examining the effects of the introduction of machines on employment, Marx starts with a critique of the compensation theory using Ricardo’s conclusions (Marx, [1890] 1990, pp. 565–575). By transforming variable capital into constant capital, the introduction of machines never frees up capital that can be used in other activities with compensatory effects on employment. Marx sets forth the implications of this starting point, highlighting the twofold effect of using machines: on the one hand, it increases the relationship between constant capital and variable capital per unit of product and, on the other, it severs the connection between labour and means of subsistence for those workers forced out of production. When this connection no longer exists, those who previously were buyers are transformed into non-buyers. “Voilà tout,” observes Marx ([1890] 1990, p. 567). The demand for wage goods decreases and, unless the demand increases independently in other sectors, their market price decreases and the productive capacity in the sector of wage goods also decreases, and consequently employment is reduced in that sector. The possibility that the connection between, on the one hand, labour and means of production and, on the other, between labour and means of subsistence is dependent on new, additional, capital that can be invested and never on capital already invested (in working capital) and transformed into machinery. From this starting point, Marx introduces three new elements into the analysis. The first concerns the capitalist use of machines. He, in fact, does not attribute to machines in themselves the responsibility for the reduction in employment; he ascribes it to their capitalist use. In particular, in itself the introduction of machines, apart from reducing costs and making the product cheaper, reduces working time and alleviates labour. It is their capitalist use that gives rise to the extension of the working day and the intensification of labour (Marx, [1890] 1990, pp. 568–569).

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The second element concerns the effects of the increased production of machines on employment. Mechanization directly reduces the number of people employed per unit of product in those sectors that introduce machines to replace labour, and it increases, indirectly, employment in the sector that produces machines, where all of a sudden a new type of worker appears, the producer of machines (Marx, [1890] 1990, p. 571). The balance of these two effects on the coefficient of direct and indirect labour must necessarily be negative if what is wanted is a reduction of the costs per unit of product after the introduction of machines, “otherwise” – Marx observes – “the product of the machine would be as dear as, or dearer, than the product of the manual labour” (Marx, [1890] 1990, p. 570). With the increase in production, employment increases less compared to what happened before the introduction of machines. We find here – at a higher level of formulation – a result that Ricardo had already arrived at. The third element concerns the cascade effects of the introduction of machines. The introduction of machines in the upstream, or intermediate, sectors of production entails a considerable increase in production that spills down into the sectors downstream, and this prompts mechanization downstream. As an example, Marx considers the case of the introduction of spinning machines in England, which at the beginning meant an increase in weavers who could be supplied with abundant quantities of cheap yarns, until the steam loom was introduced. In the same way, the overabundance of cloth increased the number of tailors, dressmakers and seamstresses, until the arrival of the sewing machine (Marx, [1890] 1990, p. 572). Of these three interconnected elements, it is important to focus on the first – the capitalist use of machines – because it is this that is behind the specific contribution of Marx to the machinery question, both in terms of analysis and for the implications that stem from it. In Marx’s conceptual framework, machines, intended in general as use value created by man to produce other use value, are none other than the result of the labour of men directly and indirectly performed for their realization. In the light of this, in order to understand the Marxian meaning of the capitalist use of machines, it is worthwhile proceeding by considering briefly the notion of “labour in general.” “Labour in general” as means of creating wealth In Capital, Marx distinguishes immediately, in the first chapter dedicated to “Commodities,” between useful labour and abstract labour. Useful labour is human activity conforming to a purpose that is concretely applied to the production of use value. Useful labour occurs, for example, in the activity of weaving or spinning. Different useful labour is qualitatively different, because the specific capacity to design and transform that men put into the production of a particular use value is qualitatively different. If we abstract from what is qualitatively specific in each type of useful labour, we find a general quality of human labour in the abstract capacity to design, give form to the

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objects of labour and transform both nature and the relation with it, and the relations between men. This abstract capacity is what Marx calls “labour in general” (Marx, [1857] 1904, p. 299) or “human labour in abstract” (Marx, [1890] 1990, p. 128). In the 1857 “Introduction to A Critique of Political economy” (Marx, [1857] 1904), Marx explains extremely clearly that “labour in general” is a determined abstraction.6 It has its validity in reference to a social reality that has reached such a level of division of labour that labour itself can no longer be identified with a particular activity. The abstraction “labour in general” and with it “the indifference as to the particular kind of labour” implies – Marx says – “the existence of a highly developed aggregate of different species of concrete labour, none of which is any longer the predominant one. So do the most general abstractions commonly arise only where there is the highest concrete development” (Marx, [1857] 1904, pp. 298–299). In such a society, in which “individuals pass with ease from one kind of work to another … labour has become … not only categorically but really, a means of creating wealth in general” (Marx, [1857] 1904, p. 299). Labour that in general becomes the means to create wealth must be put in relation to the ends. To achieve these ends, the labour is supplied by the producers in terms of “socially necessary labour-time” defined as “the labourtime required to produce any use-value under the conditions of production normal for a given society and with the average degree of skill and intensity of labour in that society” (Marx, [1890] 1990, p. 129). The production of wealth through “labour in general” thus requires, on the one hand, the identification of a purpose (or purposes) and, on the other, the designing and transforming capacity to realize what is necessary to achieve the purpose. In Marx’s analysis, it is the changes in purpose of “labour in general” that make this notion a determined abstraction and that dictate the historically determined use of labour as a means to create wealth in general. The capitalist use of machinery systems: inside the “black box” of the transformation of the purpose of the use of socially necessary labour time A specific contribution of Marx is to have shown how – in a society already producing commodities (use values produced for exchange) – capitalist conditions of the production of commodities emerge. These conditions are the result of qualitative transformations of the relation between labour, the means of production and the means of subsistence triggered by changes of scale connected to the expansion of potential markets. In Part Four of the First Book of Capital, Marx gives a concrete analysis of this, examining the transition from artisanal industry to manufacturing and then to modern industry. Strictly capitalist production relations presuppose, Marx argues, the historical process of “separation between the workers and the ownership of the conditions for the realization of their labour.” It is this process of separation that “operates two transformations, whereby the social means of subsistence and production are

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turned into capital, and the immediate producers are turned into wage-labourers” (Marx, [1890] 1990, p. 874; italics in the German original). In his reflections on the capitalist use of machines contained in Grundrisse, Marx identifies the deep-seated reasons for the transformation of the relation between “labour in general” and the means of production. Above all, what changes the relation is not the single machine but the automatic system of machines designed and coordinated like an automaton that moves on its own in order to act in conformity with a purpose that is extraneous to the consciousness of who, as a single individual, is put there to operate this system, to oversee it and to avoid interruptions (Marx, [1857–1858] 1973, pp. 614–615). The labour process is thus transformed. It no longer has its unity in labour as a human activity consciously oriented by a purpose established by the person performing the work. The unity of the labour process is imposed by the system of machines that operates according to a purpose that is extraneous to the consciousness of the immediate producers. This characteristic of the capitalist production process defines capital as the relation of decisional power over the purposes and the organization of production, and it is reproduced recursively. It is for this reason that, through machinery as an automatic system, labour objectified in the machines themselves confronts living labour.7 This opposition is thus the result of what objectified labour and living labour have in common – that is, the loss, in particular capitalist conditions of production, of decisional power on the part of those who perform the “labour in general” (Marx, [1857–1858] 1973, p. 615). In capitalist relations of production, as they are apparent in machines as a system, there is a transformation of the connection between “labour in general” and the needs to which in general labour, as an activity conforming to a purpose, responds. Considering production on a large scale, Marx observes that “the production in enormous mass quantities which is posited with machinery destroys every connection of the product with the direct need of the producer, and hence with direct use value” (Marx, [1857–1858] 1973, pp. 615–616). By highlighting this disconnection, Marx draws attention to what is lost in the capitalist production of commodities: the awareness that the satisfying of needs requires a social activity of recognition and production, which is something very different from the pure and simple act of consuming.8 Automatic systems of machines and “labour in general”: a complex relationship The use of systems of machines – replacing human labour which is already fragmented by the division of labour – increases the productivity of labour and reduces socially necessary labour (Marx, [1857–1858] 1973, p. 620). This is the source of a series of transformations of “labour in general” in its relation with the use of machines. Marx examines these transformations from the point of view (a) of the creation of an overproduction within the capitalist relations of production; (b) of the transformation of “labour in general” as a

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source of wealth of a country; and (c) of the generation of a contradiction between the development of productive forces and the existing relations of production. I shall now briefly discuss these three aspects with reference to Marx’s analysis of them in Grundrisse (Marx, [1857–1858] 1973, pp. 618–632). Regarding the first aspect, the creation of an overproduction, we need to start out from a general consideration. From the point of view of the single capitalist, the increase in the productivity of labour means that, for a given length of the working day and for a given wage, the labour time necessary to pay the workers is reduced. In this way, the relation between surplus labour and necessary labour increases (Marx, [1857–1858] 1973, p. 620). Since, according to Marx, within the logic of the capitalist system of production machines are used with the aim of increasing this relation, capitalism itself works unintentionally in the direction of reducing to a minimum the expenditure of energy in human labour. In itself, this reduction is positive in that it is a condition favourable to the development of emancipated labour (Marx, [1857–1858] 1973, p. 620). In capitalist conditions of production, however, given the working day and the real wages, this tendency implies another one, that of a structural tendency towards overproduction. In fact, whether the increase in the productivity of labour is reflected in a reduction of workers employed or whether it becomes an increase in the product with the same number of workers employed, the result would be an increase in the relative surplus labour and in the surplus product without a necessary increase in sources of demand for the economy as a whole. The increase in the relative surplus labour could be put to use in accumulation. However, if the purpose of the use of machines is to increase the relative surplus labour, the saving of socially necessary labour will affect the whole economy and, with the same length of the working day and the same real wage, will be reflected in an overproduction for the whole economy. Turning now to the second aspect, the transformation of “labour in general” as a source of wealth of a country, Marx uses as a reference the development of modern industry to argue that, with the increase in productivity of labour ensuing from the use of machines, the creation of real wealth “comes to depend less on labour time and on amount of labour employed than on the power of the agencies set in motion during labour time, whose ‘powerful effectiveness’ … depends … on the general state of science and on the progress of technology, or the application of this science to production” (Marx, [1857–1858] 1973, p. 624). It is the production process as a system that becomes dominant, and this brings about a qualitative and quantitative transformation in the relation between “labour in general” and the production of wealth: quantitative in the disproportion between labour time used directly and the amount of product obtained, and qualitative in the disproportion between “labour, reduced to a pure abstraction, and the power of the production process it superintends” (Marx, [1857–1858] 1973, p. 624).

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The essential point in this analysis of Marx concerns the qualitative transformation of “labour in general” in its relation to the means of production (the technology) that “labour in general” itself produces. In this transformation, Marx says, “the great foundation-stone of production and of wealth” becomes the social individual and its capacity of “understanding … nature and his mastery over it by virtue of his presence as a social body” (Marx, [1857–1858] 1973, p. 624). These last observations of Marx lead to the third aspect mentioned above, the generation of a contradiction between the development of the forces of production and the existing production relations. I will once again refer to the pages of Grundrisse devoted to machines and, in particular, to an observation made by Marx in which he considers the effects of the creation of disposable time (nonworking time) ensuing from the generalized use of systems of machines (Marx, [1857–1858] 1973, pp. 627–628). In the capitalist system of production, disposable time appears as free time for some. At the same time, however, the production of disposable time is accelerated by the very purpose of production and of the use of machines: the generation of value as an end in itself and not the production of use values. From this premise, Marx highlights a deep contradiction in the way the capitalist system operates. In order to achieve maximum labour productivity, it tries to reduce “to a diminishing minimum” the working time for society as a whole, thereby creating, despite itself, the conditions for an increase in the disposable time. At the same time, however, the success of this attempt creates the conditions for overproduction (Marx, [1857–1858] 1973, p. 627). In the development of this contradiction, Marx sees the evident sign that the development of productive power, when it is fully deployed, calls for disposable time to be shared by all those who contribute to wealth creation (Marx, [1857– 1858] 1973, pp. 627–628). In the perspective indicated by Marx in his analysis of the transformations of labour, “labour in general” transformed by itself through the means of production realized, creates disposable time and with it new potential. Under these conditions, to put labour time as a measure of wealth, as happens in capitalist conditions of production, implies ultimately to dictate that all the time of an individual is labour time and to base wealth on unjustified conditions of necessity and scarcity. The individual himself is thus degraded to a mere worker and “subsumed under labour.” It is the capitalist use of machines that brings out, in all its contradiction, the paradox according to which machines, which should alleviate labour and allow the worker to work less, force “the worker to work longer than the savage does, or than he himself did with the simplest, crudest tools” (Marx, [1857–1858] 1973, p. 628). On the contrary, as Marx affirms citing an anonymous pamphlet, a society can call itself truly wealthy when the working day is 6 rather than 12 hours.9

Conclusion Ricardo brings to light a problem inherent in the capitalist economic system: mechanization can involve a non-transitory increase in unemployment. There

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do not exist permanent forces that allow a reabsorption of workers forced out by machines. The fact that this can happen depends on circumstances that are not governed by necessary conditions. By identifying savings and investments and assuming, with Smith, that the demand for non-necessaries is substantially unlimited – and with it investment opportunities – Ricardo accepted Say’s law and denied the possibility of overproduction crises. His conclusion about the possibility of an increase of unemployment as a result of the introduction of labour-saving machines derives from a theory of income distribution that determines wages regardless of labour supply and demand. Within this framework, Ricardo acknowledges that the introduction of labour-saving machines can generate unemployment, but he does not even consider the possibility of overproduction: with new machines, real profits will increase,10 but they will still be fully spent. This, while excluding the possibility of a “general glut of the market,” does not in itself guarantee a reabsorption of the labour expelled by mechanization. In fact, on the one hand, employment growth is in a decreasing ratio to the accumulation of capital and, on the other, the possibility that employment increases with the increase in capitalist consumption depends on how the uninvested profits are spent. However, these spending modalities are not governed by general laws. Acceptance of Say’s law weakens Ricardo’s conclusions. At the end of the chapter on machinery, he considers the possibility that greater savings and new accumulations connected with the extension of the use of machines may lead to an increase in gross income in such a way as to restore the demand for labour (Ricardo, [1821] 1951, p. 396). The strength of Marx’s analysis lies in two elements. The first is that he considers “labour in general” as a human activity as such 11 and takes the capitalist production of commodities as the problem. This is what allows Marx, unlike Ricardo, to identify the inversion between means and ends in the capitalist production of commodities as the historically determined form of production (Vianello, 1986, p. 152). The second element is his method of analysis based on determined abstractions. The notion of “labour in general” thus emerges from certain historical conditions and in this has its validity as a unit of analysis in certain social conditions that labour itself contributes to transforming. In fact, labour, as the abstract capacity to design and produce conforming to a purpose, transforms the external conditions within which humans operate in mutual relations. These two elements converge to concentrate the attention on the changes of purpose of “labour in general” in historically determined conditions. In this way, the separation of the producers (the workers) from the conditions of the realization of their labour that Marx speaks of, requires, and determines at the same time, a general change in the purpose of production: from the satisfying of socially recognized needs, through activity intentionally oriented to this end, to profit in itself, through the use of labour time that, like its results (the products), no longer belongs to the producers. The separation between labour and the ownership of the means of production thus

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presupposes a loss of power over the purposes of production and over the very process of the identification of needs. This loss of power is the more general condition of capitalist relations of production, much more than the fact of being the owners (or not) of the means of production is. The capitalist use of the automatic system of machines examined by Marx and its paradoxical results – such as the tendency to overproduction linked to increases in relative surplus labour in the presence of unmet needs and the failure to translate the enormous potential of freeing up disposable time into opportunity for all – derive precisely from the change in purpose of the use of labour and from the inversion between means and ends recalled above.12 Far from the adaptive framework of the neoclassical paradigm, in his analysis of the capitalist use of machines Marx provides a complex framework of analysis for how a socio-economic system transforms itself as a result of two changes: the first derives from “labour in general” as human activity as such, with the peculiar characteristic of being a creative and transforming social activity; the second arises from changes in the purposes for which such activity is provided. Labour as a social, creative activity produces, directly and indirectly, new artefacts, including new machines, and this transforms the relationship between humans and between humans and the external conditions in which they act. Modalities and social consequences of these changes depend not only on “labour in general,” but on how the social purposes of its use are transformed. Whether automation has a beneficial effect on society as a whole depends on the social purposes for which it is used. Reflecting on the effects of automation, Leontief (1983, p. 6) observed that adjustments in the price of goods and factors would not be sufficient to solve the employment problem and suggested that “the problem of technological unemployment is likely to be solved by an appropriate combination of labor sharing and income policies.” The re-reading of Ricardo and Marx proposed in these pages suggests that “labour sharing and income policies” – as well as the realization of what Keynes in 1930 believed technology would allow – require institutions that promote public discussion and they require consensus on the social purposes of policies that help to avoid the paradox that the potential of technology translates into overproduction or not making available to society as a whole the time that the reduced need for working hours makes available.

Acknowledgements I would like to acknowledge Cristina Marcuzzo, Antonella Palumbo, Margherita Russo and Paola Villa for their helpful comments and suggestions.

Notes 1 Acemoglu and Restrepo (2019, p. 206). The authors consider as an “additional issue” the possibility that the increase in real income triggered by productivity growth will be concentrated in the hands of a small segment of the population with

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a low propensity to consume. This distributional impact could slow down the creation of new tasks. See Eatwell et al. (1990) and the literature cited therein for the debate on the neoclassical capital theory critique. On Ricardo’s chapter “On Machinery” and for the “Ricardo effect,” see, for example, Gehrke (2003), Kurz (2010), Freni and Salvadori (2016) and the literature cited therein. On Marx as a scholar of technology, see, for example, Braverman (1974), Rosenberg (1976), MacKenzie (1984), Adler (1990) and the literature cited therein. On Marx’s critique of political economy, see, for example, Lippi (1979), Garegnani (1984), Vianello (1986), Pivetti (2015) and the literature cited therein. For the renewed interest about Marx’s thought, and about Grundrisse in particular, see, for example, Musto (2008). I refer here to the conclusions reached by Gehrke (2003) on the discussion about the so-called “Ricardo effect.” On this, Ricardo ([1821] 1951, pp. 395–396) acknowledges his debt to an essay by John Barton (“Observations on the Circumstances Which Influence the Condition of the Labouring Classes of Society,” London: Arch, 1817) also praised by Marx ([1861–1863] 1968, pp. 575–581). In order to grasp the meaning of determined abstractions, it should be borne in mind that Marx believed that, in order to understand the historical specificities of each form of society, and of the categories corresponding to them, it was necessary to start from the most developed and complex form of society. It is therefore from capitalist society that we must start in order to shed light on the formations and social organizations that preceded it. With this method, it is possible to identify common traits, relatively abstract from specific characteristics, without losing sight of social reality as such, that is, as an entity independent from the observer. On this basis, it is possible to grasp the historical differences with respect to other forms of society and categories historically determined. The method followed by Hegel (and the economists), Marx maintains, is instead that of generic abstractions through which it is claimed to fix in thought characteristics valid for all forms of society. In this way, we end up making the present society universally valid (and immutable). It is not possible to go into more detail here about the difference between determined and generic abstractions and about the methodological implications of this distinction. I refer the reader directly to the “Introduction” of 1857 (Marx, [1857] 1904) and to the Grundrisse (Marx, [1857–1858] 1973, Introduction, Section 3). For a reflection on these themes, see Ginzburg (2015). In Marx’s critical analysis, objectified labour is labour done in the past that finds expression in the results that it produced. In the capitalist conditions of production, objectified labour is labour separated from its own conditions of realization and finds expression in the form of means of production transformed into capital. It is therefore in the capitalist conditions of production that objectified labour, in the form of machines, opposes living labour, labour performed in present time but equally separated (in the capitalist conditions of production) from its own conditions of realization. Although this aspect is not systematically discussed by Marx, it is important in order to define and understand the notion of “labour in general.” On this aspect, see Lukács (1975). Marx ([1857–1858] 1973, p. 625) refers to the anonymous pamphlet entitled The Source and Remedy of the National Difficulties, Deduced from Principles of Political Economy, in a Letter to Lord John Russell (1821). Whether this happens with or without a change in the profit rate depends on how the new technique changes the conditions of production of wage goods. The notion of human activity as such, understood as social praxis able to selftransform the relationships between men and the objective conditions within which

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they act, has been clearly indicated by Marx in his Thesis on Feuerbach (Marx, [1845] 1969). 12 It is from this perspective that Marx criticizes Ricardo’s “apologetic” idea that workers expelled by machines should find employment as “menial servants.” Marx observes ironically: “This progressive transformation of a section of the workers into servants is a fine prospect” (Marx, [1861–1863] 1968, p. 571).

References Acemoglu, D. and Restrepo, P. (2019). Artificial intelligence, automation and work. In A. Agrawal, J. Gans and A. Goldfarb (eds), The Economics of Artificial Intelligence: An Agenda. Chicago: University of Chicago Press, 197–236. Adler, P.S. (1990). Marx, machines, and skill. Technology and Culture, 31(4), 780–812. Autor, D.H. (2015). Paradox of abundance: automation anxiety returns. In S. Rangan (ed.), Performance and Prosperity: Essays on Capitalism, Business, and Society. Oxford: Oxford University Press, 237–260. Autor, D. and Dorn, D. (2013). The growth of low-skill service jobs and the polarization of the US labor market. American Economic Review, 103(5), 1553–1597. Berg, M. (1980). The Machinery Question and the Making of Political Economy 1815–1848. Cambridge: Cambridge University Press. Braverman, H. (1974). Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century. New York: New York University Press. Brynjolfsson, E. and McAfee, A. (2014). The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. New York: W.W. Norton & Company. Eatwell, J., Milgate, M. and Newman, P. (eds) (1990). Capital Theory. London: Macmillan. Freni, G. and Salvadori, N. (2016). Ricardo on machinery: a textual analysis. MPRA Paper, no. 73427. Munich: Munich University Library. Frey, C.B. and Osborne, M.A. (2013). The future of employment: how susceptible are jobs to computerisation? Oxford Martin School Working Paper, September. Oxford: University of Oxford. https://www.oxfordmartin.ox.ac.uk/downloads/academic/ future-of-employment.pdf [accessed 3 July 2019]. Garegnani, P. (1984). Value and distribution in the classical economists and Marx. Oxford Economics Papers, 36(2), 291–325. Gehrke, C. (2003). The Ricardo effect: its meaning and validity. Economica, 70(277), 143–158. Ginzburg A. (2015). Sraffa and social analysis: some methodological aspects. Situations: Project of the Radical Imagination, 6(1/2), 151–185. Keynes, J.M. ([1930] 1932). Economic possibilities for our grandchildren. In Essays in Persuasion. New York: Harcourt Brace, 358–373. Kurz, H.D. (2010). Technical progress, capital accumulation and income distribution in classical economics: Adam Smith, David Ricardo and Karl Marx. European Journal of the History of Economic Thought, 17(5), 1183–1222. Leontief, W. (1983). National perspective: the definition of the problems and opportunities in the long-term impact of technology on employment and unemployment. National Academy of Engineering Symposium, 30 June. Washington, DC: National Academy Press, 3–7. Lippi, M. (1979). Value and Naturalism in Marx. London: NLB. Lukács, G. (1975). The ontological bases of thought and action. Philosophical Forum, 7(1), 22–37.

