“There is a widespread tendency in Italy today to attribute the current recession to Angela Merkel, Mario Monti and austerity measures”. But, although the depth of the current crisis has a cyclical nature, the country's inability to grow is the legacy of more than a decade of failed reforms in credit, production and the labor market. The lack of reforms has stifled innovation and productivity growth, with the result of a wage dynamic completely independent of labor productivity and demand conditions”. They reside here "The Roots of Italian Stagnation", title of the report that Professor Paolo Manasse, professor of macroeconomics at the University of Bologna (present on the web with the Back-on-the-Envelope.Economics blog) gave at the seminar organized by the Brueghel center and the Ministry of Economy. From that intervention was born a working paper of Cerp in Brussels and an article published on Monday 24 June in Economonitor, the collection of blogs belonging to Roubini Global Economics. It is a lucid analysis of both the causes and the possible recovery road of the Italian crisis of which we report a large excerpt.
COMPETITIVENESS'
“Competitiveness measures the price of foreign goods relative to domestic ones. Different measures of competitiveness can be based on consumer prices or on