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MacKenzie, D. (1984). Marx and the machine. Technology and Culture, 25(3), 473–502. Marx, K. ([1845] 1969). Theses on Feuerbach. In K. Marx and F. Engels, Selected Works, Vol. I. Moscow: Progress Publishers, 13–15. Marx, K. ([1857] 1904). Introduction to the Critique of Political Economy. Appendix in K. Marx, A Contribution to the Critique of Political Economy. Chicago: Charles H. Kerr & Co., 265–312. Marx, K. ([1857–1858] 1973). Grundrisse: Foundations of the Critique of Political Economy. London: Penguin Books. Marx, K. ([1861–1863] 1968). Theories of Surplus-Value, Part II. Moscow: Progress Publishers. Marx, K. ([1890] 1990). Capital: A Critique of Political Economy, Vol. I. London: Penguin Books. McKinsey Global Institute (2017). A Future That Works: Automation, Employment, and Productivity. San Francisco: McKinsey Global Institute. Montani, G. (1985). The theory of compensation: a case of alternative economic paradigms. Political Economy: Studies in the Surplus Approach, 1(1), 109–137. Musto, M. (ed.) (2008). Karl Marx’s Grundrisse: Foundations of the Critique of Political Economy 150 Years Later. London: Routledge. Pivetti, M. (2015). Marx and the development of critical political economy. Review of Political Economy, 27(2), 134–153. Ricardo, D. ([1821] 1951). The Works and Correspondence of David Ricardo, Vol. I: On the Principles of Political Economy and Taxation, 3rd ed. Edited by P. Sraffa. Cambridge: Cambridge University Press. Rosenberg, N. (1976). Marx as a student of technology. Monthly Review, 28(3), 56–77. Schumpeter, J.A. (1954). History of Economic Analysis. London: George Allen & Unwin. Vianello, F. (1986). La critica dell’economia politica: ieri e oggi. In C. Mancina (ed.), Marx e il mondo contemporaneo, Vol. 1. Rome: Editori Riuniti, 145–171. Wicksell, K. ([1926] 1934). Lectures on Political Economy. London: Routledge.

12 Working conditions and quality of work in the digitized factory Dario Fontana, Sergio Paba and Giovanni Solinas

Introduction The recent debate on the Fourth Industrial Revolution (4IR, i.e., “Industry 4.0”) focuses mainly on the issues of the substitution of human labour with that of robots, the disappearance of old jobs and the emergence of new ones. The impact on workers’ conditions and the quality of work within the production plant are much less explored and often only in an indirect way. The following quotations represent two opposite views on the effects of technological change on human work: [T]he first industrial revolution, the revolution of the “dark satanic mills,” was the devaluation of the human arm by the competition of machinery. … The modern industrial revolution is similarly bound to devalue the human brain (Wiener, 1948, pp. 37–38). Digital technologies are doing for human brainpower what the steam engine and related technologies did for human muscle power during the Industrial Revolution. They’re allowing us to overcome many limitations rapidly and to open up new frontiers with unprecedented speed (McAfee, 2015, p. 68). Wiener’s pessimistic vision well represents a recurring argument about the negative effects of technological change. However, this view seems to have been disproven by many descriptions of the digitized factory of the future, which emphasize a profound change in the organization of work that entails a clear improvement in the quality of work and conditions of workers (see, for example, IEC, 2015; Lorenz et al., 2015; Hirsch-Kreinsen, 2016; IFR, 2018). It is widely accepted that robots and cyber-physical systems will soon make obsolete several tiring, repetitive and harmful tasks and jobs. Many argue that knowledge-intensive activities will be increasingly important in the factory of the future. From this point of view, and to some extent, technology promises to mitigate the conflicts between company management and workers that have marked much of the history of the last century. This at least is what the future holds for us. The processes of technological transformation and the

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spread of 4.0 technologies have already begun, albeit with different intensities between countries and regions. Although these processes are not yet complete, it is worth pausing to ask if what is promised is actually being achieved in reality. Therefore, the optimistic vision of McAfee should be confirmed by a careful analysis of the companies that are currently embracing the Fourth Industrial Revolution. This chapter represents a contribution in this direction. After discussing some general and controversial aspects of the Fourth Industrial Revolution, we will present a stylized model of a 4.0 production plant inspired by several visits to a sample of highly automated manufacturing companies located in the province of Modena (in the Emilia-Romagna region, one of the most industrialized and innovative regions of Italy). This stylized model will be used as a tool for organizing our thoughts. In particular, what we intend to do in the following pages is to critically discuss the idea, often taken for granted in the existing literature, that the quality and conditions of work in the digitized factory are clearly better than those present in factories not yet affected by the Fourth Industrial Revolution.

Labour costs, bargaining and new machines The discussion on the Fourth Industrial Revolution is basically focused on the issue of labour-replacing technologies and the consequent reduction in manufacturing employment. Many studies try to estimate the impact of new technologies on employment, with often conflicting results that basically depend on the emphasis given to three different effects: complete replacement of the job; task fragmentation and replacement of specific tasks; and the emergence of new tasks and jobs (Frey and Osborne, 2013; Graetz and Michaels, 2015; Arntz et al., 2016; Gregory et al., 2016; Acemoglu and Restrepo, 2017; Paba and Solinas, 2018; WEF, 2018). However, many other aspects not strictly related to the issue of job substitution remain largely unexplored or only partially addressed. Among these, one of the most important is related to the way in which new technologies and machines are introduced into the workshop. These processes do not follow a deterministic path, but are influenced by different socio-economic and institutional variables. Entirely similar companies in terms of product and market orientations can apply completely different technologies. In the choice of new and more efficient machinery at the plant level, with equal production needs and investment capacity of the individual firms, two other variables play a crucial role. These are the relative cost of labour and capital (machinery) and the bargaining power between workers and management. Agriculture is the most striking example of the lack of technological replacement of routine and strenuous tasks. In Italy, for example, the labour costs of migrant labourers is so low that it is not profitable to replace them with harvesting machinery, although the latter are a common agricultural

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technology in many regions of the world. The opposite case is represented by bank employees, who are desk workers performing more complex jobs and are much better paid than agriculture farmhands. In this sector, technological replacement has been producing thousands of redundancies. To some extent, a similar reasoning can be extended to the evaluation of investment in other sectors or in specific production departments. In Italy, for example, the process of technological substitution could be held back by the low cost of labour represented by the now 20-year long low wage growth. Where work has high costs, the replacement process could be stronger. Second, technological innovation can be the object of negotiation at the plant level. This belies a too deterministic interpretation of technological development and underlines the importance of the balance of power within the company. Which are the parts of the production process to be replaced and automated? What are the decision criteria? Who decides? Unfortunately, it is common to witness a total delegation to the management of these important decision-making processes. Bargaining at the firm level can affect both the timing and the specific parts of the production process to be innovated. A common example is the agreement between workers and management to give priority to the less healthy processes in terms of occupational diseases, in particular musculoskeletal disorders. This is a reasonable choice. However, in order to be effective in the bargaining process, the unions must have the ability to control the risk assessment assigned to each individual workstation. For example, in Italy, according to the law (81/2008), the risk assessment is delegated to the company and the right to oversee this is accorded only to the employee representative for safety (rappresentante dei lavoratori per la sicurezza, RLS). It is therefore clear that the lack of technical skills of the RLS – an unfortunately widespread situation – actually puts at risk the exercise of any real bargaining power. In these circumstances, management might have an incentive to submit an incorrect risk assessment, in order to achieve its own goal and relegate the real need for workers’ well-being to a secondary status. To sum up, the process of technological substitution is not always linear, and in several cases it cannot be justified by purely technological requirements.

A stylized model of a 4.0 production plant For a better understanding of the effects on work of the technological transformations associated with the Fourth Industrial Revolution, it is necessary to look more closely at the organization of the digital factory. For this reason, we present a stylized model of a 4.0 production plant based on the observation of some companies with a high rate of technological innovation in Emilia-Romagna. This model of plant cannot be traced back to a precisely identified reality and has no sectoral specificity. The plant belongs to a large group. It supplies all the branches of the group with a basic component. Even with some variations, aimed at satisfying the

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commercial standards of different countries, the production series are very long. The factory is essential, but shiny; there is “not a speck of dust.” Most of the lines are automated (except the preparation of raw materials) according to the principle of continuous flow manufacturing for all 24 hours. All lines are customized and made ad hoc on the basis of the company’s needs and in close collaboration with mainly local suppliers. Excluding managers and administrative staff and focusing only on production, the following four occupational categories can be identified. These are ranked according to occupational hierarchy, from the lowest to the highest role, without taking into account seniority and professional levels. 1. The production line worker/machine operator. This is the quantitatively most populous category. His/her basic role is to feed, load and unload the machine. This is a largely fungible worker, and the training period for the required task is negligible. This group of workers includes outgoing senior staff, formerly employed in non-automated lines, and young employees provided by external employment agencies. The former have permanent contracts, the latter may also have temporary contracts. 2. The shop technician. He/she sets up, operates and is responsible for the equipment. He/she has access to the control panel and can make some adjustments on the machine. This is the first “sensor” of malfunctions and non-conformity of the product. These technicians have a higher education than the previous group of workers and are usually trained on the job for several months. To some extent, this is the central figure in the everyday functioning of the line. This position gives access to a structured internal market for the provision of benefits, career advancement, and rewards if objectives are achieved, all according to formalized procedures with precise methods and timing. 3. Production line/shift supervisor. This role is the end point of the career of the previous category. It has the same characteristics but at a higher level of knowledge and training. He/she supervises the different production lines and represents the central figure in assuring good performance and compliance with tolerances. He/she is responsible for the monitoring of the machines and control planning, and can perform some maintenance tasks on the machines. 4. The engineer. At the top of the structure, there is a small group of workers whom we call “engineers” for simplicity’s sake. This category includes mechanical, information technology (IT), and management engineers, but also chemists, material experts, etc. They usually work in the factory during standard office hours but are available at other times. The careers of these workers are different from the careers of those previously described, in as much as they have completed at least one tertiary education cycle and many of them have accumulated experience through mobility among different firms. They are part of the company management or are in close contact with it. They contribute to the definition of some strategic choices, whether regarding the product, the company’s internal organization or other areas.

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In the factory of our representative firm, the production lines are fully integrated with the material and finished product warehouses, allowing full traceability for each of the units produced, and they provide and receive the information necessary to organize the planned production batches. Finally, they provide the basic references for delivery and shipping. The management of information flows and their integration with the production processes place this type of factory at the top of the automation plants of the EmiliaRomagna region. It would probably qualify for a high position in some “readiness” rankings for Industry 4.0 (SEDB, 2017). It is considered, in all respects, an Industry 4.0 production plant. One can allow some variations in the model of plant described above without any significant loss in the general picture. For example, the product may not be a component, production may not be a continuous flow process, workers and robots can work together side by side in the lines, there may be different mixes of manual work and latest-generation management technologies, processing can take place in a controlled environment (temperature and/ or air quality), and there may be important differences in the composition of the workforce (by gender, age, presence of ethnic minorities, etc.). This production organization model is just an example. Many other solutions are possible – for example, different organizations of work characterize batch production, firms producing only prototypes, firms on the border between manufacturing and services that develop machine control software, and platforms that manage processes in an integrated way. By the same token, logistics hubs such as Amazon’s or logistics departments using digital-type voice control systems (e.g., Cortana-Microsoft) to guide operators in the correct handling of merchandise are clearly not related to this model. However, the plant described above is probably the most representative and widespread model of process automation in the Emilia-Romagna region. It is important to emphasize that this model is still very far from the fully robotized factory but, at the other extreme, also very far from the traditional factory organization, even when it has some automated workstations and work systems, which undoubtedly remains the most common set-up. In Emilia-Romagna, when reference is made to series productions with a high level of automation and integration of processes and information flows, we have in mind a reality that can be traced back to the one just outlined.

Taylorism and Industry 4.0: standardization and low qualification of work can easily co-exist with digitalization Some of the literature on the digital revolution and the reports continuously provided by media give the impression that Industry 4.0 is the domain of high technology, creativity, flexibility and imagination. The Panglossian world described by Asimov, where all the bad things are left to robots, does not really seem to materialize.

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With regard to manufacturing, process industrialization remains the most convenient solution for time and costs even in advanced industrial areas such as Emilia-Romagna. The standardization of work practices, as illustrated by the description of the processes proposed earlier, is far from disappearing. In line with one of the typical principles of lean production, Industry 4.0 technological innovation seems to follow a process of simplification of work operations. The reduction of complexity does not, however, always correspond to the reduction of the tasks carried out by the individual worker, which indeed not infrequently increases. Individual machines continue to be poka-yoke (Japanese for “error-proof” or “foolproof”), just as prescribed in the Toyotist factory. In other words, the man–machine interaction becomes increasingly “easy,” and the raw materials and semi-finished products are less and less handled by the worker. The Taylorist logic of the prescription of tasks emerges in the digitized evolution of old practices. Many man–machine operations, which are highly standardized or of a persisting simplicity, are prescribed in the checklist or are the result of a limited set of choices. There seems to be little difference between the work organization and the checklists described many years ago by Bright (1958) and Coriat (1979) in discussing the transition to mass production and those used in our sample of so-called “Industry 4.0 companies.” For machine operators, there is no increase in process control. Skilled workers and technicians certainly enjoy greater autonomy. However, even for the latter, in some cases the discretionary power of intervention has been reduced as compared to the past. With the new machine tools, the knowledge of workers is mainly dedicated to the setting up of the equipment in order to create stable processes for longer and longer cycles. The remaining time is devoted to the control and monitoring of multiple machines. Even desk jobs and, in some cases, even highskilled jobs (e.g., developer engineers), seem to be affected by the process of standardization and fragmentation caused by software homogenization. The activity of quality control is often rhetorically seen as an emancipating factor for the worker, but in fact it is increasingly delegated to the “infallibility” of the machine. The worker can only carry out a generic control of the quality of the product, while complex control operations are always delegated to separate figures – the technicians and engineers of the initial example – or to specific technical services, when not assigned directly to machine manufacturers like in the case of more complex and specific parts. Another element characterizing standardization is the presence of different forms of temporary workers, with a high turnover (e.g., temporary agency workers, contract workers, etc.). The employment of temporary labour in Italy is facilitated by the growing process of de-regulation of the Italian labour market that affects all the sectors of the economy. However, what should be stressed here is a clear correlation between the use of temporary workers, or workers with little or no experience in manufacturing, and the simplification/ standardization of production processes. From this point of view, precarious and low-skilled work can easily co-exist with the digitalization of production

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processes. The employment of these workers requires the application of simple and easily understandable procedures. In most cases, on-the-job training takes place in a shorter time frame compared to the past, which is measurable in days or, at most, a couple of weeks. The possibility of “real” training is excluded. In consequence, the cognitive complexity of the entire organization of work is downgraded. In fact, the growth of skills caused by the adoption of new digital technologies seems to benefit only the professional figures responsible for the management and control of work processes. Once again, the benefit is not for everyone. This result seems consistent with the literature on human resource management (see, for example, Lazear and Gibbs, 2014).

Maintenance, control, and instruction of machines As seen above, line workers cannot solve complex problems related to machine malfunctioning or breakdown. These operations are delegated to specialized maintenance technicians. The complexity of new technologies, both in terms of hardware and software, poses new professional challenges to these workers and is partly addressed with internal training. However, there is an increasing recourse to the services offered by the producers and installers of equipment, and this leads to reduction in the knowledge and understanding of the complexity of production processes not only of the maintenance technicians but also of the user firm itself. The instruction of the machine is perhaps the focal point for understanding the organization of production processes and the hierarchical structure related to it. Who decides which functions (and therefore what effects) the machine or software algorithm must have? Most authors emphasize the importance of employee involvement and participation (sometimes forgetting that the “consensus” of workers is often obtained in less noble ways). In a phase of progressive weakening in the role of trade-union bargaining, the organizational choices risk turning towards a unidirectional trajectory, restoring a Taylorist perspective. If standardization re-emerges with new forms, corporate control over workers also changes its appearance but does not completely disappear. The needs of corporate management influence the choice of new digital technologies, and, in relation to these, new practices and tools for controlling the workers are developed. The news has reported on the conditions of strong control of Amazon’s workers or “riders” working through platforms for other companies, but there are also cases that are no longer futuristic, such as the inclusion of microchips in the body or the geolocation of the worker. There are numerous examples of digital tools with worrying implications, such as voice control systems or the insertion of the workers’ identification number in the machine software so as to continually profile team performance, or even the experimentation of a corporate smartwatch whose use still seems shrouded in mystery but which is supposed to be able to track the vital functions of individual workers.

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Following the example of user profiling, which has now become the core business of internet tech giants, the digitalization of work allows the easy construction of databases on machine and worker performance. Therefore, the ever-present need to rationalize the production process and control the workers, which has often accompanied the technological innovation cycles, is now revived in a new form. From this point of view, it does not seem excessive to speak of “digital Taylorism” (Brown and Lauder, 2013) or of “hyper-Fordism.” As Cominu (2018) also notes, digitalized work is mostly described for its positive aspects of worker empowerment, cognitive growth and autonomy, a step towards the de-verticalization of decision-making processes and more participative organizations. All these are not new topics, and they have always figured in the discussion on work organization. The point is that it does not seem that these goals are being achieved. On the contrary, the prevailing logic is that of adapting the social system to the needs of the technical system. In this context, the participation of workers in the choices of technological change is substantially limited. They are asked to passively adapt, instead of contributing, at least in part, to the control of the production system (see Gaddi et al., 2018).

Training and skill development It is often taken for granted that digitalization increases the quality and skills of workers. Such statements, however, are not always supported by evidence. First of all, we must distinguish between training and skill development, which are often used as synonyms. Many tasks and jobs now require merely short-term training, so the need for professional development – accumulation of skills and cognitive ability – is increasingly reduced. This is not to say that the need for labour complexity is disappearing. The point is that the number of workers potentially interested seems to be increasingly reduced, in line with Braverman’s (1974) old idea of the degrading impact of machines within the organizational processes of work. Nor would we suggest that training is a useless tool, but we need to ask ourselves where to address it. The use of new automated and digital technologies can be seen as a vehicle of “liberation” from merely productive and repetitive operations, which can leave room for the development of skills aimed at understanding the entire production process – in the sense of increasing the power of control of the worker – such as to share the prerogatives hitherto reserved only to company managers. However, in the organizational model described at the outset, professional development and even the training of line workers play a very limited role, unlike in the case of technicians and engineers. From this point of view, the 4.0 automated factory can have a much more hierarchical structure compared to pre-existing organizations. Depending on the job grades/professional levels taken into consideration, both McAfee’s

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optimistic approach and Wiener’s pessimistic approach – illustrated in the two quotes presented in the opening of this chapter – may be justified.

Work intensity and health The standardization and simplification of human–machine interaction has led to an increase in the number of machines that each worker must follow. The increase in work intensity is a central aspect of the new forms of work organization, but in the general discussion between social scientists and, in particular, among economists, this plays a marginal role. In this regard, some studies on the impact of the new production technologies on work conditions provide some worrying data. An example is the recent European Working Conditions Survey (European Foundation for the Improvement of Living and Working Conditions, 2017). This survey shows that from 1991 to 2015 work intensity in Europe clearly increased. For example, from 35% to 50% of workers declare working at a high speed for at least half of their working time. Similar results are obtained for those working to tight deadlines. This data alone are sufficient to refute the deterministic view of a necessarily positive correlation between technological development and quality of work. In the last decade, moreover, work-related pathologies have increased and changed. Today, musculoskeletal disorders and stress are the main pathologies related to the new methods of production. At the European level, these disorders cover about 60% of occupational diseases (Eurostat, 2010), and in the last 20 years there has been an important acceleration in the number of cases. In France, for example, according to the Institut National de Recherche et de Sécurité (INRS), from 1992 to 2012 the incidence of these pathologies has increased more than ten-fold (cited in Eurostat, 2010). The changes in work-related pathologies reflect the changes in the relationship between person and machine within the general framework of increasing work intensity. In fact, these pathologies stem from the unsustainability of the production process, which is mainly due to the increase in the pace of work and in workloads combined with the lack of autonomy and control (Punnett, 2014; Roquelaure, 2015). The responsibility for these conditions must mainly be attributed to managerial responsibilities in terms of work organization and not to the development of technology in itself. It is now clear that new technologies have reduced process times while at the same time favouring greater health and safety in the workplace. However, the constant increase in labour intensity has almost reached the limit of human physiological capacity, not in the sense of classical physical fatigue but of the worker’s osteo-muscular and mental endurance. To some extent, this historical trend concerns the firms that are now adopting Industry 4.0 technologies, foreshadowing a future that looks anything but promising for the workers. In this context, the analysis of workers’

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health conditions becomes an important indicator of the quality of managerial choices in the application of new technological systems. There is now greater awareness of the fact that workplace risks are increasingly inherent in decision-making processes related to work organization. As a result, in recent years new risk assessment methods have been developed that give a more accurate idea of workers’ conditions in new production systems. These methods incorporate dimensions of analysis related not only to postural ergonomics but also to workloads, pace of work, control, and autonomy of the worker (Karasek and Theorell, 1990; Colombini and Occhipinti, 2014). A greater integration between risk assessment techniques, epidemiology and sociology can therefore provide new tools and a new perspective for the study of Industry 4.0 technologies and the related organization of work. If used directly by the workers, these evaluation techniques can become important tools in the negotiation process.

Conclusion The politico-institutional genesis of the debate on Industry 4.0 is currently conditioning research, in particular that of economists, on a predominantly macro-oriented and forecasting-oriented terrain. In many cases, this generates futuristic and controversial scenarios that turn out to be poorly founded on methodological grounds and with little empirical evidence. The most obvious example concerns many estimates on the probability of the technological substitution of specific professional categories. These estimates are often based on a static and schematic view of both the professions and the skills associated with them. This distorted perspective is complicated by two additional elements. The first is an interpretation of the Fourth Industrial Revolution, and of the families of technologies related to it, as a radical change, a technological leap, with a clear boundary between a before and an after. A consequence of this approach is the underestimation of the procedural aspects of the innovative process, which neglects the importance of the socio-economic context in which these ongoing transformations occur, enabling reconstructions and narratives of a strongly ideological nature (Shiller, 2017). The second element, typical of a deterministic approach, is the idea that the adoption of a technology, given scientific knowledge, follows a largely specific and predictable path. The alleged objectivity of technological change is therefore used, in cascade, as the main – if not the only – perspective for understanding the development of the firm. Again, social relations, in the factory and out, are essentially irrelevant, and the regulatory mechanisms of work must be adapted, more or less passively, to the domain of technology. The method of investigation that we have adopted, on the contrary, aims to suggest that in choosing the epistemological approach one cannot ignore the context of the material influences of the social relationships in which the processes of technological change are embedded.

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This is emphasized most effectively, albeit from very different theoretical perspectives, by the seminal studies of Landes (1969), Rosenberg (1976) and Noble (1984). The lesson to be drawn from these works is that listening to workers matters a lot. A sound evaluation of the impact of digitalization on workers and in the workplace cannot be separated from the opinions and assessment of the stakeholders, of all the social subjects involved. The survey, especially in a phase of deep and accelerated transformation, is an indispensable investigation tool, not only for the sociologist but also for the economist. This involves following the suggestion of “talking to the people” as a non-occasional method of investigation and research (see Brusco, 1989 and Pugliese, 2008). In these pages, it has been argued that the organizational principles that guide the organizational transformation associated with Industry 4.0 are not new. Turning our gaze to the literature of the last two decades, we can see how 4.0 factories overlap with the ideal typical models of Taylorist-style “lean production.” Some researchers point out that companies are increasingly applying a “lean and mean” model, as proposed by Harrison (1994), to a significant number of workers. This model follows the technical principles of cost reduction and intensification of the pace of work, but does not provide for any involvement and participation on the part of workers, contrary to what is often invoked at the political level (Gaddi et al., 2018; Cipriani et al., 2018). If this is the case, an important conclusion follows. The long debate on post-Fordism in the 1990s had reached an important point: “production intelligence” cannot be held only by technicians and engineers. To increase the quality of production and the work environment, it was argued, some degree of participation and involvement of workers is needed. This applies even to workers in the lower ranks of the occupational scale and of the company hierarchy (Kern and Schumann, 1984; Sabel and Zeitlin, 1985; Womack et al., 1990; Boyer and Freyssenet, 2000). Scholars of Italian industrial districts have reached similar conclusions (see Brusco, 1996). From the evidence we have collected and from the views shared by many scholars, it seems that we are very far from that “participatory regulation” promised by much of the current literature on the Fourth Industrial Revolution. The “human use of human beings,” as envisaged by Wiener (1950), will be the outcome of human choices and not of supposedly technology-driven processes. This work was inspired by the process of technological transformation of a sample of Italian manufacturing firms that are among the most advanced in Emilia-Romagna. Note, however, that these firms are probably still in a transition stage and that many of the promised benefits of automation have not yet fully materialized. To be sure, factory work today is incomparably better than some decades ago. However, from the Ford T to the present day, in mass production, some form of Taylorism has never disappeared: it has re-emerged in Toyotism, in lean production and even in industrial districts. Therefore, it is not surprising that it can be found today also in the digitized factory.

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13 Digital transformation in the automotive supply chain A comparative perspective Margherita Russo

Introduction In recent years, a wide literature on digital transformation in manufacturing and services has grown up.1 Much of this literature has explored the impact on many diverse aspects from long-term changes in labour demand and skills (Frey and Osborne, 2013; Brynjolfsson and McAfee, 2014; Chuah et al., 2018) to the impacts on productivity and growth (Bajgar et al., 2019). A new perspective on the ongoing digital transformation has been prompted by the Organisation for Economic Co-operation and Development (OECD) to highlight specific metrics needed to assess its impact on the economy and society and to support innovation policies. Relevant projects are “Going Digital”2 and “Digital and Open Innovation” (OECD, 2019a).3 Drawing on these contributions, this chapter aims to shed light on the impact of digital transformation on the reorganization and relocation of the various segments of the automotive supply chain. In particular, it will focus on the effects generated by different paces of adoption of digital technologies in this supply chain, with regard to both the various segments and the various sizes of companies, in different countries. The causes of this heterogeneity will be discussed, and the implications for the full impact of the ongoing transformation will be considered in relation to industrial and innovation policy in Europe. These perspectives are essential if we are to foster structural changes in the economy and society which are necessary for European cohesion and growth (Simonazzi et al., 2013). The chapter addresses the issue by reviewing empirical evidence on the automotive supply chain, which includes the most advanced manufacturing and service companies that are now adopting digital technologies (Calvino et al., 2018). Although it has a level of digital intensity greater than in other supply chains, there is no alignment across the many specializations within the supply chain nor is there alignment across countries. The automotive supply chain is essentially a global value chain, but it has regional characteristics for the production of specific types of cars or types of components. Within Europe, Germany has worldlevel key players among car makers – BMW and Audi-Volkswagen Group – with a leading role in the supply chain, which is characterized by strong links with

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manufacturers located in Central and Southern Europe (Simonazzi et al., 2013; Celi et al., 2018), but also in China and Mexico (Amighini and Gorgoni, 2014; Gorgoni et al., 2018). Currently, and increasingly, China is playing a crucial role in the European side of the automotive supply chain. Evidence from case studies in the automotive industry in China, Germany, Italy and Japan will help in identifying the main challenges of digital transformation for European countries, which will involve a strongly interrelated supply chain both within and outside Europe. Beyond its relevance for the adoption of digital technologies, the automotive supply chain is important for its cross-sector interrelations (De Backer and Miroudot, 2012; Russo, 2015; OECD, 2017). I argue that interrelations matter because they mark the pace of changes within the many sub-systems (energy, transport, industry, public administration) of the world’s socio-technical and economic systems. This chapter then presents an outline of what is meant by “digital transformation” and discusses the specific research questions on how digital transformation has brought about changes in the working of production systems. Next, it presents a taxonomy of various sectors’ digital intensity (proposed by Calvino et al., 2018) and discusses the importance of country case studies to explain the wide cross-country variation observed within each sector. The empirical evidence presented will refer to available case studies on the adoption of big data in Japan (Motohashi, 2017) and on Industry 4.0 technologies in Italy (Brancati et al., 2019). These two country case studies will pave the way for a focus, presented in the ensuing section, on differences occurring within the value chains, which I will illustrate with regard to the automotive supply chain in China, Germany, Italy and Japan. I then go on to discuss the results focusing on the changes driven by the production of electric vehicles and by cross-country collaboration. The final section concludes the chapter by pointing out the implications of the ongoing transformations for industrial and innovation policy in Europe.

What is meant by “digital transformation”? The “digital economy” has become a common term used in both political and academic spheres, but there is no universally accepted definition for it. The Internet economy is often used as a synonym for the digital economy, although its scope is narrower. The Internet economy is the transformation of the economy and society brought about by the use of information technologies. These transformations occur in practically all sectors of the economy, since the full range of our economic, social and cultural activities are supported by Internet and related information and communication technologies (ICTs). Digital transformation is a term associated with cross-sector technological changes (Bajgar et al., 2019).4 Most of these changes are summarized with a focus on industry by the label “Industry 4.0,” which has been adopted by governments and by business companies to refer to the development of

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“smart factories” (Wang et al., 2016) involving greater flexibility, large-scale customization, speed and autonomy in production and collection of large amounts of data, and a significant reduction in costs by increasing efficiency and reducing the duration of innovation cycles. According to the German Plattform Industrie 4.0 (the platform responsible for Industry 4.0 in Germany),5 The term Industrie 4.0 stands for the fourth industrial revolution, a new level of organization and control of the entire value creation chain during the life cycle of products. This cycle is oriented toward increasingly individualized customer demands and stretches from the concept, to the order, to development and manufacture, to the delivery of a product to the end user, right up to the recycling process, including the associated services (Sendler, 2018, p. 15). The “4” in the term “Industry 4.0” indicates the Fourth Industrial Revolution (Davies, 2015). The three previous industrial revolutions refer to the changes brought about by hydropower and steam power, electricity, and automation, respectively. The Fourth Industrial Revolution refers to the use of a range of technologies (Liao et al., 2017; Yin et al., 2018): information technologies, digital technologies (e.g. 3D printing, Internet of Things, advanced robotics), new processes (e.g. data-based production, artificial intelligence, synthetic biology) and new materials (e.g. bio- or nanotechnology). In order to analyse digital transformation, it is necessary to shift the attention from the individual manufacturing factory to the entire production system. This implies that the relevant unit of analysis becomes the entire production system in which automation and connectivity in production, sales, transport and logistics, and after-sales occur (Yin et al., 2018). The main technology drivers of the digital transformation are the devices enabling communication between machines, products and people in cyber-physical systems. In such systems, exchanges of matter, energy and information incorporate data flows and calculations into physical environments and processes (e.g. manufacturing processes). This is done via radio frequency identification (RFID), a technology that uses a chip device (the size of a grain of rice) related to the products, or via micro-electromechanical systems (MEMS), a technology of microscopic devices, particularly those with moving parts.6 Through cloud systems, data are transferred to centres that evaluate information and communicate with machines, other products, and people. A new level of synchronization of production processes and monitoring of product data in real time is thus framing the organization and working of production systems from product development to manufacturing and sales. It is expected to have far-reaching consequences on productivity, job design, labour competences and skills, income distribution, wealth and the environment. In this framework, artificial intelligence allows production systems to go further by automatically optimizing them, by predicting machine failures and by simulating new production and product innovations.

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Crucial players in digital transformation are the digital start-ups: they put on the market new products, additional functionalities for existing products, and digital services. They transform existing commercial activities into digital ones (e.g., the adoption of digital technologies increases the affordability of a product or service, or allows the introduction of new functionalities). Other players in the digital transformation are digital platforms: meta-level agents emerging from different economic sectors such as a telco, like Vodafone, which uses its technological infrastructure (Internet connections) to supply new services built on data analytics, or platforms supporting transactions between producers and consumers, like Amazon, or platforms supporting transactions between customers and producers and between producers, like Alipay. Other relevant players are the regulators who orient, enhance and support the pace of digital transformations in their development and adoption. The state-of-play of digital transformation embraces developments and devices that are at the core of the iconography of smart manufacturing in the Industry 4.0 paradigm. This iconography generally conveys a very strong message of connectivity and integration within and outside the factory as key features. Another strong message of both iconography and literature is the disappearance of routine and physical effort in factory manufacturing (Brynjolfsson and McAfee, 2014; Chuah et al., 2018). The dimensions involved in this integration essentially bring together the Internet of Things and the Internet of Services with “smartness” characterizing energy grids, people mobility, logistics in transport of goods, ways in which buildings are built and interact with the environment and with the activities inside, and products. In smart manufacturing, the “digital twin” models the product, or part of it, with regard to the memory of its production process, thus allowing flexible product-driven configuration of production, intelligent automation using robots – collaborating with robots and people – and increasing efficiency of inventory management. A multi-layer structure must be considered in order to analyse smart manufacturing in Industry 4.0. In fact, it is embedded in a multi-layer network of interactions involving several types of agents (located at different levels): service partners; suppliers of raw materials, intermediate goods and services; customers; competitors; investors; and technological providers – but also regulators and media. A number of technologies and devices support these interactions through an array of (smart) manufacturing support services and (smart) operation services: project management, customer relationship management, information rights management, supply chain management, and technology scouting. When one moves from the iconography of connectivity (the essential character of the Fourth Industrial Revolution) to a more analytical framework of connections, the attention has to focus on potential leakages but also on spillovers and complementarities that might emerge within and between companies belonging to the same sector or to different sectors.

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To this end, it is useful to refer to the analytical framework developed by Motohashi (2017) to study the diffusion of big data in manufacturing companies in Japan. First of all, he highlights the main areas of activities: product development, production, sales, and after-sales services. Because the level of vertical and horizontal integration may differ between firms, the activities might be undertaken to a different degree within and outside the company. The generation and use of data in each activity and the exchange of data between activities (as in the case of the development department using data collected in the production process) is a critical feature calling for collaboration within companies’ departments or between companies (suppliers or customers). The management structure adopted in the use of data, the presence or absence of a specialized department to promote the use of big data, and the human resources needed for the use of data in the various departments might all create barriers to the use of data and might hamper the impact of big data on the performance of companies. As shown by Motohashi (2017), there are various types of data that are generated within the company,7 such as computer-aided design data and simulation data (generated by the development of products) or ordering data (generated in the interaction with the after-sales services and after-product activities). Data are generated also in the relationship with customers (operating data and failure data) and with suppliers (manufacturing process data and procurement goods inspection data). Flows of information within the company, between the development department and the production activities (or between a company and its product developer), relate specifically to manufacturing and design requirements and the setting of allowable tolerances. Within production activities, information refers to production customization and process improvements. Information flows between production activities and after-sales services or after-product development characterize traceability, which is relevant for improving company performance. In particular, prediction of failures and potential cost reduction is associated with the information flows between after-sales activities and customers. Information on consumable orders fosters a more effective prediction of demand and management of inventories (of both final products and bought raw materials, intermediate goods and components). All the information flows mentioned above require not only the investment in dedicated machinery, devices and software applications, but also a structure of permissions within and outside the company in order to support effective actions. Although this issue is not new in the organization literature dealing with innovation processes (Lane et al., 1996), it becomes a key feature to be considered when interpreting the different patterns of adoption of digital technologies within a supply chain. In the following two sections, differences in the adoption of digital technologies will be considered with regard to sectors and various supply chains and within the automotive supply chain. The cross-country perspective is limited to the available case studies that present a relatively homogeneous set of information.

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Digital transformation in progress A taxonomy of digital intensity A taxonomy of sectors’ digital intensity has been proposed in the context of the OECD project “Going Digital” (Calvino et al., 2018). The taxonomy is grounded on several dimensions, which are explored in a set of OECD countries for which data were available:8 (a) a technological dimension (measured by the share of ICT tangible and intangible assets – that is, software, investments, share of intermediate purchases of ICT goods and services, stock of robots per hundreds of employees, ICT investment, ICT intermediate consumption, and robots); (b) a human capital dimension (i.e., skills, knowledge) required to embed technology into production (measured by the share of ICT specialists in total employment); and (c) an organizational dimension that looks at changes in the way firms behave on the output market (measured by the share of turnover from online sales). These three dimensions provide input for defining a global index of digital intensity with regard to 36 ISIC Rev.4 sectors. The dimensions and the global index are computed for the periods 2001–2003 and 2013–2015. The results of the comparative analysis using the taxonomy proposed by Calvino et al. (2018) show that, between the two periods, the various sectors show a different degree of positive dynamics, in the various dimensions and in the global index, without a sharp change in the overall ranking (a result due to the different structural characteristics of the various sectors). Another result is, for each dimension, the large dispersion of the indexes among the countries under analysis. Limiting our attention to the cross-sector comparison in manufacturing activities (i.e., to the ISIC Rev.4 codes from 13 to 33),9 with regard to the global index of digital intensity computed on 12 countries, the taxonomy returns four groups of sectors, according to the quartile of global digital intensity:10  





Low: food products, beverages and tobacco; Medium-low: textiles, wearing apparel, leather; coke and refined petroleum products; chemicals and chemical products; pharmaceutical products; rubber and plastics products; basic metals and fabricated metal products; Medium-high: wood and paper products, and printing; computer, electronic and optical products; electrical equipment; machinery and equipment not elsewhere classified; furniture; other manufacturing; repairs of computers; High: transport equipment.

In concluding their study, Calvino et al. (2018, p. 34) highlight that – although promising in supporting country-specific analyses – the taxonomy of digital intensity would benefit from other indicators on ICT-related patents,

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use of robots in services and, in particular, “from an indicator of the value of data used by companies in production,” information for which a complete time series across sectors and countries is not currently available. In the absence of such comparative framework, two country case studies, one on Italy (Brancati et al., 2019) and one on Japan (Motohashi, 2017) summarized below, present empirical evidence on differences in the digital transformation among industries and supply chains. These case studies are particularly interesting because the two countries have taken up – with their national industrial policies – the challenges posed by the digital transformation promoted by the German Industry 4.0 national plan. Big data in Japan In 2015, the Research Institute of Economy, Trade and Industry (RIETI) sponsored an empirical analysis on the adoption of big data in Japanese manufacturing companies (Motohashi, 2017). Representing a response rate of 14%, the 561 interviews collected information on companies of different sizes, mainly medium-sized and large companies.11 The topics addressed by the empirical investigation focused on three main areas: the organization of the enterprise; its collection and use of big data (by type of data); and the use of data generated outside the enterprises. Companies’ activities were analysed with regard to three macro-areas: design and development, manufacturing, and after-sales services. The main results are that big data in Japan is widely used in all activities and that companies with a big data function are more likely to use it in various departments and this improves their performance. However, there is a great disparity in terms of style of use of big data, depending on the size of the company. More than half of small and medium-sized enterprises (SMEs) responded that, despite having heard of the Internet of Things, they did not know how they could use this technology. The policy implications of these results impinge on three areas of intervention: promoting the diffusion of the use of big data, in particular for use in SMEs; supporting the development of human capital needed for the use of big data; and defining strategic standardization activities for the Internet of Things. Industry 4.0 in Italy In 2017, Italy launched a national industrial policy to support the upgrade of equipment needed for the big step towards the Fourth Industrial Revolution. In 2018, the Italian Ministry of Economic Development sponsored an empirical survey to assess the rate of adoption of Industry 4.0 technologies in the Italian manufacturing sector (Brancati et al., 2019). The national survey reveals a significant dissemination of digital technologies, which is greater in larger companies, but also a non-negligible diffusion in SMEs, involving more

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than 20% of companies with ten or more employees and almost 50% of large companies.12 A very high diffusion rate is expected among SMEs in the next two years (also in the south of Italy, which generally lags behind in innovation processes and in economic development). The set of technologies taken into consideration by the empirical survey are cyber-security, horizontal and vertical integration of information, cloud computing, big data analytics, Internet of Things, collaborative robots, 3D printing, simulation, smart material and augmented reality. The rates of use vary, with the highest share for Internet of Things and the lowest for augmented reality (respectively 3.7% and 0.4% of all the companies in the sample). These technologies have a relatively greater dissemination in larger companies than in SMEs. The analysis also highlights that companies attribute different goals to digital transformation: large companies aim at enhancing their efficiency (even at the expense of employment), whereas SMEs target new business models and quality improvements. There is a close link with innovative strategies and research, and the “4.0 companies” are in the excellence range but they are small in size (the median value is seven employees). The quality of the managerial factor (with a strong incidence of training and external relations) is one of the most critical features for the future adoption of Industry 4.0 technologies. Significant differences emerge from a comparison across the ten value chains considered in the report. In Italy, the clothing supply chain has the lowest share of companies adopting Industry 4.0 technologies (4.7%), while the electric machinery and electronic supply chain has the highest share (24%). These results suggest different strands of policy interventions: fostering the quality of management; informing and educating SMEs on the potential benefits deriving from the adoption of Industry 4.0 technologies; supporting companies through organizational changes; and upgrading capital equipment. Indeed, in Italy, the current industrial policy programme at the national level has drastically reduced the previous support to capital substitution in favour of greater support for these policy interventions. The two country case studies show that in Japan and Italy different types of Industry 4.0 technologies are adopted by companies, with different intensity in the various sectors characterizing the two economies. The ongoing digital transformation shows that there are different paces of change across industries and, within industries, across companies of different sizes. Indeed, within each industry and value chain, firms of different sizes generally represent various segments of specialization. These differences matter in the development of the digital economy. But their impact can be better understood by moving from a comparison between countries (looking at different industries) to a closer look at the state-of-play of the digital transformation in the companies belonging to the automotive value chain in four major countries competing in the world market.

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State-of-play of digital transformation in the automotive supply chain: China, Germany, Italy and Japan In what follows, I will focus on the automotive supply chain in China, Germany, Japan and Italy in order to highlight the most critical factors in each country. The comparison aims at providing a better understanding of national strengths and weaknesses in the digital transformation in the automotive supply chain in those countries. And this should help to highlight the implications for industrial and innovation policy in Europe that aims at enhancing the potential of Industry 4.0 on the economy and society. The case study on China and Germany builds on the ongoing research conducted by Kern and Wolff (2019), who interviewed managers in 27 companies in the two countries. Their aim was, among others, to single out the most critical features underlying the digital transformation in the automotive supply chain of the two world-leading countries in car manufacturing, which both have strong cross-country links in the automotive value chain. The case study on Italy builds on two chapters of the Observatory on the automotive supply chain (2018), respectively by Cabigiosu (2019) on Industry 4.0 and by myself on the interviews in Emilia-Romagna (Russo, 2019). The case study on Japan is based on the analysis developed by Motohashi (2018) on the survey conducted by RIETI in 2016. In these case studies, the technologies considered encompassed the main categories of digital technologies.13 Among the key facts that have an impact on digital transformation in the automotive supply chain, some national specificities have to be considered. China is characterized by a huge and expanding domestic market due to rising incomes and a growing middle class; in 2015, the national policy “Made in China 2025” was launched, including detailed guidelines, tasks and target industries to support the digital transformation of the entire economy. It targeted the mobility sector and saw the manufacture of electric vehicles as a key goal in that productive, social and environmental transformation. Many Chinese companies are still at Industry 3.0. Lagging behind in some fields and stepping ahead in others, Chinese suppliers are important not only for the Chinese car-makers, but they are also crucial for the European, Japanese and US car-makers.14 Germany has key players among the car-makers in Europe and at the world level. In 2012, it launched Industrie 4.0, a set of national policy measures encompassing interventions in automation and robotics and standards for effective cyber-physical systems, in education and in the creation of a fine-grain network of competence centres spread all over the country in order to support SMEs in their digital transformation. Italy has a long tradition as a supplier of European, Japanese and US carmakers. In 2017, Italy launched a national policy on Industry 4.0 (as mentioned above), with incentives to support investment in physical assets for Industry 4.0 and to enhance competences of SMEs. A variety of opportunities and levels of upgrade in the automotive supply chain characterize Italian suppliers. Japanese car production is third worldwide, with challenging

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transformations in hybrid vehicles and electric vehicles. In 2015, Japan adopted the Fifth Science and Technology Basic Plan, focusing on Super Smart Society (Society 5.0). The empirical investigation by Kern and Wolff (2019) highlights some critical conditions that challenge the development of Industry 4.0 technologies. First, data security is a common issue both in Chinese and German companies, with the threat of hacking attacks indicated as a serious issue by German suppliers. Suppliers in both countries pointed to standardization as another key issue. For Chinese suppliers, standards set by car-makers could hamper the development of more effective solutions from a closer co-operation with supply chain partners in the value chain. In both countries, the government is expected to have a crucial role in reducing uncertainty and setting standards. For German suppliers, standards would reduce internal complexity (e.g. reduced number of software solutions) and they could be provided by the German Association of the Automotive Industry (VDA). China has a specific challenge related to employment skills; in particular, there is an issue of know-how loss due to relatively high employee turnover and also due to a lack of talent for high-tech jobs. German suppliers drew attention to a critical issue stemming from their external relationship with suppliers, which arose because of the inadequate quality of data and because of the unsatisfactory level of IT implementation by suppliers, many of whom do not accept a fast adoption of new technologies. As to Italy, the 2018 edition of the survey on the automotive supply chain (with a sample of 441 companies) has for the first time a section on Industry 4.0, which focuses on challenges and opportunities for automotive suppliers (Cabigiosu, 2019). Although 40.5% of suppliers have so far not reflected on or initiated innovation plans in Industry 4.0 technologies, the remaining share is either very active (25.9%), or has already defined a plan (22.1%), or considers Industry 4.0 a strategic priority of the company (11.5%). Considering willingness to adopt innovative Industry 4.0 solutions, 48.5% are focusing on examining at least one Industry 4.0 solution and 37.2% will adopt at least one in the future, with 14.3% of respondents remarking that they are not willing to adopt any 4.0 solutions. In the case of Italy, the main risks and constraints that hinder the activation of Industry 4.0 initiatives differ across the various categories of suppliers. There are those who specialize in engineering and design, systems, and modules; subcontracting manufacturers; specialists operating in the motorsport niche; and specialists operating in the after-market. The main constraint is the initial investment: on average, this is the case for almost 28% of the companies, with no sharp differences between the various types of specialization. “The firm’s culture and the inability to evaluate the opportunities offered” is the second main constraint, affecting, on average, 17.5% of all companies, with 24.4% of systems and modules producers and only 12% of specialists operating in the after-market. “Lack of internal resources” is a constraint for 16% of companies, but it is less relevant for subcontractors (manufacturing) and specialists (about 13.3%). For specialists operating in the motorsport niche, the “lack of knowledge about the

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new business solutions and technologies” is the second most critical constraint (for almost 24% of companies). The detailed picture emerging from the empirical investigation reveals the existence of highly differentiated conditions that must be taken into consideration when a systemic perspective is adopted and innovation policy measures are undertaken. Regarding the automotive supply chain in Japan, three main findings have to be underlined. They reflect the key results of the detailed empirical analysis developed by Motohashi (2018), which is based on in-depth interviews with 33 automotive firms. These 33 firms were identified as automotive firm suppliers (i.e., by and large producing automotive parts) and were interviewed by RIETI in the survey on big data. Although the sample is very small, some interesting comparisons can be made that lead to three key findings. The first finding is that these automotive firms showed a greater propensity to share data with other supply chain partners (working in the automotive value chain) than with companies working in other supply chains. In particular, it was found that automotive companies were more likely to share digital data with suppliers and customers, as compared to companies in other industries (respectively 45% and 35% with suppliers and 61% and 38% with customers). The second finding is that the internal use of digital data was larger for companies in the automotive industry compared to companies in other industries. The third finding concerns the impact of big data use: it was high mainly on cost reduction, traceability and manufacturing process improvement, but the use of big data was less relevant in enhancing product innovation and customer development.

Multi-dimensional perspective on digital transformation: two examples Digital transformation calls for a multi-dimensional perspective in order to understand ongoing changes and suggest possible policy measures. The perspective on the many interrelated dimensions of digital technology is clearly significant with regard to what is going on in China, which is targeting sustainable mobility with a shift towards electric vehicles, whose production will largely benefit from digital technologies. First of all, the size of the Chinese domestic market (not to speak of those of the African countries in which China is expanding production facilities and markets) opens up the possibility to perform large-scale experiments on alternative techniques to produce energy. This is important because technologies improve, with regard to performance, in a cumulative way, and this allows for the emergence of socio-technical systems of complementary technologies, which is fostered by patterns of user–producer interactions (Arthur, 1983; Rosenberg, 1963, 1996; Teece, 1986): scaling up across several alternatives would then provide a great benefit to countries unable to exploit the various alternative technologies.15 Within this framework, policy makers should leave many doors open for the emergence of complementary technologies or improvements deriving from learning (by interacting with other producers and with users and by learning-by-doing) and from scaling up. This

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seems to be the path of innovation policy that China has been undertaking: while in 2015 “Made in China 2025” focused mainly on batteries and on energy produced in nuclear plants (and with some other renewable energy sources), early in 2019 China promulgated the Financial Subsidy Policy for the Promotion and Application of New Energy Vehicles that now includes fuel cell technology and small unit production of hydrogen.16 The combined conditions of a very large scale of production and domestic adoption might enhance the possibility of scaling up alternatives, such as batteries, hydrogen fuel cells and the decentralized small-scale production of hydrogen (among those now on stage), that might have further applications in other countries. In turn, the large-scale production of electric vehicles will radically change the supply of components and also the relative role of car manufacturers, whose competences were essential in designing and assembling cars with internal combustion engines. Another example of the need to adopt a multi-dimensional perspective is the learning potential emerging from cross-country competence networks. Let us consider the case of an Italian company (with more than 600 employees) that is a leader in the segment of modular and redundant uninterruptible power supplies and was the European leader in the production of a telematics system for the remote control of vehicles (having a great impact on insurance companies’ performance). This company was acquired by Deren, a Chinese company aiming at becoming the world leader in connectivity and seeking to extend its offering to multiple product lines in automotive platforms. The acquisition was realized in two steps: the first was at 49% to make explicit the strong interest in the company without, however, running the risk of depriving it of the many links with the social and economic fabric in which it was embedded (a gentle acquisition). In two years, the company increased its employment in Italy by more than 100 employees engaging in a new longterm project of growth: the design and implementation of a new plant in Chongqing Industrial Park, where some leading car-makers are located (among others, Porsche, BMW, Volkswagen, PSA), in one of the fast-growing provinces of the Chinese area crossed by the Belt and Road Initiative. The investment project in Chongqing was funded by the Chinese owner, Deren, which obtained a ten-year contract for the supply of PSA in France for the production of a crucial component to be used in electric vehicles assembled in plants in Europe for the EU market. The plant in Chongqing is designed and controlled, in remote, in collaboration with the Italian subsidiary, which in two years has become fully controlled by the Chinese acquirer, which has reinforced – thanks also to its positive performance – the former’s strong embeddedness in the Emilia-Romagna region. A series of positive bootstrapping processes is enhanced in that cross-country competence network: feedback on local competences in Italy from the design and remote control of such a plant; impact on local competences in China in relation to the strong linkages within that network of competences; and feedback on the competence network in the three countries (Italy, China, France) and in related business activities.

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Policy implications The empirical evidence presented in this chapter supports the hypothesis that the analysis of the ongoing digital transformation calls for an analytical framework that takes into account many interrelated dimensions. In particular, the analysis has to consider new emerging actors, new competences and skills, new opportunities for mutual learning, and many diverse levels of adoption of the various technologies encompassed in Industry 4.0 (within and across countries as well as within supply chains). These many interrelated dimensions – and the related cascade of changes in technologies, organizations and users’ needs – are essential in supporting our understanding of the complex digital transformations that are still at their outset and also for supporting policy measures that could foster the benefits deriving from digital technologies and mitigate potential divides. With regard to the pace of transformation, the empirical evidence on Japan and Italy highlights a large disparity in the pace of transformation (i.e., adoption of Industry 4.0 technologies) in both countries. In particular, the divide between SMEs and large companies is worthy of note, but so is the diversity across supply chains. If one considers that the full potential of digital technologies derives from its systemic adoption, this outcome underlines the need to reduce heterogeneities across industries and within sectors and supply chains. Companies lagging behind in the pace of their technical and organizational transformation may become marginal suppliers – that is, they may be barely capable of catching up with the innovative potential of digital technologies and thus lose their competitive advantage. The industrial landscape of many specialized suppliers may shrink, and this may orient customers towards other suppliers more aligned along the same technology pathway. The focus on the interrelationships in the global automotive value chain in four countries (China, Japan, Germany and Italy) has made clear the need to look at the ongoing transformations in the digital economy with regard not only to complementary changes of technologies, but also to labour organization and production. For example, the shift towards the large-scale production of electric vehicles will change the supply of components and also the role of car manufacturers. Also, standards are a critical area for policy interventions: for example, the quality of digitalization in the automotive supply chain in China will impact EU vehicles, an outcome that will have companies demanding the setting of standards and more effective controls. The implications of such changes for innovation policy have to consider the systemic changes in related systems of education, transport infrastructure and renewable energy production: their path of development will be strongly affected by the pace at which electric vehicles are produced, remote control is effective and standards are set.

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Acknowledgments I wish to thank Johannes Kern for his comments on a previous version of the chapter and for highlighting the recent development in the Chinese policy on electric vehicles; Alessandra Colecchia, Kazuyuki Motohashi, Caroline Paunov and Sandra Planes Satorra for discussions on the topics presented in this chapter; and the editors for providing invaluable comments and suggestions. A special thanks goes to Jane Stevenson for her linguistic revision of the chapter.

Notes 1 See Agrawal et al. (2019) for a detailed survey. 2 The project website (http://www.oecd.org/going-digital/) presents several reports, the digital roadmap, policy briefs and a toolkit for the analysis of digital technologies to support innovation policies. 3 The OECD is developing measurements of digital transformation (OECD, 2019b). The goal is not to rank countries or to create composite indicators, but to provide policy makers and policy analysts with key indicators of the Going Digital policy framework (OECD, 2019b, p. 3). Four main overarching actions aim at building a new generation of data and indicators: (a) make the digital transformation visible in economic statistics; (b) understand the economic impact of digital transformation; (c) measure wellbeing of digital transformation; and (d) design new approaches to data collection. Five actions will target specific areas: (a) monitor transformative technologies (in particular, the Internet of Things, AI and Blockchain); (b) make sense of data and flows; (c) define and measure the skills needed in the digital era; (d) measure trust in online environments; and (e) assess governments’ digital strengths. The measurements so far made available (OECD, 2019b) provide significant insights on trends in the digital era, growth and well-being access and use of connectivity, innovation cascades, skills needed in the digital transformation, social prosperity, trust, and market openness. 4 The OECD refers to those transformations as the “next production revolution” (OECD, 2017). 5 Detailed information is available at https://www.plattform-i40.de/PI40/Navigation/ EN/Home/home.html [accessed 9 July 2019]. 6 This technology merges, at the nano-scale, with nanoelectromechanical systems (NEMS) and nanotechnology. MEMS are also referred to as micromachines in Japan, or micro systems technology (MST) in Europe. 7 The several, diverse flows of information are supported by different software applications, such as computer-aided design manufacturing (CAD/CAM); computer-aided engineering (CAE); simulation, product life cycle management (PLM); manufacturing execution systems (MES), supply chain management (SCM); and enterprise resource planning (ERP). 8 Australia, Austria, Denmark, Finland, France, Italy, Japan, the Netherlands, Norway, Sweden, the UK, and the US are the countries for which the array of sector-specific indicators is available (see Calvino et al., 2018, p. 9, who are aware that “the extent to which the measures computed generalise to other countries remains an empirical question that deserves further investigation”). 9 The full list for the 36 ISIC Rev.4 sectors is available in Calvino et al. (2018). ISIC = International Standard Industrial Classification. 10 According to the classification: “‘High’ identifies sectors in the top quartile of the distribution of the values underpinning the ‘global’ taxonomy, ‘medium-high’ the second highest quartile, ‘medium-low’ the second lowest, and ‘low’ the bottom quartile” (Calvino et al., 2018, p. 31).

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11 In Motohashi (2017), size classes are defined as follows: small are the companies with 300 employees or less, large are the companies with 301 employees or more. 12 SMEs are the companies with less than 250 employees. Results are disaggregated by size class according the following sizes in terms of number of employees: 1–9, 10–49, 50–249, and 250 or more. 13 The full list of technologies considered in the case studies is as follows: cloud computing services providing a platform for worldwide access; mobile services and technologies integration in the working environment; RFID data transfer without physical contact; big data and smart data (analytics converting big data into smart data); all-time localization through sensors and data transfer; robotics in production and logistics; Internet of Things connecting devices; additive manufacturing solutions with 3D printers (flexibility for prototypes and small batches); augmented reality; and simulation. 14 The ongoing changes in the trade and political relations between China and the US are not examined here, but it is worth mentioning that they are strongly affected by the aim of controlling the development of digital technologies, whose application is crucial in electric vehicles and in vehicles with autonomous driving. 15 Lock-in conditions affect the path-dependence of innovation processes (Arthur, 1983). 16 See the policy release 138/2019 (DRC, 2019).

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Chuah, L.L., Loayza, N.V. and Schmillen, A.D. (2018). The future of work: race with – not against – the machine. Research & Policy Briefs, no. 16. Washington, DC: World Bank Group. http://documents.worldbank.org/curated/en/626651535636984152/pdf/ 129680-BRI-PUBLIC-The-Future-of-Work-final.pdf [accessed 9 July 2019]. Davies, R. (2015). Industry 4.0: Digitalisation for Productivity and Growth. Brussels: European Parliamentary Research Service. http://www.europarl.europa.eu/RegData/ etudes/BRIE/2015/568337/EPRS_BRI(2015)568337_EN.pdf [accessed 9 July 2019]. De Backer, K. and Miroudot, S. (2012). Mapping global value chains. Paper prepared for the Final WIOD Conference: Causes and Consequences of Globalization, Groningen, The Netherlands, 24–26 April. http://www.wiod.org/conferences/groningen/ Paper_DeBacker_Miroudot.pdf [accessed 9 July 2019]. DRC (2019). Notice on Further Improving the Financial Subsidy Policy for the Promotion and Application of New Energy Vehicles. No. 138(2019), 26 March. Beijing: Development and Reform Commission, Ministry of Science and Technology, Ministry of Finance and Industry of the People’s Republic of China. http://jjs.mof.gov.cn/ zhengwuxinxi/zhengcefagui/201903/t20190326_3204190.html [accessed 9 July 2019]. Frey, C.B. and Osborne, M.A. (2013). The future of employment: how susceptible are jobs to computerisation? Oxford Martin School Working Paper. Oxford: University of Oxford. https://www.oxfordmartin.ox.ac.uk/downloads/academic/future-of-emp loyment.pdf [accessed 9 July 2019]. Gorgoni, S., Amighini, A. and Smith, M. (2018). Automotive international trade networks: a comparative analysis over the last two decades. Network Science, 6(4), 571–606. Kern, J. and Wolff, P. (2019). The Digital Transformation of the Automotive Supply Chain: An Empirical Analysis with Evidence from Germany and China. Case study contribution to the OECD TIP Digital and Open Innovation project. Rome: Italian Ministry of Economic Development. https://www.innovationpolicyplatform.org/ system/files/imce/AutomotiveSupplyChain_GermanyChina_TIPDigitalCaseS tudy2019_1.pdf [accessed 9 July 2019]. Lane, D., Malerba, F., Maxfield, R. and Orsenigo, L. (1996). Choice and action. Journal of Evolutionary Economics, 6(1), 43–46. Liao, Y., Deschamps, F., de Freitas Rocha Loures, E. and Pierin Ramos, L.F. (2017). Past, present and future of Industry 4.0: a systematic literature review and research agenda proposal. International Journal of Production Research, 55(12), 3609–3629. Motohashi, K. (2017). Survey of big data use and innovation in Japanese manufacturing firms. RIETI Policy Discussion Paper Series, 17-P-027. Tokyo: Research Institute of Economy, Trade and Industry. https://www.rieti.go.jp/jp/publications/p dp/17p027.pdf [accessed 9 July 2019]. Motohashi, K. (2018). With Regard to Big Data Use of Automotive Industry in Japan. Supplemental analysis based on RIETI Big Data Use Survey. 27 September. Note prepared for the OECD TIP Digital and Open Innovation project. Rome: Italian Ministry of Economic Development. OECD (2017). The Next Production Revolution: Implications for Governments and Business. Paris: OECD Publishing. OECD (2019a). Digital Innovation: Seizing Policy Opportunities. Paris: OECD Publishing. OECD (2019b). Measuring the Digital Transformation: A Roadmap for the Future. Paris: OECD Publishing. Rosenberg, N. (1963). Technological change in the machine tool industry, 1840–1910. Journal of Economic History, 23(4), 414–443.

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Rosenberg, N. (1996). Uncertainty and technological change. Conference Series: Federal Reserve Bank of Boston, 40, 91–125. Russo, M. (2015). Distretti, piccole imprese e sapere diffuso nei sistemi produttivi della meccanica. In L. Sciolla and M. Salvati (eds), L’Italia e le sue regioni: l’età repubblicana. V. II: Territori. Rome: Istituto della Enciclopedia Italiana, 147–160. Russo, M. (2019). Digitalization and Open Innovation in the Automotive Supply Chain in Emilia-Romagna. Case study contribution to the OECD TIP Digital and Open Innovation project. Rome: Italian Ministry of Economic Development. Sendler, U. (2018). The basics. In U. Sendler (ed.), The Internet of Things. Berlin: Springer Verlag, 15–36. Simonazzi, A., Ginzburg, A. and Nocella, G. (2013). Economic relations between Germany and Southern Europe. Cambridge Journal of Economics, 37(3), 653–675. Teece, D.J. (1986). Profiting from technological innovation: implications for integration, collaboration, licensing and public policy. Research Policy, 15(6), 285–305. Yin, Y., Stecke, K.E. and Li, D. (2018). The evolution of production systems from Industry 2.0 through Industry 4.0. International Journal of Production Research, 56 (1–2), 848–861. Wang, S., Wan, J., Zhang, D., Li, D. and Zhang, C. (2016). Towards smart factory for Industry 4.0: a self-organized multi-agent system with big data-based feedback and coordination. Computer Networks, 101, 158–168.

14 Productive structures and industrial policy in the EU Michael H. Best

Introduction The issues that attracted most public attention as the crisis of the Eurozone played out were the fiscal imbalances and public debt problems of the peripheral member states (Greece, Portugal, Italy, Spain and Ireland). However, hidden behind these problems are structural imbalances that have been described as follows: The crisis has laid bare the divergent productive structures in the EU. Regional policies have focussed on physical infrastructure and training, but no attention has been given to industrial policy, something which the neo-mercantilist core around Germany has no interest in promoting. EU policies have tended to cement the existing European division of labour, and imposing austerity policies on the peripheral countries will exacerbate this yet further (EuroMemo Group, 2012, p. 2). But did the crisis actually lay bare the divergent “productive structures” within the European Union (EU)? Most economic commentary on the divergence in productivity performance has been conducted in terms of competitiveness, labour market flexibility, and government regulation, as if the underlying structure itself was not the problem, but merely some of its characteristics, which could be rather easily addressed were policymakers willing to address. The term “competitiveness” implies that with a change in prices in international markets an economy’s enterprises would again become competitive, the trade balance would improve, and growth will return. But this assumes that price competition is the problem. What if the deeper problem is not price but product competitiveness rooted in limited production capabilities? Unfortunately, devaluation of the currency or lowered prices via fiscal austerity measures will not address this problem. As one scans the economies of the Eurozone, the question that poses itself is the following: why are there so many globally competitive, technologically advanced, mid-sized firms in Germany, Austria, Denmark, Finland, the

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Netherlands and Sweden and so few in the peripheral economies? My contention is that companies in these countries benefit from operating within productive structures that facilitate product-led competition and continuous innovation. The absence of the concepts of productive structure and productled competitiveness from public discourse and academic economic analysis deflects “growth” policy away from its proper focus. It fosters the impression that driving down prices by austerity measures is the only solution to the “lack of competitiveness” in the destabilized, lagging economies. This chapter uses the approach of “productive structure” to highlight the concept of “strategic industrial policy,” and the weaknesses of the approach to industrial policy developed at the EU level before and during the crisis and austerity. The concept of ‘productive structure’ is located within a political economy perspective in which business organization and industrial policy are explanatory variables rather than outcomes. Where conventional economic theory presumes price-led competition, industrial policy within Germany and the Nordic economies is about productled competition. This has profound effects for the objectives, implementation and effects of industrial policy. Instead of conceiving industrial policy as merely correcting market failure, one should conceive of it as a strategic organizer. Its role is precisely to shape productive structure in ways that contribute to business development, industrial innovation, sectoral transitions and socially rational product systems. In what follows, I first develop an economic theory of a productive structure in which industrial policy’s role is conceptualized as a strategic organizer rather than a market optimizer. The perspective is illustrated by outlining the strategic role of industrial policy in Germany. We then turn to industrial policy as conducted by the European Commission (EC) and suggest that it diverges sharply from that deployed in the successful social market economies of Europe. The crisis within the Eurozone grew out of and exposed long unaddressed flaws in the productive structure of peripheral member economies. But structural problems can only be ignored for so long. The old economic growth narrative is passé: neither quantitative easing nor fiscal policies recreate the conditions for sustainable prosperity. The opportunity is to formulate industrial and economic policies that address the flaws in the productive structures. Much can be learned from the productive structures of the core economies in the EU. Unfortunately, these lessons have not to-date informed the EU’s regional development policies and programmes. If anything, they have served to reinforce the divergence in productive structures between the leading and lagging EU member states.

Productive structure: a conceptual framework The high productivity levels of enterprises in the dynamic core of the EU (Germany and the Nordic countries) result from “structured” interrelationships involving the following four elements.

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(1) Entrepreneurial firms. The entrepreneurial firm is the pivotal agency within the productive structure framework. Firms exist because an individual cannot do everything alone and one cannot do everything at once (Penrose, [1959] 2009). Entrepreneurial firms are companies that are organized to compete based on new products or processes and not primarily on price. Productivity is a measure of successful innovation in the Schumpeterian sense of improvements in product, process, organization, and technology. Productivity advances are driven by entrepreneurial firms but not in isolation (Best, 2001, 2018). The superior collective innovation capability of entrepreneurship in the core countries is reflected in patent applications to the European Patent Office. Another indicator is the high level of gross expenditures on research and development (GERD). The latter is a measure of R&D absorptive capacity. High GERDs indicate new product development (NPD) and technology management (TM) capabilities in business enterprises. Entrepreneurial firms seek to establish a dynamic competitive advantage anchored by a distinctive organizational competence, which usually comes in the form of a production platform (“technology base,” in the words of Penrose) that can generate a pipeline of new products. This requires NPD and TM capabilities, the development of which presents a challenge well beyond a world-class production line. The productive structure perspective offers conceptual tools to interrogate production in the form of fundamental, engineering-based principles by which regions and nations have historically established competitive advantage and industrial leadership. The result is a set of measures by which performance can be benchmarked for purposes of characterizing global competitiveness. Nevertheless, the idea of productive structure encompasses more than the internal organization of production within firms. (2) Mode of competition. The internal organization of the firm is structurally linked to the prevailing mode of competition in the market. To paraphrase Marx ([1867] 1961, p. 243), anarchy in the market begets despotism behind the factory gate. Put differently, intense price competition in the market reinforces models of work organization that divide managers and workers, planning and execution, thinking and doing. These shop-floor practices are not consistent with new product development and innovation which depend upon inclusive, learning and flexible models of work organization. Thus product-led competition creates a different set of pressures on internal organization than price-led competition. Efficient new product development is about the integration of design and manufacturing on the shop floor and entails incessant improvement via experimentation to establish best practice. The introduction of new technologies requires cross-disciplinary teamwork. Companies organized to tap the creative input of a committed workforce are better placed to succeed. (3) Localized capability developmental infrastructures. Business units do not develop production capabilities in isolation. Successful indigenous global competitors are regionally embedded within a complex of private and public

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relational networks. Opportunities for networking relations to organize and support NPD and TM capabilities are stronger in regions with tooling, machine- and instrument-, and equipment-making companies. In others, both engineering-oriented consultancies and public research institutions provide technical expertise to support product development activities. Financial institutions with locally calibrated, due-diligence expertise are particularly important to fostering opportunities for long-term capability development initiatives. A close examination of NPD and TM capabilities of firms within the advanced productive structures of the EU reveals a range of intermediary agencies that mediate between government funding agencies and organizational capability development activities of firms, particularly small and medium-sized enterprises (SMEs). These non-profit, non-governmental agencies have long-term developmental orientations or missions and intimate knowledge of firms with whom they engage. In regions with globally successful indigenous technology-driven enterprises, national and regional government agencies fund basic research conducted in research-intensive universities and developmental research conducted in technically focused research institutes in ways that complement applied research conducted in enterprises. In this way, inter-organizational “chains of innovation” are embedded in triangular relations intersecting the three spheres of government, education, and industry. (4) Strategic industrial policy. The fourth element of “structured” interrelationships is strategic industrial policy. Attention to linking the interrelated elements of productive structures distinguishes capability-driven industrial policy from government direct assistance to business. The government goal of increased innovation can be pursued by tax incentives. But such programs do not target production-capability development. They are likely to have little aggregative impact upon the chain of innovation. The concept of productive structure points to the dual role of intermediary institutions and infrastructures: they are resources used by entrepreneurial firms and arms-length delivery vehicles for long-term and strategic industrial policy. Strategic industrial policy designed to foster product-led competition involves subtle shaping of support infrastructures, material and intangible, to advance the product-development and technology-management capabilities of enterprises as distinct from the two-way relation between government and companies. This is because the chain of innovation is about the subtle coordination of links interconnecting governmental, educational, and industrial spheres. Strategic industrial policy has a second fundamental role: long-term sectoral indicative planning. The government is responsible for collective choice, where individual and social rationality diverges. Hirsch (1977) brought attention to the “tyranny of small decisions” which generate a divergence between private and collective rationality. If one person stands on his toes to watch the parade, he/she can see it better, but once everyone does so the view is not improved and all are less comfortable. In this example, individual preferences cannot be achieved by individual actions; instead, social action in the form of

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a collective agreement is the only means of achieving the goal of watching the parade in a comfortable position. In some cases of large-scale consumption interdependence, such as cigarette smoking, government taxes and bans can correct for the “externalities” of individual choice in the cigarette industry. But other cases are not so easily addressed. Some products, once established, are embedded in a wider “social infrastructure of consumption” in which the role of the industry in the economy is not tractable to management by taxes, subsidies, and bans. The classic example is the car-based urban transportation industry. Once a highway system, employment and housing patterns, and an energy supply system are integrated and in place, the transportation industry becomes intractable in three ways. First, it is intractable to individual choice, since in the short to medium term, the “market” does not enable individuals to choose between, for example, a Copenhagen bicycle mass-transit system and a Dublin carbased system. Second, it is intractable to “market-failure” remedies of achieving an optimal transportation system by taxes and subsidies. The structural problem here is that taxes and subsidies only operate to increase or decrease resources for a given product system. Third, once any one system is established it becomes intractable to social choice. It will be locked in place into the long term by accompanying infrastructures and vested interests. Choosing amongst product systems like urban transportation necessitates a political means for making social choices. This is a reason why a “social” market economy can more effectively achieve private preferences under conditions of pervasive consumption interdependence (Best, 1982). A strategic industrial policy is not simply about developing competitive advantage for growth, it is also about characterizing social needs that are consistent with sustainable prosperity. The latter involves creating the administrative capacity to shape sector strategies to account for material and social infrastructures of consumption. Simply investing in infrastructure is not the goal; it is necessary to align infrastructures of production and consumption in ways that foster socially rational long-term growth. As I argue below, two decades of EU structural fund investments contributed to the growth booms of both Ireland and Greece but also left both countries with a set of intractable sectors which have become barriers to growth. Again, in the core area of Germany and the Nordic countries we find intermediary agencies that align production and consumption infrastructures in sectors that otherwise may generate social limits to growth.

Productive structures in EU centre: focus on Germany The German, Austrian and Nordic productive structures are highly similar in terms of open-system business models, developmental infrastructures, and “triangular” industrial policy agencies and instruments. But it is unlike the productive structures by which the US and Japan established industrial leadership or the yet-again different productive structures of China.

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From the neoliberal perspective, free markets and low taxes are the keys to growth. The theory, however, is not consistent with economic history. Nineteenth-century American industrial leadership is not a story of free markets “creating” an innovative productive structure. It is a story of the building of productive structures and the organizational capabilities that constitute them. Marshall, amongst others, described the first period in US industrial leadership as the American System of Manufactures. Similarly, twentieth-century American economic history cannot be told without Chandler’s history of the organizational innovations in production and business organization operationalized by the leaders of what became Big Business. Neither of these productive systems spontaneously emerged via the propensity to “truck, barter, and exchange” or by price-taking firms in the “market.” The rise of the fast-growing Asian economies beginning with Japan is also a story of the emergence not of free markets but of productive structures that enabled enterprises to achieve performance standards, sector by sector, that could not be matched by the competition. But the story of the rise of Japan, South Korea, Taiwan and China cannot be explained by organizational innovations in the business model alone, or in terms of “development states” devising industrial strategies. These are productive structures constituted by populations of entrepreneurial firms and adaptive clusters that likely exhibited combinatorial association properties. This refers to the periodic recombinations of legacy skills, facilities, and capabilities combined with new ones to pursue new market opportunities and take full advantage of technological changes. The German and Nordic country productive structures, likewise, have proven highly successful and innovative. German economic policymakers understood the critical relationships between production capabilities, education policy and banking institutions long ago and established industrial leadership with the integration of science and industry in the formative stages of industrialization. The post-war German model was not to imitate the productive structure of the US. Rather, it developed an alternative SME-based business system structurally linked to a “strategic organizing” industrial policy. Industrial policy was integral, but it moved sharply away from the “direct aid” and pre-war corporatist integration regime. At the centre of the German productive structure is the Mittelstand business system, which is characterized as a large, dynamic population of SMEs. In a study of world-leading mid-sized German firms, over 70% are family-owned, even though many combine family ownership with professional management. Even more striking is the fact that the average age of the successful companies was 70 years (Venhor, 2010). Entrepreneurial firms in Mittelstand regions can leverage a range of extrafirm resources to facilitate a transition to a focus and network, open-system business model. The diversity of specialist companies is an open system in which an individual company’s focus on a core capability and partner with another company for complementary capabilities (Richardson, 1972). The entry barriers are reduced as a new entrant can focus on a single, core

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capability and plug into open-system networks for complementary capabilities. This enables SMEs to pursue a strategy of flexible specialization and form partnerships to jointly coordinate not only production but the development of new products. These are extra-firm, collective organizational capabilities that enhance participant firms’ NPD and TM capabilities. Another example is the capital goods infrastructure. Nearly one-third of the German Mittelstand companies are in machine equipment and half are in machine equipment, electrical engineering, and industrial products. This capital goods sector performs as a system-level resource as infrastructure that firms can leverage to develop new products and processes. Inter-firm connections of this type add to the openness of a region’s business system; they are a functional equivalent to managerial coordination within multi-divisional enterprises. But most importantly, open-system business models lower the barriers to the transition of mid-sized firms to entrepreneurial firms. Technology research and human resources agencies constitute a second form of infrastructural or system-level resources that enhance entrepreneurial firms. The Mittelstand industrial system contains a dense network of research and skill development institutions closely aligned with sub-regionally distinctive technological capabilities including the Fraunhofer Institutes, the Helmholtz Research Establishments, and the Max Planck Institutes. Industrial policy rarely involves direct links between government and companies; instead, it is largely conducted indirectly to firms through infrastructural agencies. For example, technology policy in the Mittelstand regions is not about technology transfer. Rather, it is about the coordination of a chain of innovation involving government, industry, and research institutions. The basic research is government-funded but conducted by independent research labs and universities which, in turn, partner with industry to link applied research and NPD into the chain. For the Nordic regions, these triangular interrelations support and facilitate linked chains of innovation. A measure of the superior innovation performance of regions within the “social market” economies can be seen in the Eurostat map of patent application data by NUTS 3 regions.1 Processes of opportunity creation can be found at both ends of the chain of innovation. Mission-driven research is the prerogative of government at one end. On the other end is a population of entrepreneurial firms in the form of SMEs with the capacity to detect opportunities, to develop customers and create a market. Macro-sectoral research suggests that the secret to Germany’s economic success cannot be explained in terms of clusters, localization or agglomeration economies (Alecke et al., 2006). From the productive structure perspective, what makes these regions innovative is not simply the existence of individual entrepreneurial firms but populations of enterprises which collectively act as an industrial experimental laboratory. The multiplication of NPD experimentation across hundreds and even thousands of firms continuously and successively generate new opportunities that can be exploited by industrial policymakers that have sensitive antennae to capture promising developments with infrastructural support in the early stages.

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Industrial policymaking in the German chain of innovation model is distinguished in a second role of government, which is not commonly appreciated. As noted above, sectors are highly interdependent and their interdependence has long-term consequences for the “social infrastructure of consumption.” But the form that sectors take and the product systems by which they serve consumption needs are also a policy matter. The German model subjects product systems to an impact analysis in terms of the social infrastructure of consumption and a risk analysis associated with the coordination failure in the form of the “tyranny of small decisions.” Here, we find potentially powerful feedback effects between the productive structure and the standard of living that are not captured in growth statistics. One might ask why and how the Nordic countries have the non-congested urban transportation systems; the environmentally friendly energy and builtenvironment systems; the inclusive and preventive healthcare systems; and the meritocratic educational systems. The answer is that the government plays an organizing role in shaping the infrastructures upon which all product systems depend and in conducting impact analyses of product systems to make objective social choices amongst alternatives. Success at this demand side of industrial policy depends upon and is reinforced by success on the supply side of the macro-productive structure. The role of detecting and creating opportunities works in both directions: government to companies and companies to government. This is ignored in transaction cost theories of the optimal size of the public sector. Effectiveness here depends upon taking advantage of and building on a region’s legacy of skills, facilities, and capabilities. Government, education, industry – each has a requisite ingredient for an “entrepreneurial” productive system. It is the interrelationships that give power to the system – not the firms alone, not brilliant industrial policy, and not leading research-intensive universities.

Structural Funds and EU industrial policy The EU administers what has been called the “world’s largest development program.” The Social Fund was created in 1958 to tackle regional disparities in Europe. It was joined by the European Regional Development Fund in 1975 and, eventually, in the run up to the establishment of the Single Market in 1992, the Cohesion Fund. The trio of funds is commonly known as the “Structural Funds.” In 2008, expenditures on these funds represented about one-third of the European Community budget (Lords, 2008, p. 28). The Structural Funds were designed to support the convergence in income of the lagging member states and regions with the more prosperous regions in the EU. The Directorate-General for Regional Policy is responsible for design, monitoring, and evaluation of Structural Fund interventions (Bradley and Untiedt, 2012).2 They are channelled along three lines: physical infrastructure, human capital, and direct assistance to firms to enhance growth

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and productivity.3 Since the Lisbon Strategy of 2000, the income convergence objective has been extended to the promotion of a knowledge economy and growth in jobs. Two targets were set – increasing the share of public and private investment in R&D to 3% of gross domestic product (GDP); and securing an employment rate of 70% – and both were to be achieved by 2010. While the Structural Funds are designed and commissioned in a form of partnership between national governments in the recipient states and the DG-Regional Policy within the EC, they are administered and implemented at the local and regional levels by national administrations. In the language of the EC: Cohesion policy has been recognized as a key instrument at the Community level contributing to the implementation of the growth and jobs strategy – not just because it represents one third of the community budget, but also because strategies designed at local and regional levels must also form an integral part of the effort to promote growth and jobs. The role of SMEs, the need to meet local skill demands, the importance of clusters, the need for local innovation centres is such that in many cases strategies also have to be built from below, at the regional and local levels (EC, 2006, p. 8). All seemed well until the crisis in 2007. Ireland and Greece were the biggest success stories with a decade or more of high rates of growth.4 But the crisis has exposed the lack of competitiveness of indigenous firms and sectors in the peripheral economies. Behind the façade of growth, the large flow of Structural Funds to the lagging member states was not accompanied by a convergence in productive structures. What went wrong? While current EU policy documents represent a political desire to address regional disparities, they do not outline a development strategy to address the lack of business and organizational capabilities to drive productivity and innovation. The Lisbon Strategy, launched in March 2000 by the EU heads of state and government, set R&D targets to be reached by 2010, but implementation was not elaborated.5 By default, this falls back on the industrial policy in the Structural Fund programs of direct aid to companies and general investment in human capital and physical infrastructure. But this is not how industrial policy is conceptualized or conducted in the more advanced member states of the EU. As outlined above, in these cases industrial policy is best understood as informed by an analytical economic framework which accounts for productive structure and strategic agency. In the advanced, core EU states industrial policy has achieved the strategic and administrative capacity to generate impressive results in advancing R&D levels, innovation, product competitiveness, and economic performance. The situation in the less successful, peripheral states is very different, as I will show in the next section.

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Productive structures in the EU periphery: focus on Ireland Compared to the pre-crisis level (2007), industrial production had reached only 64% in Greece and Spain, 72% in Italy, and 79% in Portugal by 2014.6 The crisis, combined with the ensuing austerity programs plunged all four into severe recessions. It also exposed the gap, if not the further divergence in productive structure, between the core and the peripheral economies of Europe. The southern peripheral states suffer from the same fundamental challenge: failure to build and grow enough innovative business enterprises to drive productivity advances and create jobs on a regional or national scale.7 Indicative data are illustrated in the Annex.8Table 14.1 (Section B) compares R&D as a percentage of GDP of various countries. In 2008, a similar pattern to that of the patent statistics emerges: the peripheral economies of Ireland, Spain, Italy, Greece, and Portugal, collectively at around 1.3% of GDP, were well below the core economies of the EU at 2.5% and Finland and Sweden leading at 3.5%. Table 14.1 (Section A) compares the number of companies by country that in 2008 were listed in the top 1,000 EU companies ranked by R&D investment. Greece, with a population of 11 million, had four while Finland and Denmark, with less than half the population, had 58 and 47, respectively. Ireland had 12. Finland spends nearly 130 times more on R&D than Greece and nearly 13 times more than Ireland. But, according to the OECD STI Scoreboard,9 roughly 70% of Ireland’s R&D is conducted by foreign affiliates of enterprises. Greece, in contrast, has virtually no R&D investment by either domestic or affiliates of foreign enterprises. In 2008, there were 12 indigenous Irish companies amongst the top 1,000 R&D performers in Europe.10 One was a bankrupt bank, one had nine employees, and three were food producers. It is quite clear that even Ireland, the “success story” of EU development policy, had not made progress towards the Lisbon Strategy goals for 2010 (R&D of 3% of GDP or 70% employment rate). What went wrong? Why did Ireland not develop a stronger productive structure generating more entrepreneurial firms in the lead up to the financial crisis? While the provision of a full answer is outside the scope of this chapter, Irish industrial strategy had played an important role in creating the Celtic Tiger. Given Ireland’s effective lack of much industrial history, it was an impressive achievement. Ireland’s industrial policymakers could not draw upon a legacy of skills and capabilities upon which to build a strategy. The country’s lack of an industrial history did not bequeath the country with virtually any world-class manufacturing sectors or even individual enterprises. The lack of business enterprises with the capabilities to drive growth was not lost on Irish industrial policymakers. Established by the Irish government in the late 1940s, the Industrial Development Authority (IDA) later in the 1970s became one of the world’s leading foreign investment attraction agencies and attracted many of the US’s leading electronics and pharmaceutical companies to make Ireland their European base of operations. The strategy to attract foreign direct

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investment (FDI) was enormously successful, and it is largely responsible for creating the Celtic Tiger boom years of the 1990s. Many multi-national corporations (MNCs) set up branch plants in Ireland, many of which operated according to world-class manufacturing performance standards. EU Structural Funds were used during the 1990s to improve the state of physical infrastructure and to establish a national tier of regional technology colleges (RTCs) to develop an engineering and business curriculum and hire the staff needed to educate the students to meet the specific human resources needs of the MNCs and to run locally managed, globally successful branch plants. The IDA was largely responsible for building the inter-organizational links amongst government, education, and industry that were required to attract many world-leading companies to build branch plants and collectively to establish sectors in Ireland. However, the huge success of the FDI-led strategy created new growth challenges. First, FDI did not lead to R&D investment in Ireland. While the affiliate plants did and do operate according to world-class production standards in terms of cost, quality and time, most do not establish NPD and TM capabilities in their Irish operations. This is understandable: success at TM and NPD are tied into extra-firm networks, intangible infrastructures and chains of innovation developed over time at the company’s home base. Second, success at attracting FDI was not followed by the emergence and growth of a population of indigenous entrepreneurial firms. Overall national growth remained stubbornly dependent upon FDI. With hindsight, the strategic challenge, that was largely neglected, shifted from one of attracting foreign investment to building indigenous and integrated productive structures. The response to the challenges facing indigenous enterprise growth led in 1993 to the separation of the IDA into three separate organizations (MacSharry and White, 2000). The IDA would continue to specialize in promoting foreign investment, but a new agency, Enterprise Ireland, was established to specialize in assisting domestic industry. Forfás, Ireland’s national trade and innovation advisory board, specialized in research and on policy advice. The IDA continued to do what it did best. As the original waves of computer, medical device and pharmaceutical firms gradually matured, it attracted a new wave of FDI in international financial services and new social media. Concurrently, the government established tax incentives to encourage R&D investment by foreign firms, which were extended to indigenous enterprises. And the government created Science Foundation Ireland on the model of the National Science Foundation of the US to build scientific research capacity in Irish universities. The question then became: did the new industrial policy measures work in addressing the challenges of limited R&D and the scarcity of indigenous, rapidly growing entrepreneurial firms? The aggregate R&D-related data suggest that they were not successful in fostering the creation of an indigenous “knowledge” economy. However, the aggregate data could hide real progress in business development not captured by R&D and patent statistics.

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To get a deeper understanding of the productive structures, an investigative project was conducted in the Irish cross-border region using a research methodology that combined official macro-sector data and personal visits to enterprises in the border counties of Ireland and Northern Ireland. Many individual firms were found that were highly successful, together with a limited number of entrepreneurial firms (Bradley and Best, 2011, 2012a, 2012b). Most of these developed a lone-firm strategy; they were not members of networked groups of firms or adaptable clusters. Nothing was wrong with these companies. In fact, they were quite extraordinary, but the problem was that there were far too few such entrepreneurial firms. The productive structures in which they were embedded did not include “intangible infrastructures” enjoyed by SMEs in the core countries that can be leveraged to develop and grow new products and regions to grow new companies. Consequently, the sectors within which they operated were not integral parts of differentiated clusters with the adaptive capability to develop new products and processes to detect, create and exploit market opportunities and assimilate new technologies. As noted above, intangible infrastructures have a double role: they are used by firms pursuing product-led strategies and the means of delivering industrial policy measures designed to enhance NPD and TM capabilities of a region or nation’s enterprises. Examples of the missing intangible infrastructures are lack of clusters of tooling, instruments, and equipmentmaking companies; science and technology research labs; and businesscapability development resources. Without a critical mass of companies that pursue product-led strategies, it is little wonder that intangible infrastructures common in the core economies are largely non-existent. It is important to note that infrastructures on their own are not the key to the establishment of a population of entrepreneurial firms. It depends upon the productive structures in which they are embedded and the extent to which they are interconnected. Comparing the indigenous business system of Ireland with the core economies, we can distinguish two types of industrial policies. They point to two different development paradigms and consequent business cultures. The intangible infrastructures that structure arms-length relationships between governmental agencies and companies in the core economies are missing in Ireland. The other paradigm is one of direct assistance. It can include government funding of human capital and material infrastructures. But too often industrial policy led by one-to-one relationships between industrial policy agencies and client companies feed into a business culture of state dependency. One can distinguish the two industrial policy approaches in the following way. One leads in the direction of dependency through compensation for perceived threats and weaknesses. It is pushed by state agencies and creates a comfort zone for regional actors. The other seeks to identify existing strengths and opportunities and to shape distinctive regional development strategies that require much greater local inputs, and it makes greater calls on local imagination and implementation.

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The big question is why the gap in productive structures between the EU core and periphery countries has not converged after the creation of a single market combined with over 20 years of well-financed EU regional development investments. Ireland is interesting because of the very success of industrial policy in the past. The problem on the periphery is not market failure; it is lack of organizational capabilities. The business enterprises on the periphery lack the capabilities to compete in the Single Market. Enterprises on the periphery are embedded in productive structures that do not support entrepreneurial firms and foster open-system, focus and network business strategies that drive cluster dynamic processes (Best, 2001, 2018). The IDA found a successful way to set up plants with world-class manufacturing practices via attracting affiliates of MNCs. The problem came when the challenge shifted to the need to devise the means to establish and diffuse NPD and TM capabilities to the main body of indigenous firms. This demanded a more fully integrated productive structure and associated industrial policy strategy. This is where the Irish strategy was shown to be wanting. Not enough firms developed new products, moved into new markets, grew to mid-size, adopted new technologies, or innovated. Lacking the infrastructures to support product-led competition, the indigenous enterprises struggled to survive in a competitive wedge between the technologically innovative European regions on one side and Asian high-volume low-cost producers on the other, both of which benefitted from superior productive structures.

Product systems and intractable sectors I have addressed industrial policy’s role in advancing a region or nation’s productive structures in the form of production and business development capabilities. As one scans the economies of the Eurozone, another form of structural imbalance distinguishes the core from the peripheral economies. The design of product systems in which private and social rationality diverge is left to the “market” in the periphery but guided by industrial policy in the Nordic countries. These are cases in which choosing one product system precludes choosing another. Here, product choice is also industry choice and will have long-term consequences. Some are obvious cases. For example, once the car-based mode of urban transportation is in place, it affects the cost of living, as everyone must buy a car and pay for insurance. And as more move to the car, insurance fees and injury claims mount and the exodus from public transportation drives up its costs per passenger as well. Eventually, everyone is worse off as congestion increases the time required for travel. Public pressure will mount for increased expenditures on infrastructure in the form of more roads funded by the government. At this point, the cost of re-engineering cities for a combined mass transit and bicycle system would no longer be an option. In other cases, major product systems take shape without consideration of inter-sector spillover costs. The Irish energy sector grew rapidly but was

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entirely import-dependent. It did not have to be. Both the housing and transportation product systems increased the demand for imported fossil fuels, while Ireland’s greatest natural energy resource, wind off the west coast, remained unexploited. The centralized national grid based on imported fossil fuels would be quickly overwhelmed if offshore windmills were to be connected to the low-capacity transmission lines on the west coast. In these major industries, pervasive consumption interdependencies and/or scale economies exist and generate path-dependent processes that structurally reinforce the original choice of product system. Over time, they create a “social infrastructure of consumption” that locks them in place. Not surprisingly, according to the Irish Academy of Engineering (2010), Ireland’s infrastructural performance is only half that of the Scandinavian countries. In the core economies, governments organize urban transportation, energy systems, healthcare, and building codes to align private and collective rationality. This is not so in the periphery, where product system choice is commonly left to private choice in the “market” without consideration of the consequences. EU Structural Funds that go to governments that lack strategic and unified economic policy frameworks risk being wasted on fragmented infrastructure projects, direct aid to companies, and human resources programs that do not advance long-term industrial performance. Absent a theoretical analysis of productive structures and the ideological dominance of neoliberalism, the social market model has not informed EC industrial policy documents. In its wake, the “direct aid” model has been applied and industrial policymaking was shunted away from DG-ECFIN to DG-REGIO. Here, the political appeal of decentralization of Structural Funds has trumped concerns over the lack of absorptive capacity to meet the challenge of building and rebuilding core economy-like productive structures.

Conclusion: government as strategic organizer The problem in the peripheral economies of the EU is the lack of NPD and TM capabilities in their business enterprises. Economies in the periphery of Europe lack flexibility but not only or even primarily in labour markets and government regulations. The deeper cause of inflexibility is in the productive structures. The way ahead in the EU is for the economic policymaking agencies of the EC to guide the development of structural change programs in the peripheral regions that have proven successful in the core nations. To do its job, government must be a long-term “strategic organizer” rather than a short-term “market optimizer.” This involves developing industrial policies informed by an economicanalytical framework that accounts for the interrelationships of the constituent elements of a region or a nation’s productive structures. From the organizational capabilities perspective, it is the responsibility of government to develop a strategic vision and policies that align the constituent elements of productive structure. Such policies must meet three conditions.

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First, industrial policies need to be strategic and built upon an evidencebased, global competitor analysis of the elements of each region or nation’s productive structure. For this, each region’s capabilities, skills, facilities, and infrastructures must be audited, researched, made transparent, and benchmarked with competitor productive structures. The opportunities for sectoral transitions must be researched within a global strategy framework. Economic development involves sectoral transitions. Evidence-based industrial policy requires company-specific databases to search for indicators as expressed in the market of distinctive local technical capabilities and deep craft skills that can be nurtured by targeted infrastructural development. The data can also be interrogated to identify entrepreneurial firms, emerging sectors, cluster dynamics, and sector-transitioning processes. Static clusters are relatively easy to identify; the challenge is to characterize innovating firms and adaptable clusters. This administrative capacity is not currently in place in EU economic development agencies. It is part of normal activities in the core countries. Second, governments in the peripheral economies must design growth plans that address the changes required to transform and align the elements of the nation or region’s productive structure including the business system, production capabilities, skill-formation institutions and technicalsupport infrastructures (Best, 2018). This includes attention to the chain of innovation, as all three spheres must be linked into a triangular system to coordinate basic, developmental and applied research with the related enterprise processes that support NPD. The vision of organizational change must address how companies are governed and how the shop floor is organized. Third, the demand side of the economy must be incorporated into industrial policymaking to account for consumption and sectoral interdependencies. It is not enough to grow the easiest sectors which may have very high social costs once consumption and sectoral spillover or interdependencies are considered. A snapshot of the Nordic sectoral composition reveals that the transportation, energy, and construction sectors have not been treated separately, but that otherwise the hidden costs of consumption and sectoral interdependencies have been made transparent. Industrial policy in the core economies has administrative capacity to account for both production-side and consumption-side “infrastructures” and their effects on growth. Moreover, governments have a role in influencing and even creating markets to which companies respond. Governments do this by funding material infrastructures in, for example, highway systems or mass transit systems or by being buyers of technologically advanced products and services. In these cases, the government is creating market opportunities to which companies respond. Timing is critical. After socially irrational product systems have been “institutionalized,” the consequences cannot be corrected in the short to medium term by “internalizing the market” in the form of taxes and

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subsidies. A carbon tax, for example, that is not accompanied by a restructuring program to transition to alternative product systems in the transportation, energy and construction sectors does not provide a strategic vision to guide development programs such as the EU Structural Funds. This is the challenge of industrial policy.

Acknowledgements Everything that I have written over the last decade or so, especially about the policy framework perspective outlined in this chapter, has been filtered through sharing ideas and working in the field with John Bradley. Paola Villa constructed Table 14.1 and made constructive comments to improve every part of this chapter. If it was a science paper, then all of our names would be on it.

Notes 1 See https://ec.europa.eu/eurostat/statistics-explained/index.php/Archive:Patent_sta tistics [accessed 8 July 2019]. NUTS = Nomenclature of Territorial Units for Statistics. 2 The DG-Regional Policy (DG-REGIO) runs the Structural Funds programs independently of the DG-Economic and Finance (DG-ECFIN), which is responsible for wider economic policies. This separation between public investment policy and overall economic policy is rarely seen at the level of individual member states (Bradley and Untiedt, 2012; Lords, 2008). 3 Detailed data and charts on European Structural and Investment Funds are available at https://ec.europa.eu/regional_policy/en/funding/ [accessed 8 July 2019]. 4 The surprise was Greece, which averaged 4% GDP growth for the decade to 2007 (AMECO database, at http://ec.europa.eu/economy_finance/ameco/user/serie/ SelectSerie.cfm). 5 The Lisbon Strategy was the first time that member states agreed to have R&D targets to be reached over a 10-year period (i.e., by 2010). The Europe 2020 Strategy, launched in 2010, also set R&D targets to be reached by 2020. The focus of this chapter is to propose the concept of “strategic industrial policy,” and to show the weaknesses of the approach of industrial policy at the EU level before and during the crisis and the austerity period. 6 AMECO database, at: http://ec.europa.eu/economy_finance/ameco/user/serie/ SelectSerie.cfm. 7 Irish GDP data as a measure of national income and output are distorted by the price transfer practices of its large MNE sector combined with the nation’s unique corporate tax regime. 8 Research and innovation statistics at the regional level can be found at https://ec. europa.eu/eurostat/statistics-explained/index.php/Research_and_innovation_statis tics_at_regional_level [accessed 8 July 2019]. 9 See https://www.oecd.org/sti/scoreboard.htm [accessed 8 July 2019]. OECD = Organisation for Co-operation and Development; STI = Science, Technology and Innovation. 10 Data on R&D ranking of the EU’s top 1,000 companies are available at http://iri. jrc.ec.europa.eu/scoreboard17.html [accessed 8 July 2019].

38 41

58 70 53 47 30 32 209 12 21 57 4 4

7.6 23.1

5.3 9.2 16.4 5.5 10.7 8.3 81.9 4.4 45.3 59.5 11.2 10.6

Population (million)

17,468 5,125

6,787 6,952 9,703 3,418 2,558 736 45,097 532 1,471 6,566 53 153

R&D investment (E million)

950,875 562,611

534,814 834,151 1,003,566 310,776 570,200 352,434 5,885,277 60,602 485,379 1,185,032 6,281 34,863

Employees (No.)

32.0 6.1

25.0 23.0 15.0 14.0 13.0 10.6 18.0 3.4 2.8 5.0 0.1 0.8

% of LF3

2.71 n.a.

3.55 3.49 1.62 1.62 1.92 2.57 2.60 1.39 1.92 1.16 0.66 1.45 3.37 n.a.

3.17 3.14 1.98 2.91 2.39 3.08 2.87 1.50 1.24 1.34 0.83 1.29

5.65 n.a.

15.95 11.00 5.69 12.12 8.26 8.44 7.41 6.81 6.14 3.78 4.38 7.95

8.94 n.a.

15.27 14.07 8.74 14.82 11.14 10.01 8.25 12.65 6.78 4.86 7.40 8.45

2014

2008

2008

2014

Total researchers per 1,000 total employment

R&D as % of GDP

B) Main science and technological indicators (MSTI)

3

2

1

The EU Industrial R&D Investment Scoreboard is a compilation of the top 1000 European headquartered companies by R&D investment. The EU Industrial R&D Investment Scoreboard has a separate scorecard for the top 1000 non-EU companies. Percentage of labour force was derived by assuming the labour force was equal to 40% of a country’s population.

Sources: EC (2009); population data from Eurostat database; Wikipedia; OECD; and MIST at https://stats.oecd.org/Index.aspx?DataSetCode=MSTI_PUB# [accessed 8 July 2019].

Switzerland Taiwan

Non-EU2

Finland Sweden Netherlands Denmark Belgium Austria Germany Ireland Spain Italy Greece Portugal

EU

Companies

A) R&D EU scoreboard companies and employment impact, 20081

Table 14.1 Indicators on R&D in a sample of EU and non-EU countries around 2008 and 2014.

Annex

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References Alecke, B., Alsleben, C., Scharr, F., Untiedt, G. (2006). Are there really high-tech clusters? The geographic concentration of German manufacturing industries and its determinants. Annals of Regional Science, 40(1), 19–42. Best, M. (1982). The political economy of socially irrational products. Cambridge Journal of Economics, 6(1), 53–64. Best, M. (2001). The New Competitive Advantage: The Renewal of American Industry. Oxford: Oxford University Press. Best, M. (2018). How Growth Really Happens: The Making of Economic Miracles through Production, Governance and Skills. Princeton, NJ: Princeton University Press. Bradley, J. and Best, M. (2011). Bypassed places? The post-Belfast Agreement border economy. Journal of Cross Border Studies in Ireland, 6, 25–44. Bradley, J. and Best, M. (2012a). Rethinking regional renewal: towards a cross-border economic development zone. Journal of Cross Border Studies in Ireland, 7, 37–58. Bradley, J. and Best, M. (2012b). Cross Border Economic Renewal: Rethinking Irish Regional Policy. Armagh, Northern Ireland: Centre for Cross Border Studies. http:// www.crossborder.ie/pubs/2012-economic-report.pdf [accessed 8 July 2019]. Bradley, J. and Untiedt, G. (2012). Future perspectives on EU cohesion policy. Hermin Economic Paper, no. 1–2012. http://www.herminonline.net/images/downloads/hep/ HEP-1-2012.pdf [accessed 8 July 2019]. EC (2006). The Growth and Jobs Strategy and the Reform of European Cohesion Policy. Fourth progress report on cohesion. Communication from the Commission. COM(2006) 281 final. Brussels: European Commission. http://ec.europa.eu/transpa rency/regdoc/rep/1/2006/EN/1-2006-281-EN-F1-1.Pdf [accessed 8 July 2019]. EC (2009). The 2009 EU Industrial R&D Investment Scoreboard. Luxembourg: Office for Official Publications of the European Communities. http://iri.jrc.ec.europa.eu/ documents/10180/11324/The%202009%20EU%20Industrial%20R%26D%20Investm ent%20Scoreboard [accessed 8 July 2019]. EuroMemo Group (2012). Euromemorandum 2012. European Integration at the Crossroads: Democratic Deepening for Stability, Solidarity, and Social Justice. http://www2. euromemorandum.eu/uploads/euromemorandum_2012.pdf [accessed 8 July 2019]. Hirsch, F. (1977). The Social Limits to Growth. London: Routledge and Kegan Paul. Irish Academy of Engineering (2010). Infrastructure for an Island Population of over 8 Million. Newry, Ireland: InterTradeIreland. Lords (2008). The Future of EU Regional Policy, House of Lords, HL 141. London: The Stationary Office. MacSharry, R. and White, P. (2000). The Making of the Celtic Tiger: The Inside Story of Ireland’s Boom Economy. Cork, Ireland: Mercier Press. Marx, K. ([1867] 1961). Capital: A Critique of Political Economy, Vol. 1. Moscow: Foreign Language Publishing House. Penrose, E. ([1959] 2009). The Theory of the Growth of the Firm, Revised ed. Oxford: Oxford University Press. Richardson, G. (1972). The organization of industry. Economic Journal, 82(327), 883–896. Venhor, B. (2010). The power of uncommon common sense management principles – the secret recipe of German Mittelstand companies – lessons for large and small companies. Paper presented at the 2nd Global Drucker Forum Vienna, 18–19 November. http://www.druckersociety.at/repository/2010/day01/15'30-17'00/Venohr_ 101118_PPT_Beamerversion.pdf [accessed 8 July 2019].

15 Vision vs improvisation On the industrial future of Italy Salvatore Biasco

Finally, we can talk about it Industrial policy is the set of public actions aimed at increasing the competitiveness of a country or area and at strengthening its productive system through direct and indirect instruments. The neoliberal era questioned state intervention in the productive structure, considering it discretionary, arbitrary and in fact inefficient with respect to its alternatives. These alternatives were essentially reduced to a single one in Italy as well in other Western countries: letting market selection and pressure operate, predisposing a competitive and flexible economic environment populated by multiple private actors. In substance, industrial policy has long meant competition policy (including competition in the labour market) and privatization. It was complemented by the creation of sector authorities responsible for monitoring the competitive process by tax relief and by other measures aimed at encouraging and incentivizing economic activity. The European Union (EU) has reinforced this drive with its extreme aversion to discretionary policies and through the sentences of the Court of Justice, which always leaned towards keeping the state out of the economy and instead legitimating fiscal and regulative competition. The term itself, “industrial policy,” has long been banned from the lexicon of political economy alongside its disappearance from academic debate and textbooks. Only very recently has it re-emerged in the EU debate (although practices that could be referred to as “industrial policy” have always been implemented in some form by the most far-sighted states). In Italy in particular, the long absence seems to be over: the term has been cleared for use, but it was necessary to wait until 2016 (with the Digital Plan) to see any action that could properly be ascribed to it. It should be remembered that industrial policy is not limited to single interventions concerning firms, sectors or public industry, but also consists in the ability to govern the context in which productive processes occur by acting on the ground, coordinating public and private actors, monitoring the implementation of policies, setting priorities and calling relevant actors to their responsibilities.

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In what follows, I would like to propose a normative and critical review of the “state of the affairs” of industrial policy in Italy. The aim is not to present a review of the large literature developed over time; rather, I intend to highlight the key issues that should be addressed by policy-makers in order to overcome the main structural weaknesses of the Italian productive structure. The choice to adopt a normative and critical review of the ‘state of affairs’ on the industrial future of Italy justifies the lack of references in the text and the inclusion of a limited number of references for further reading at the end of the chapter. I will start by examining how the country is faring in terms of some of the policies impacting the generality of production sectors in a horizontal way (in Italy, called “factor policies”). Next, I will proceed by examining some of those specifically directed at orienting the productive structure of the country. Finally, I will claim that, although the policies envisaged in this chapter must be implemented on a national scale and as a national responsibility, they must be geared towards producing a particular effect where development is lagging, namely in the South, where territorial differences with the most advanced areas of the country are quite sharp.

The need for governing policies affecting the productive context Research and development Research policy certainly involves the management of the productive context. At its heart, it is not the provision of incentives – often directed towards the support of actions that firms would have undertaken in any case (as is currently happening in Italy) – but the drawing-up of long-term plans focused on major projects of technological development. These plans require a coherent governance of multi-dimensional processes and a unified management of public funds – which should rely on an Agency for Research to guarantee selection procedures according to well-established international criteria. An industrial policy worthy of its name should provide an appropriate allocation of resources to the selected projects and call together the best industrial capacities, in terms of engineering, technology and delivery, in synergy with universities and research centres. It should take care of the production and territorial chains that are connected to these projects to make these chains a driver of growth. Its missions could be centred on green chemistry, smart cities, digital development, cultural assets, mobility and energy efficiency. In Italy, however, these missions are struggling to take off: a national agency is not there yet, the programmes of eight ministries and 20 Regions are often inconsistent and generic, and the disbursements are not infrequently random. When, in 2016, spending on research started to grow again – after years in which, unlike in other countries, it had been curtailed – this happened with great approximation

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and with the assignment of the Human Technopole project funds (for food research) to an institute without competences in the field. Moreover, no open calls for tender, clear rules or calls to the scientific community to develop alternative proposals were envisaged. Some later revisions about the selection of projects are not enough to overcome the nature of an improvised project. Close to the question of the governance of major research projects is also the question of applied research at the service of firms. The Italian model runs the risk of not pursuing either a mission-oriented or an applied research characterization, but remaining in between. It is also not guided by a public mandate and is characterized by the dispersion and self-referentiality of different centres. As regards applied research, there are no national (or local) institutions capable of connecting firms with places where innovative research is conducted, as is the German Fraunhofer Gesellschaft. Neither do we have something resembling the Fachhochschulen (laboratories and schools of applied sciences operating outside the university system). To develop applied research, it would take six or seven research centres focused on technological paradigms and the transfer of knowledge. A criterion to create them and to choose their location could, experimentally, be based on the financing share of property guaranteed by consortia of private partners in the proponent territorial district or virtual district (in addition, of course, to criteria based on the quality of projects themselves, not least the quality of the network of the subjects involved, including universities and research centres). This could happen through public bidding or auction. Education The education system is another pillar for a well-designed productive context capable of taking into account the needs of the productive structure. Issues span from technical schools to universities. Good governance and a good design are particularly important in this field, though Italy is far from moving in this direction. In Italy, technical education suffers from various shortcomings: there is no organic design, hours spent in laboratories and in specialized teaching have been reduced, and programmes have been made more rigid. The country also lacks a national teacher-training system. On top of this, there is no coordination between state-regulated professional education, which is too similar to high school, and that of regional competence, which is characterized by a strong differentiation in school quality and a by small range of professional qualifications. Finally, there is no system of national evaluation. The paradox is that, at the same time, firms find it hard to find on the market about 150,000 technical profiles to be hired. Despite efforts made in recent years to introduce some corrections, the model of technical training requires a radical revision of its institutional set-up and

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a substantial increase in spending commitments. Suffice it to say that the Italian expenditure per pupil is equivalent to half that of France and that of Germany. In addition, while in Germany apprenticeship training is not an internship or a stage but an organic part of the scholastic path, in Italy it is simply a particular work contract (i.e., a sort of temporary contract, where on-the-job training is by and large informal). Post-diploma technical education is incardinated in ITS (Instituti Tecnici Superiori, i.e., higher technical institutes), of which only 103 exist and host less than 12,000 students, whereas the French equivalents train 1.2 million. The recent provision for school–work alternation has been introduced without adequate preparation and due attention to the formative content of the working experience. Rather than turning universities into a driver of the country’s growth, the state has left them to themselves without a wider vision of the demand for competences. In the last decade, the number of standard academic positions (i.e., teaching staff) has decreased from 62,000 (in 2008) to 50,000 today and that of students from 320,000 to 260,000, and funds have been cut by 20 percent. Many mechanisms follow perverse logic: allocation of funds, selection and replacement of teaching staff, evaluation processes of departments, degree options and the prevalence of competition over collaboration. The organization of research suffers, as mentioned, from self-reliability and from an excessive articulation of professional profiles (coupled with frozen careers and low pay). Rebalancing plans among universities of different quality based on agreements and checks are absent. In recent years, Italy has focused on sporadic instances of excellence in a worsening framework, rather than aiming to raise the general average quality, with the consequence of seeing a great deal of difference in quality between institutions and between territories. The establishment of the “three plus two” education structure (with Bachelor of Science and Master of Science programmes) has not reached its goal, considering that after obtaining the educational qualification (on average in five years, instead of three, and with low marks, below 90 out of 110 in one-third of cases), 55 per cent of Bachelor graduates continue their tertiary education by undertaking a higher degree course. A revision is needed: the “three plus two” system must be rethought in favour of professionalizing degrees that are not subordinated to specialist degrees. In fact, the short study paths most directly related to high-level technical professions are few and very weak (while in Germany, such courses account for almost 40 per cent of graduates). This issue is now being addressed by the Italian Conference of Deans, but it has not yet been broached by the political class. Without an applied technical education, it is difficult for the Italian productive sector to prosper. It must be added that also “high-level education apprenticeship” (introduced in 2003), a form of higher technical specialization to be carried out in universities and firms at the same time, has not taken off.

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Direct policies At the level of direct policies, there has never been a debate in Italy dealing with the issue of what kind of productive structure the country needs to achieve and how to govern the processes needed to get such a structure. Yet, it is necessary to address these questions in order to guide the kind of interventions suitable to design a model for Italy to follow for the next 20 years. The questions to be addressed are different, all-important, and urgent. In particular, there is the question of whether to focus on the dimensional growth of small firms, on technological brokerage, on logistics, on the development of the South, on energy efficiency, on cultural goods, or on sectoral excellence, and so on. What is absolutely essential is that the resources allocated to firms, even those aimed at tax relief, are not dispersed to operations carried out without a vision of the future and given out at random. Some facts mark the distance from this approach. To have a digitalization plan for the country, Italy had to wait for 2016. Funds allocated to infrastructures for the period 2015–2023 by the governments in office in the previous parliamentary term have no operational plans and have been made effectively programmable from 2019. The government that was in office up to few months ago has planned a very modest increase in public investments and suspended some major works (e.g. the Turin–Lyon railroad and the natural gas pipeline in Puglia). Drilling works in the Adriatic Sea have been halted too. What is absolutely essential is that the resources allocated to firms, even those aimed at tax relief, are not dispersed in operations carried out without a vision of the future. Digitalization The strategic importance of the Digital Agenda (enacted with the budget law for 2017) is out of the question, but its current conceptualization has both merits and shortcomings. The key point is that the creation of network infrastructure is not enough. The development of digital platforms for supply chains and productive districts is also needed in order to integrate firms and connect them to public and private research centres, according to a rational design. This should be based on open standards, on the sharing of expertise and best practices, and on guidance services. The competence centres (centri di competenza) of a future establishment (envisaged with the 2017 budget and identifying eight universities as centres of reference for firms) are still to be defined, if ever, with regard to their vocational specialties and operational parameters. In any case, their funding is insufficient. Also, with regard to material infrastructure there is much room to suspect that the duplication of the broadband grid in the name of competition would imply a form of waste. It is probably more appropriate to opt for a single network created through a synergy between the public and private sectors. Furthermore, the digital literacy plan aimed at families and small and medium-sized enterprises (SMEs) is not clearly defined.

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With regard to the diffusion of public wi-fi connectivity, there has been a disengagement of local administrators and governments apart from the two territorial exceptions of Milan and Rome, as well as Sardinia, which, however, only have a limited number of hot-spots. The reasons why the country’s second digital grid, owned by Poste Italiane, has not been utilized for the diffusion of wi-fi throughout the national territory are unclear. The privatization of the Poste Italiane (the company with 13,000 branches providing integrated services in insurance, banking, mail and transportation) is incomprehensible if not seen in the light of a neoliberal understanding of industrial policy. Rather than capitalizing on the very high synergies between this company and the public sector (logistics, digitization of the public administration, a variety of possibilities of connecting citizens with the administration), the state has let the company be led by private sector concerns (and, in fact the expansion of Poste has taken place in another direction – that is, it is entering into the asset management business). Lastly, it is not clear why digitalized information on six million firms and ten million administrators, which is owned by InfoCamere (a consortium set up by the Chambers of Commerce), has not been acquired by the state. As it now stands, it is likely that this information will be duplicated. Without dwelling on the subject, it must be added that industrial policy obviously also involves the spread of knowledge, and that it requires, among other things, that artificial intelligence algorithms be open and accessible to all. SMEs and technology On SMEs, there is no organic project to turn their widespread diffusion in Italy into a system, a project that – horizontally or by supply chains – that would aim at their aggregation and enable them to make a technological leap forward. Suffice it to say that no measures encouraging mergers is in place, apart from tax neutrality when they merge. Italy has been very late in recognizing firm networks legally, that is, those projects between producers aimed at a common development of services and platforms. Such contracts are now 5,300 and involve more than 32,000 firms, but they are not a lever of industrial policy. These networks have not benefitted from significant financial support, nor, most importantly, have they been encouraged to evolve from contractual networks to organic networks (those including clauses constraining business transfer or providing for other forms of integration leading to mergers). Only through an institutional guidance can the connection of SMEs with technology be fostered. This must move from the awareness that smaller firms are often unable to understand how to innovate in a manner that is suitable for them. Consequently, demands for innovation remain unexpressed even if firms generally feel a need for a technological advancement. Furthermore, there is often no ready-to-use technology that is applicable to their individual cases. More than incentives, a technological leap requires scouting by professional figures and institutions that are familiar with production-related issues

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and know how to dialogue with the world of applied research, in order to adapt available solutions to each specific case. The competence centres, when they become operational, will seem to be more directed towards large and medium-large enterprises, while for SMEs it remains necessary to create a specific interface between research and firms and to focus on technological brokerage figures or institutions able to carry out the scouting job. These should be accredited in a special register. Regions can devote their own institutions to this task, but the central state should play the role of coordinator and co-financier. Completing the framework would require a portal of innovations, which could be entrusted to the National Institute for Research (Consiglio Nazionale delle Ricerche, CNR), and a portal of available technical skills that would be classified according to standard criteria by universities. The proposal for providing tax breaks to SMEs employing “digital angels,” that is, experts on enabling technologies, can be useful in the absence of something else, but it does not address the need to conceive of a governance of the overall process aimed at their growth, which, as mentioned, is not triggered spontaneously. Internationalization The governance of the internationalization processes remains very much incomplete, as the Chamber of Commerce and the Italian Trade Agency (Istituto per il Commercio Internationale, ICE) do not communicate with each other, whereas in other countries, primarily Germany, their ability to work in synergy represents an important strength of SMEs. In this area, there still is no binding national strategy that allows Regions, which today have a broad mandate in terms of industrial policy, to find their role in a framework without diverting resources from it or duplicating various operations. Special attention to logistics Although I do not wish to dwell on specific aspects of different sectors, it is appropriate to stop over at least on the subject of the logistics for international trade, albeit briefly. Logistics could represent a winning card in the future and allow Italy to become a hub for part of the freight traffic which today follows Northern European shipping routes. An important opportunity is offered by the doubling of the Suez Canal and the Gotthard Tunnel, but, to seize it, Italy must try to connect itself more closely to the trans-European networks. An infrastructural commitment is needed to accommodate hightonnage ships, as well as for the allocation of rail investments, according to the strategic importance of commercial ports. The aim of all that is not only to expand the intermediated volumes of freight traffic, but also to move it significantly from the road to the railway and the sea. Italy could be a natural hub for Switzerland, Alsace, Bavaria, and Baden Württemberg. In contrast, it suffices to note that 70 per cent of finished and semi-finished products and

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raw materials arriving in Northern Italy from the East transit through foreign logistics hubs and operators, while only 13 per cent of the EU’s sea freight traffic passes through Italy. The Plan for Logistics and Ports (launched in 2015) draws an effective and interesting picture, but reasons to be satisfied when we take stock of it are very few. The projects relating to the Giovi and the Brenner passes are proceeding slowly, while prospects for the Italy–France axis remain uncertain. Problems related to logistics and transportation are also intertwined with the Southern question as the South is still isolated from the most important railway lines? The project to extend the high-speed line going up to Reggio Calabria has not materialized, and the construction of the Naples-Bari-Taranto route has only received its first round of financing. There is also much uncertainty about its ultimate completion, and, in any case, is proceeding rather slowly. Ports are not only important for freight traffic but for cruise-ship traffic as well. Ports of landing for cruise traffic should be transformed into points of tourist attraction and into an integral part of the social life of the urban fabric with recreational, sport and commercial facilities. They should be connected with the places of interest in the hinterland, especially in the South. Accordingly, the national and regional rail network should be unique, integrated and capable of satisfying the relevant interconnections. The fragmentation of local rail operators will not help to achieve this goal.

Connecting industrial policy to territorial rebalancing The question of how an industrial policy intertwines with territorial rebalancing must be posed, on account of its fundamental importance; it does not only touch logistical and infrastructural issues. Unfortunately, the crucial role that the South has in determining the future of Italy does not seem to raise the concern that it should. An idea is missing on how to insert the South into national policies aimed at redesigning the administrative, regulatory, fiscal and incentive framework of the entire Italian economy; policies through which one can expect particular repercussions in this area and that can have a territorial graduation, even within the South itself. It cannot be said that incentives and bonuses are lacking; many exist and of various types. Financial commitments, however, are mainly borne by the Regions, but their provision does not respond to a broader design that would instead require a direct commitment by the central government, a monitoring of the various actors, and the ability to provide guidance in managing the processes. “Pacts” signed by the government with each southern Region and with some southern cities risk leading to a fragmentation of projects with numerous duplications. These pacts consist in a survey of the available resources and in a list of interventions to be implemented with related deadlines and foreseen disbursements. It is certainly noteworthy that they have indeed been launched, and that some of the commitments that they envisage are valuable. At their

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core, however, they consist essentially in an attempt to accelerate the use of the EU Structural Funds and often promote dormant projects to be funded with resources already destined for the South. No additional and specific commitments are currently foreseen beyond ordinary public spending destined to the South for the 2014–2020 period. Overall, the impression one gets is that the pacts do not correct the underlying weakness of policies for the South and that they are, in fact, working poorly. The role of the South would need to be rethought in its entirety and in the context of its geo-economic location (in the Mediterranean Sea). Instead, the framework of productive policies has remained for too long mainly a responsibility of fragile regional institutions in a context not within their grasp. The Regions have been left without a model of reference, without a reward for best practices and without a national deposit of experiences to inspire the different territorial contexts. The result has been a poor hierarchy of interventions, an excess of aid to micro-enterprises and local activities, an excessively pronounced focus on incentive tools, and oversized partnerships characterized by a lack of precision in the tasks of the actors present at the decision-making tables. One cannot escape the impression that the Regions have focused on strengthening and supporting the fabric of local businesses rather than attracting capital. On the other hand, the great infrastructural axes of the South, such as energy, water and transport, exceed the planning capacities of the Regions. Further, the fields of ports, interports, sea motorways and the digitalization of the territory as well as public administration provide new objectives that, in the same way, transcend the regional dimension. As mentioned above, the same can be said about the role of trade logistics. There is no need to renounce to the degree of federalism achieved, nor is there a need to affirm that participatory and bottom-up development should cease, but it must be stated that it should take place in a framework that rewards selectivity and sets the baseline criteria against which the effectiveness and the externalities of the allocation of resources can be assessed. So far, this context is missing. It remains an illusion to continue thinking that development can rise solely from the bottom upwards. A public subject – or more public or mixed institutions – is fundamental in implementing systemic coordination; in providing highquality, integrated projects; and in organizing capital and private and public actors. Such a subject should dialogue with the territories and carry out policies to attract investments related to their unique features, as well as interact with the technological districts, productive supply chains, and cities. And above all, it must establish priorities. We do not need a subject that manages resources, but rather one that is able to direct and coordinate in such a way as to bring about change. To conclude, I summarize my arguments by recalling the most recurrent positive and negative terms in this short review of some of the issues of industrial policy. On the positive side, there is “governance,” “guidance,” “planning,” “future,” and “concentration of resources.” And on the negative side, there is “improvisation,” “spontaneity,” “buffer measures,” “absence of coordination,” and “dispersion.”

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Further reading Bianchi, P. (2018). 4.0 La nuova rivoluzione industriale. Bologna: Il Mulino. Biasco, S. (ed.) (2008). Il laborioso mondo delle PMI e lo Stato. Rome: Fondazione ItalianiEuropei. Cattaneo, E. (2016). Documento di studio relativo al progetto Human Technopole. Senato della Repubblica, 4 May. https://www.senato.it/leg/17/BGT/Testi/Allegati/ 00000217.pdf [accessed 14 July 2019]. Cefalo, R. (2017). Diventare “duali”? Struttura e riforma della formazione professionale in Italia. Percorsi di secondo welfare, 17 February. https://www.secondowelfare. it/primo-welfare/diventare-duali-struttura-e-riforma-della-formazione-professionale-i n-italia.html [accessed 14 July 2019]. CER (2017). Il sistema delle politiche di sostegno all’internazionalizzazione. In CER, Rapporto Cer 4/2016. Rome: Centro Europa Ricerche, 49–72. CNR (2018). Relazione sulla ricerca e l’innovazione in Italia Analisi e dati di politica della scienza e della tecnologia. Rome: Consiglio Nazionale delle Ricerche. Confcommercio (2017). Analisi e previsioni per il trasporto merci in Italia. https://www. confcommercio.it/documents/10180/3599445/Analisi+e+previsioni+per+il+trasporto +merci+in+Italia/7310f660-ce91-48a2-a0fc-1328985b92b3 [accessed 14 July 2019]. Fondazione Ricerca & Imprenditorialità (2017). Materiali per una politica industriale 4.0 inclusiva delle start-up e PMI innovative. https://www.fondazioneri.it/wp-content/ uploads/2018/04/materiali-per-una-politica-40.pdf [accessed 14 July 2019]. Ioannidis, J.P.A. (2018). Ripensare i finanziamenti. Il modo in cui distribuiamo i fondi per la ricerca scientifica non favorisce i risultati migliori, Lescienze.it, 4 December. https://www.lescienze.it/archivio/articoli/2018/12/04/news/ripensare_i_finanziam enti-4211216/ [accessed 14 July 2019]. Lucchese, M., Nascia, L. and Pianta, M. (2016). Industrial policy and technology in Italy. Economia e Politica Industriale, 43(3), 233–260. MEF (2016). Strategie per le infrastrutture di trasporto e logistica. Documento di Economia Finanza. Allegato. Roma: Ministero dell’Economia e della Finanza. http://www. dt.tesoro.it/modules/documenti_it/analisi_progammazione/documenti_programmatici/ W-_Del-_Allegato_-_INFRASTRUTTURE.pdf [accessed 14 July 2019]. Onida, F. and Viesti, G. (2016). Una nuova politica industriale in Italia. Florence: Passigli Editore. Simonazzi, A. (2015). Wanted: an industrial policy for the southern European countries: the case of Italy. In F. Gerlach, M. Schietinger and A. Ziegler (eds), A Strong Europe – But Only with a Strong Manufacturing Sector: Policy Concepts and Instruments in Ten EU Member States. Marburg: Schüren, 146–172. SVIMEZ (2016, 2017, 2018). Rapporto sull’economia del Mezzogiorno. Rome: Associazione per lo Sviluppo dell’industria del Mezzogiorno. Trigilia, C. and Viesti, G. (2016). La crisi del Mezzogiorno e gli effetti perversi delle politiche. Il Mulino, 65(1), 52–61. Viesti, G. (2016). Università in declino: Un’indagine sugli atenei da Nord a Sud. Rome: Donzelli Editore. Viesti, G. (2018). La laurea negata: Le politiche contro l’istruzione universitaria. Bari, Italy: Laterza Editore. Visco, I. (2014). Investire in conoscenza. Crescita economica e competenze per il XXI secolo. Bologna: Il Mulino. Visco, I. (2018). Investimenti pubblici per lo sviluppo dell’economia. Rome: Banca d’Italia.

Index

Entries in bold denote tables; entries in italics denote figures. “100 donne contro gli stereotipi” 197n14 abstractions, determined 210, 214, 216n6 active measures 161; see also ALMPs Agenda 2010 55 Albania: and debt build-up 93; economic growth in 84, 89; manufacturing in 103 Alipay 236 ALMPs (active labour market policies) 152–3, 155, 161, 164, 164n1, 193 Amato, Giuliano 70 Amazon 223, 225, 236 Andreotti, Giulio 79 anti-industrial actions 119 antitrust policies 143 applied research 264; in Germany 54, 253, 256; in Italy 120, 270 artificial intelligence 6, 203–4, 235, 273 Attali, Jacques 70, 75–7 austerity 1–3; EC on 35–6; German governments imposing 57; in Greece and UK 5, 168–70, 172–81; impact on economic recovery 45; in Italy 14–15, 29, 121, 124–5, 190; and labour market policies 163, 164 Austria 7; and end of Warsaw Pact 74; income inequality in 133, 136–7, 145; manufacturing in 103, 105, 108; productive structures of 254 automation 6; employment effects of 198n36, 203–5, 215, 223; and Industry 4.0 236 automotive industry 6–7; Central European cluster 53; digitization of supply chain 233–4, 237, 241–3, 245; in Spain and Italy 46–7

autonomous communities of Spain 39, 48 autonomy: financial 193; in the workplace 224, 226–8, 235 backwardness, advantage of 111n6 Baker, James 76 balanced growth, path of 204 Balladur, Édouard 70 Baltic states: current accounts of 85, 92; and debt build-up 93; deindustrialization of 88; industrial sector in 99; manufacturing in 103–5; recovery from Great Recession 89; wages in 57 banks: in EME countries 88; German 13, 56; rescuing 45, 93 bargaining power, within firms 19, 31n1, 143, 145, 220, 225 bazaar economy 123 BBC (British Broadcasting Corporation) 189 Belgium: income inequality in 133; manufacturing in 103; wages in 18, 22 Berlin Wall 74–5 Bettio, Francesca 186 big data 234, 237, 239–40, 243, 247n13 Bitterlich, Joachim 80 Bonino, Emma 82 Brandt, Willy 75 Braverman, Harry 226 Brexit 13, 168, 170, 181 Brodolini, Giacomo 196n5 Brodolini Foundation see FGB budget surpluses, in Italy 15 Bulgaria: current account of 92; and debt build-up 93; entry into EU 146;

Index manufacturing in 103–5; youth employment in 157 Bund der Vertriebenen 75 Bundesbank 70–1, 73, 79 Bush, George H. W. 77 capability developmental infrastructures, localized 252–3 capital exports 56 capital flows: and current account imbalances 92, 120; and debt-led growth 123, 126n9; liberalization of 4, 70, 88, 114; reversals of 99, 105 capital goods infrastructure 256 capitalism: modern managerial 117; use of machines under 6, 203, 205–8, 210–13, 215 carbon tax 265 care work 140, 181–2, 194–6; see also women, unpaid labour of Caucasus region 108 CEE (Central Eastern Europe) 108, 123, 159, 163 Central Europe: current account balances in 92; debt build-up in 93; export capacities of 87; growth rates 111n8; industrial sector in 40, 99; labour integration in 42; manufacturing in 103–5, 108, 125; productive structural changes in 41; see also CEE; CESEE CEPR (Centre for Economic Policy Research) 127n17 CESEE (Central, Eastern and Southeast Europe) 84–5, 88–9, 93, 101 childcare 62, 177–81, 194–5 China: automotive industry in 234, 241–5; competition for Italy from 6, 14, 23, 29; Europe’s exposure to exports from 61, 123–4; manufacturing capacity 110; productive structures of 254 Chongqing Industrial Park 244 cloud computing 235, 240, 247n13 CMPF (Centre for Media Pluralism and Freedom) 188 CNR (Consiglio Nazionale delle Ricerche) 274 Cohesion Fund 257 collective bargaining 42, 54–5, 62, 172–3 collective choices 2, 253–4 commodity production, Marx on 209–11, 214 compensation theory 203, 207–8 competence centres 241, 272, 274 competition, mode of 252

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competition policy 87, 110, 268 competitiveness: and domestic demand 9; in EMEs 85, 92; of German manufacturing 53, 123–4; and Greek structural reforms 173; of Italian industry 39–42, 117, 119–20, 122; labour market reforms and 3, 45, 52, 57, 61; of peripheral economies 258; and product quality 62, 250; and remittance dependency 108 complementarity: asymmetrical 113; symmetrical 125 computerization 204 comunidades autónomas see autonomous communities of Spain consumption, social infrastructure of 254, 257, 263 corporate governance 143–4 corruption 48 Corsi, Marcella 186 cost-competitiveness 126n4 Council of Europe, Recommendation on Gender Equality 186–7 credit booms 109 Croatia: and debt build-up 93; independence of 81; manufacturing in 101, 103–5 cross-sector interrelations 7, 234 CSRs (Country Specific Recommendations) 152 current account imbalances: in EMS 70; in Germany 51–2, 57, 60–1, 127n21; in Italy 120; in LMIEs 85, 89, 90, 92, 95, 96; unsustainable 4; see also external imbalances cyber-security see data security Czech Republic: current account of 92; and debt build-up 85, 93; and German manufacturing 53; manufacturing in 101–3; recovery from Great Recession 89 Czechoslovakia 72–3; see also Czech Republic; Slovakia data security 240, 242 debt see external debt; private debt; public debt; sovereign debt debt build-up 85 decision-making processes, in industry 221, 226, 228 deindustrialization, in CESEE countries 27, 40, 48, 88, 109 deleveraging 85, 87 Delors, Jacques 70–1, 79

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Denmark: current account balance of 41; income inequality in 133–9; manufacturing in 103; mid-sized firms in 7 depoliticization, of economic space 126n6 Deutsche Mark 52, 61, 73, 75 developmental state 125 DG-ECFIN 165n6, 263, 265n2 DG-REGIO 263, 265n2 Digital Agenda (Italy) 268, 272 digital economy 234 digital intensity 233–4, 238 digital technologies 6–7, 219, 223; adoption of 6, 225, 233–4, 236–7; categories of 241; and China/US relations 247n14 digital transformation 6–7, 233–4; in automotive supply chain 241–3; differences in 239–40; multi-dimensional perspective on 243–5; technological drivers of 235–6; use of term 234–5; see also Fourth Industrial Revolution digitalization 150; Italian national plan for 272–3, 276; of production 223–6, 229, 245 discretionality 118, 126n5 disinflation 120–1 disposable incomes 4, 134–40, 136, 139, 145–7; see also income inequality disposable time 213, 215 domestic demand 2, 9; in Germany 52, 59; in Italy 15, 29, 40–2, 113, 116, 120, 124–5 dualization 2, 27, 193 Dumas, Roland 77 EAP (Economic Adjustment Programme) 168–9, 172–3, 181 East Germany see GDR Eastern Europe: economic growth in 84–5; end of Communism in 71–3, 78; German exports to 61; structural distortions in 109; see also CESEE EC (European Commission): economic policymaking agencies of 263; on Germany’s current account 61; imposing austerity 124; and industrial policy 251; and Italy 13; and labour market policy 151, 159, 163; responses to economic crisis 35–7 ECB (European Central Bank) 13; independence of 36; and labour market policy 163; proposal of 70–1

ECJ (European Court of Justice) 268 ECOFIN (Economic and Financial Affairs Council) 70–1 economic growth: comparative 37, 86, 88; and current account balances 95; employment intensity of 55; and industrial policy 7; and manufacturing sector 106–7; and private debt 94; sectoral contributions to 100 economic integration 3, 37, 125 economic policy 2 economic stagnation: in Greece 169; in Italy 13, 29 education: EU reforms to 142–3; in Italy 270–2; see also training EES (European Employment Strategy) 151–2, 155, 163, 164n2, 165n7 EGs (Employment Guidelines) 152 elasticities of imports and exports 114 eldercare see social care electric vehicles 7, 14, 234, 241–5, 247 EMEs (emerging market economies) 87, 99–108, 110, 111n4 Emilia-Romagna region 220–1, 223–4, 229, 241, 244 employment: gender gaps in 170, 171; in Industry 4.0 221–3; in Italy 122, 187; public 48, 116; Ricardo and Marx on 206–9, 214; and technological innovation 203–4, 215, 219; and technological innovation 198n36; variation in 38; see also labour markets; mini-jobs; temporary jobs; unemployment employment models, national 38 employment policy 150 employment security 152, 155, 161–4, 162, 164n1 EMS (European Monetary System) 31n1, 33, 70, 81, 120–1 EMU (European Monetary Union): austerity bias in 1; convergence between countries of 2–3, 51–2, 61–3; creation of 3, 70–1, 80; and German reunification 72–5, 77–9; Italy in 13–15, 20, 29–31, 42, 114, 120–3, 125; and labour markets 159, 164; other European countries’ exchange rates with 89; and political union 69, 80–2; rethinking design of 8; Spain in 42; wages in 58 endowments 4, 140–3, 147 Enterprise Ireland 260 entrepreneurial firms 252–3, 255–6, 259–62, 264

Index EPL (employment protection legislation) 151–2, 155, 161, 164n1 equality of opportunity 141–2 ethnic minorities 176, 182, 223 EU (European Union): creation of 76, 79; decision-making rules under 36; and Greek austerity 169; income inequality in 133–4, 145–7; industrial policy in 257–8, 263–5, 268 (see also Structural Funds); labour market policies in 150–4; new economic governance in 60–2; NPD and TM capabilities in 253; productive structures of 250–2, 262; rethinking design of 8; Spanish integration into 39; young people’s employment in 157 Euro, exchange rates of 42, 59–60 Euro-4 countries 14, 16–17, 19–20, 21, 22, 23, 27, 28 Europe: and the EU 8; North-South divide in 85, 87, 110 European Banking Union 84 European Community: becoming European Union 72, 74–5, 78–9; and economic convergence 51 European convergence model 109 European Council, and beginnings of EMU 71, 73–4, 76, 78–81 European disintegration process 1–3, 8 European integration: competitive model of 42; pre-crisis framework 89 European Parliament 74, 76, 80 European Regional Development Fund 257 European Single Market 52, 70, 80, 87, 110, 126n11, 257, 262 European Social Fund 177 European Working Conditions Survey 227 Europeanization 120, 126n7 Europe's South see LMIEs eurosclerosis 151 Eurozone see also EMU Eurozone crisis 51–2, 54, 59, 84, 127nn17–18, 250–1 exchange rates: ability to adjust 85; CESEE regimes 88–9; elasticity of export demand 23; and EMU 80; Italian 14, 19; misalignment of 4; Thatcher on 72; see also Euro, exchange rates of executive compensation 143–4 export and import development, comparative 97–8

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export capacities 4, 87, 105, 109–10, 111n15 external debt 40, 85, 89, 114 external demand 40, 113, 115 external imbalances: Italy’s problems with 113; in LMIEs 85, 89–93; structural 111n3; ways of adjusting to 96, 99; see also current account imbalances Fachhochschulen 270 factor policies 269 Farmitalia 120 FDI (foreign direct investment) 87–9, 110, 260 feminism 5, 189–90, 195 FGB (Brodolini Foundation) 185–6, 194, 196–7n5 financial markets: and EMU rulebook 30; and inequality 140, 144; liberalization of 88, 109, 126n6 financialization 120–1 Finland: income inequality in 133, 136–9; manufacturing in 103 fiscal austerity see austerity fiscal consolidation: distributional impact of 108–9; and gender 191; in Italy 13–15, 18, 20, 121 fiscal policy: contractionary European 9; in Germany 61 flexicurity 150, 152, 154–5, 159, 161–3, 162, 165n9, 193 Forfás 260 Fourth Industrial Revolution 6, 219–20, 228–9, 235, 245; and automotive industry 241–3; and employment 220; iconography of 236; national plans for 239–40; organisation of production under 221–4, 227–8; and upkeep of machines 225; see also digital transformation France: and beginnings of EMU 69; and breakup of Yugoslavia 81; fiscal policy of 15–18; and German reunification 75–8; income inequality in 133; labour market in 19; manufacturing in 27, 103; profit share in 20; and trade relations 23, 61; wages in 18–19; work-related pathologies in 227 Franco, Francisco 39 Fraunhofer Institutes 256, 270 GALCA project 194 GDP growth see economic growth

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GDR (German Democratic Republic), end of 72–9 gender budgeting 5, 190–2, 197n24 gender equality 5–6; and care policy 181; impact of austerity on 168–9, 173–4, 182, 190–1; and the media 187–8; national policies on 176–8; supranational policies on 186 gender monitoring 192, 197n24 gender pay gap 140, 173–4, 178, 187 gender-mainstreaming 177, 186, 190–2, 196n3, 197n23 Genscher, Hans-Dietrich 70–1, 76–7, 80 GERD (gross expenditures on research and development) 252 Germany 2; automotive industry in 53, 234, 241–2; complementarity with Italy 120, 123–5, 133; export-led economic model of 52–4, 60–1; fiscal policy of 15; growing rift with rest of Eurozone 55–7; impoverishment of the state 54; income inequality in 133, 136–9; industrial policy in 7, 251; intermediary agencies in 254; labour market in 19; neo-mercantilist core around 250; productive structures of 254–7; recovery from Great Recession in 59–60; reunification of 72–4, 76–9, 126n11; as role model 3, 51–2; suggested policy shift for 62–3 Gilets Jaunes 18 Gini coefficient 14, 134–9, 135–6, 145–7 glass ceiling 188 global financial crisis of 2008 see Great Recession globalisation: impact on Europe 123, and inequality 140 Glorious Thirty (1945–1975) 40, 42 GMMP (Global Media Monitoring Project) 187–8, 197n8 Gorbachev, Mikhail 72–7 government, strategic organizational role of 253, 256–8, 260, 262–3 government bonds, German 59 Great Recession 1–2, 13, 35; and EU peripheral countries 84, 87, 89, 93–6, 259; and gender equality 169–70; German labour market in 52, 57; inability of Eurozone to prevent 51; and income inequality 133; increase in Euro before 42; and labour market policies 150, 152–5, 158–9, 163–4; and manufacturing sector 105; Spain and Italy after 37, 44

Greece: care policies in 178–81; current account of 92; and EU structural funds 254, 258; gender equality policy in 176–7; impact of austerity on 45, 168–70, 172–3, 181–2; income inequality in 133–6, 138; women’s employment in 170–2, 171, 176 Greek crisis 81, 168–81 green jobs 191 Grundrisse (Marx) 208, 211–13, 216nn3,6 Hartz Reforms 55, 123 healthcare 178–9, 263 Helmholtz Research Establishments 256 Honecker, Eric 74 household work: marketisation of 195; men’s involvement in 191 human activity 209, 211, 214–15, 216n11 human capital: accumulation of 157; and big data 239; and inequality 142–3; and productive structures 257–8, 261 human resources, and productive structures 256, 263 Human Technopole project 270 Hungary: and debt build-up 85, 93; end of Communist rule in 72–4; and German manufacturing 53; manufacturing in 101–3; recovery from Great Recession 89 hyper-Fordism 226 ICE (Istituto per il Commercio Internazionale) 274 ICT (information and communications technology) 123, 222, 234–5, 238 IDA (Industrial Development Authority) 259–60, 262 IGC (Intergovernmental Conference) on Monetary Union 74, 76–81 IMF (International Monetary Fund) 140, 169 import deficit 56, 59 income convergence 85, 258 income distribution 113, 122; theories of 203, 205, 214 income inequality 133–4; comparative 4, 133–9, 135–6, 139, 145–7; in Germany 59; in Italy 14; reducing and preventing 138–44, 146–7 income security 155, 161, 162, 193 indicative planning 253 industrial districts 41, 122, 229 industrial networks, cross-European 87, 110

Index industrial policy 5, 7–8; and development paradigms 261; evidence-based 264; in Ireland 259–60; in Italy 115, 117, 121, 268–9, 273–6; neoliberal opposition to 268; new forms of 62, 87, 110; for the service sector 196; strategic 251, 253–6, 265 industrial revolutions 219 industrial sector: in EMEs 88, 99; Spain and Italy compared 39, 42 Industry 4.0 see digital transformation; Fourth Industrial Revolution inequality 1, 4 inflation, in Italy 18–20, 118 InfoCamere 273 informal sector 117 information asymmetries 143–4 information flows 223, 237, 246n7 information technologies see ICT infrastructures, intangible 260–1 inGenere.it xi, 5–6, 185; and economic policy 186–7, 189–90, 193–4; foundation of 186; and “pink new deal” 195–6 inheritance tax 143, 145 innovation: big data enhancing 243; chains of 253, 256–7, 264; collective 252; continuous 7, 251; in Italy 24; see also technological innovation innovation centres, local 258 innovation policy 7, 196, 233–4, 241, 244–5 INRS (Institut National de Recherche et de Sécurité) 227 integration, vertical and horizontal 237, 240 intellectual property rights 140, 144 interest rates 15, 30, 59, 85, 121 intermediary agencies 253–4 internal demand see domestic demand internal devaluation: in Germany 53–7, 60; rejection of 62; in Spain 45 internationalization 39, 114, 117, 125, 274 Internet of Things 235–6, 239–40, 247n13 Ireland: debt build-up in 56, 93; and EU structural funds 254; export performance 96; manufacturing in 103; MNE sector of 265n7; product system of 262–3; productive structures of 258–62; youth employment in 157 IRI (Istituto per la Ricostruzione Industriale) 115

283

Italian debt 13 Italian economic miracle 4, 114–18 Italy 2–4, 6–7; aggregate demand deficiency 20–2, 24, 27; anti-industrial actions in 119–20; automotive industry in 46–7, 241–3; changes in employment in 38, 47; current account of 92; debt build-up in 111n2; “declinist” account of 121; economic growth of 35, 37–8; economic solutions for 30–1; economy compared to Euro-4 16–17, 21–3, 28; external constraint of 114, 120–3, 125; fiscal policy after Maastricht 15–18; gender and economics in 186, 189–93; gender and the media 185, 187–9; in Great Recession and after 45–8, 124; historical trajectory of 39–40; income inequality in 133, 135–6, 138–9; Industry 4.0 in 220–1, 224, 234, 239–40, 244–5; labour costs in 114–16, 220–1; labour relations in 18–20, 42; logistics sector 274–5; long-term recession 13–15; migration to 82; net lending/borrowing 41; North-South divide in 126n3, 275–6; (see also Northern Italy; Southern Italy); productive structure of 30, 40–2, 113–19, 122, 125, 269, 272; public sector in 43, 44, 47; R&D in 269–70; share of manufacturing in GDP 103; technological infrastructure of 272–3; technology gap in 126n1 ITS (Instituti Tecnici Superiori) 271 Japan 6; automotive industry in 234, 241–2; big data in manufacturing 237, 239; eldercare in 196; Industry 4.0 technology in 240, 245; as model for Germany 53; productive structures of 254–5 job security 152, 155, 161–3, 162, 164n1 July Agreement (Italy) 18, 31n1 Keynes, John Maynard 31, 203, 215 knowledge economy, EU promoting 258 Kohl, Helmut: advisors to 70; and European monetary and political union 80–1; and German reunification 72–9 La Terza Italia 41 labour: objectified 211,216n7; organization within factories of 53, 219, 224–8, 252;

284

Index

participation in production planning 229; taxation of 154, 161; training for see training; see also trade unions labour contracts, non-standard 172–3 labour costs: in CESEEs 88; differences in Eurozone 55–6; relative to capital 220–1; see also wages “labour in general” 209–15 labour intensity 32n3, 175, 179, 227, 229 labour market flexibility 250; limits of 62; policies promoting 8, 18, 43, 124, 151–2, 164; see also flexicurity labour market polarization 204 labour market policy 5, 8–9; and gender equality 169–70, 191, 193; and industrial policy 32n5; influences on 154–5, 157–9, 163–4; neoliberal 151–3; structural approach to 150–1; see also ALMPs labour market policymaking, intensity of 151, 154–5, 158, 159–4, 160–2 labour market reforms 4–5; and gender equality 172–6; in Germany 54–5, 123; policy goals of 150–2, 163; reasons for enacting 155; and young people 152–4 labour market regulations: and employment 45, 154; in Germany 55, 59–60 labour market segmentation 124, 152–3 labour markets 2–3; efficiency of 150, 152–4; in Germany 52, 54–5, 57, 59, 62, 123; impact of Great Recession on 108–9; and inequality 140; in Italy 13, 19, 29, 31–2n1, 224; in Spain 43, 45, 82; women’s participation in 5, 43, 164, 165n3, 171, 172, 189, 193 labour productivity: and automation 207, 211–12, 215n1; in eldercare 198n36; in Italy 18, 22–7, 25–6, 30, 32n3; Marx on 213 labour relations systems: compared 42–3; in Germany 54–5 LABREF database 154, 161, 165.nn6–7 Le Maire, Bruno 13 lean production 53, 224, 229 La Lega 13, 30 Levy Economics Institute 194, 196 Libya 81 Lisbon Strategy 258–9, 265n5 Lithuania: manufacturing in 103, 105; petroleum sector 111n12 LMIEs (low and medium-income economies) 84–7, 89, 103, 107–10, 111n2

logistics 7, 105, 223, 235–6, 247n13, 272–5 long-term care see social care luxuries, in Ricardo 206–7 M5S (Five-Star Movement) 13, 30 Maastricht Treaty 3; criteria for accession under 51; decision-making rules under 36; and Italy 14–15, 18, 29 machines see technological innovation macroeconomics: de-democratization of 31; engendering 195 “Made in China 2025” 241, 244 manufacturing: core area for 109; profitability of 28; smart 236 manufacturing imperative 99, 101, 108 manufacturing sector: growth of 106–7; impact of Great Recession on 110; in Italy 22, 23–7, 28, 29, 229, 239; share of GDP 101–5, 102, 104; in Spain 45 marginalism 204 market incomes 4, 134–40, 135, 137–8, 139, 144–7; see also income inequality market power, and inequality 143–4 Marx, Karl 6; on automation 205, 208–15; on competition and firm organization 252; use of abstractions 216n6 Max Planck Institutes 256 Meade, James 141 Mediterranean countries: inequality in 135–6, 138–9; labour market in 154, 156, 159–63, 165n9 MEMS (micro-electromechanical systems) 235, 246 mid-sized firms 7, 53, 116, 250–1, 256 Miliband, Ed 141 mini-jobs 55, 59, 62 minimum income, guaranteed see UBI minimum wage: in Germany 59; in Greece 172–3; and inequality 144–5; Italy lacking 18; in UK 174 Mittelstand business system 255–6 Mitterand, François 69–70, 72–9 Modena 220; see also Emilia-Romagna monetary policy: expansionary 49, 119; “with hands tied” 121 Montenegro: current account of 92; export performance 96; manufacturing in 103 Monti, Mario 15 mothers: and labour market 173, 174, 172, 177, 180, 182; women’s role as 188 multi-national corporations (MNCs) 260, 262

Index NATO 73–4, 76–8 NEET (not in employment, education or training) 153, 155–60, 156–7, 187 neoliberalism: in Germany 57, 60; and industrial policy 255, 268, 273; in Italy 29; shifting away from 63; social effects of 4; in Spain 39 Netherlands: income inequality in 133–4, 136–7; manufacturing in 103; mid-sized firms in 7; trade surplus of 41; wages in 18, 22 network infrastructure 272 NGOs (non-governmental organizations) 185–6, 192, 197n24 NHS (National Health Service) 175, 179, 181 non-tradeables 100–1, 109 Nordic countries 165n9: eldercare in 196; industrial policy in 7, 251, 262; inequality in 135–6, 138–9; intermediary agencies in 254; labour market policy in 159, 163; productive structures of 254–7; sectoral composition of 264 North Macedonia 96 Northern Ireland 261 Northern Italy 41, 275 Norway, income inequality in 146 NPD (new product development) 252–3, 256, 260–4 nurseries 178, 180–1; see also childcare OECD (Organisation for Economic Co-operation and Development) 13; on digitalization 233, 238, 246n3; and labour market policy 151; and school reforms 142 Olivetti 119 OMC (Open Method of Coordination) 152, 163 open-system business models 254–6 organizational capabilities 255–6, 258, 262–3 Osborne, George 170 overproduction 211–15 paradigm shift, secret 59 participatory regulation 229 part-time employment 55, 170, 171, 173–4 passive measures 161; see also unemployment benefits patent statistics 252, 259–60 pathologies, work-related 227

285

pensions: and gender 175, 192; and income inequality 134, 138, 146–7 peripheral countries 3–4, 7–8; industrial policy in 7, 251, 258–9, 262–4 physical assets 194 Piketty, Thomas 141, 145 pink new deal 6, 190, 194–5 Plan for Logistics and Ports 275 Poland: Communist rule in 72–3; and debt build-up 85, 93; economic growth in 84; and German manufacturing 53; Germany’s border with 74–7; income inequality in 133, 135–6, 138–9; manufacturing in 101–3; recovery from Great Recession 89; youth employment in 157 political integration 2–3, 72 political union 69, 71–3, 76–82, 82n1 Portugal: economic growth in 88; and EMU 81; and German banks 56; imposition of Troika on 60; income inequality in 133–9; manufacturing in 103; response to Great Recession 92–3, 105; youth employment in 157; see also Southern Europe Poste Italiane 273 post-Fordism 229 power relations, asymmetric 4, 114 precarity 44, 153, 165n3 pre-distributive policies 4, 140–4, 147 private debt: financing growth 56; in LMIEs 89, 91, 92–3, 94, 96; transfer to public sector 44 product systems 7, 251, 254, 257, 262–5 production, forces and relations of 213 production intelligence 229 production matrix 15, 113–14, 124–5 production networks: cross-border 87–8, 109–10; reshuffling of 20–2 production system: as unit of analysis 234–5; worker participation in 226 productive structures 2–4, 7–9; building of 254–7; conceptual framework for 251–4; convergence in 258; differences in 36, 38–40, 45, 48, 250; state intervention in 268 product-led competition 7, 251–3, 262 profit rates: in Germany 56; in Italy 20, 24, 27–9; in Ricardo’s theory 206 profit share 18–20, 27, 29 proprietary democracy 141 protected class 29, 32n4

286

Index

public debt: financing mechanism 36; in Italy 44, 48, 121, 124; in LMIEs 89, 91, 92–3 public investment: in Germany 3, 54; in Italy 18, 29; in Spain 45 public sector: in Spain and Italy 39–40, 42, 43, 47–8; women’s employment in 5, 172–4, 181, 191 public spending, in Spain and Italy 44, 49n2 quality control 224 RAI 188 railways 113, 274–5 R&D (research and development) 53, 252, 258–60, 265n5, 266, 269–70; see also applied research real estate bubbles 40, 44–5, 123, 126n9 redistribution of income 4, 9, 133–4, 136–40, 147; intensity of 137; and pre-distribution 142, 144–5 reindustrialization 88 relational capital 143 remittances 40, 92, 108, 111n13 retirement 55, 175; early 155 RFID (radio frequency identification) 235, 247n13 Ricardo, David 6, 203–8, 213–14, 216n12 RIETI (Research Institute of Economy, Trade and Industry) 239, 241, 243 risk assessment techniques 228 robotics 203, 219; and care work 196; collaborative 236, 240; and digital intensity 238–9; in Industry 4.0 223 Romania: current account of 92; and debt build-up 93; economic growth in 89; end of Communism in 74; entry into EU 146; industrial sector in 99; manufacturing in 103–5 Rosselli, Annalisa 186, 189 RTCs (regional technology colleges) 260 ‘rules of the game’ 2, 141–3 safe haven effect 59 Say’s law 214 school-to-work transitions 153–4, 157 Schröder, Gerhard 54 Schumpeter, Joseph 203 Science Foundation Ireland 260 SCM (supply chain management) 236, 246n7 sectoral transitions 7, 251, 264 self-employment 173–6

Serbia: current account of 92; manufacturing in 103 SGP (Stability and Growth Pact) 36 Simonazzi, Annamaria 1, 9, 60, 111n1, 186, 189, 197n5 skill development 226, 256; see also training Slovakia: current account of 92; and debt build-up 85, 93; and German manufacturing 53; manufacturing in 101–3; recovery from Great Recession 89 Slovenia: and debt build-up 85, 93; export performance 96; independence of 81; manufacturing in 101–3 smart data 247n13 smartness 236 SMEs (small and medium enterprises): and big data 239; in core EU countries 255–6, 261; and EU industrial policy 258; Industry 4.0 technologies in 239–41, 245; in Italy 122, 272–4; use of term 247n12; within productive structures 253 Smith, Adam 24 social care 6, 175, 179, 181, 193–4, 196, 198n36 Social Charter 74 social conflict, in Italy 117–18, 120 social economy 192 Social Fund 257 social infrastructure, investment in 185, 190, 193–6 social justice 140 social market model 8–9, 254, 263 Southeast Europe 85, 88–9, 92–3, 96, 99, 101, 103, 111n13; see also CESEE Southern Europe 3; current accounts of 92; debt build-up in 93; economic crisis in 35, 84; and German manufacturing 53, 123; industrialisation of 40; labour costs in 55; lack of convergence in 88; manufacturing in 101–5; models of 36; structural distortions in 109; Troika-imposed policies on 62 Southern Italy 41, 269, 272, 275–6 sovereign debt 84, 87 Spain 2–3; current account of 92; economic growth in 35, 37–8; historical trajectory of 39; income inequality in 133–8; labour relations in 42–3; net lending/borrowing 41; post-Great Recession recovery of 45–8; productive structure of 40–2;

Index public sector in 43, 44, 47; variation in employment in 38, 46 specialization, flexible 256 speculation 48 standardization of work practices 223–5, 227, 242 start-ups, digital 236 state dependency 261 Stoltenberg, Jens 70 strikes, in Italy 119 structural change, and labour productivity 24 structural divergence 108–9 Structural Funds 177, 254, 257–8, 260, 263, 265, 276 structural imbalances 108, 250, 262 structural policies 8 structural reforms 3; EC imposition of 35; in Germany 52, 57; in Spain and Italy 14, 43, 45 supranational policies 133, 140, 147 surplus labour 212, 215 Sweden: income inequality in 133–5, 138; manufacturing in 103 Switzerland, income inequality in 146 SYRIZA 169 tax collection, insufficient 39, 43–4 tax incentives 253, 260 tax rates, marginal 145 taxation, joint 193 Taylorism 223–5, 229; digital 226 technological brokerage 272 technological gap 115, 119 technological innovation 198n36: bargaining around 221; and employment 6, 205–9, 220–1, 224; and inequality 140; in Italy 117; social effects of 203–4, 219–20; social embeddedness of 228–9; under capitalism 211–15; and work conditions 226–8 technology base 252 technology research 256 technology transfer 88, 110, 256 Teltschik, Horst 70, 77 temporary jobs 19, 55, 62, 153, 171, 173, 224 tertiarization, impoverishing 124 Thatcher, Margaret 70–2, 74–7, 79–80 Tiananmen Square incident 72, 74 TM (technology management) 252–3, 256, 260–3

287

tourism sector, in Spain and Italy 32, 39, 41–2, 46–8 Toyotist factory 224, 229 trade balances: and competitiveness 250; German and Italian 123; in LMIEs 88–9, 92; and manufacturing sector 103–5, 104, 108 trade liberalization 87–8 trade unions 18–19, 53, 59, 124, 126n6, 189 tradeable sectors: disequilibria in 85, 87; divergences in development of 4, 110; strengthening 99–101 tradeable services 100–1, 103, 108 training 7; in EES 152–3; in Germany 53–4, 62; Germany and Italy compared 270–1; and technological innovation 222, 225–6 transformation approach 122 transportation, urban 254, 257, 262–3 Trichet, Jean-Claude 82 the Troika 60, 62, 163, 168, 173, 182 Turkey, economic growth in 89 tyranny of small decisions 253, 257 UBI (Universal Basic Income) 145, 198n26 UK (United Kingdom): care policies in 179–81; and EMU 3, 70, 81; gender equality policy in 177; impact of austerity in 168–70, 173–4, 181–2; income inequality in 133–9; and trade relations 61; women’s employment in 5, 170–2, 171, 176 Ukraine 108 UN (United Nations), Fourth World Conference on Women 186, 196n3 unemployment: and gender 171; in Greece 169; in Italy 122; and labour market 45; in LMIEs 108; technological see employment, and technological innovation; youth 84, 108, 153–9, 156–7 unemployment benefits 18, 55, 62, 154–5, 161, 165n9, 193 United States: automotive industry in 241; income inequality in 145–7; productive structures of 254–5 Universal Credit 176 universities: in Germany 256; in Italy 189, 269–72, 274 user profiling 226 value chains, global 7, 233–4, 240–3, 245 Villa, Paola 4, 186

288

Index

vocational training see training Vodafone 236 voice control systems 223, 225 wage goods 207–8, 216n10 wage restraint: EU’s reliance on 8, 31, 42, 61; in Greece 172; in Italy 2, 14, 18–20, 22, 29, 114, 116–17, 120, 124 wages: in Germany 55, 57–9, 61, 123–4; indexed to inflation 119; marginalist theory of 203–4; Ricardo on 205–7; for women 174–5; see also minimum wage Waigel, Theo 79–80 Warsaw Pact 71, 73 WBG (Women’s Budget Group) 176, 196 wealth taxes 141 welfare state 36; gender mainstreaming of 192–3; in Greece 182; in Italy 43, 117–19; retrenchment of 1 Werner Report 71, 80 Western Balkans 103, 108, 111n3 Wiener, Norbert 219, 227

women: financial independence of 192–3; impact of austerity on 43, 168–70, 174–9, 182 (see also labour market); media access of 187–9; participation in decision-making 191; social and economic integration of 6, 9, 177; United Nations conferences on 186; unpaid labour of 192–3, 195; labour of 197n24; see also gender equality working capital 205–6, 208 working hours: extension of 208, 212–13; flexible 53, 57 young people: impact of Great Recession on 155; and job insecurity 43, 165n3; and labour market policy 4–5, 150–4, 157–9, 163–4; see also unemployment, youth Youth Guarantee 153 Zagladin, Vadim 74, 76 Zapatero, José 82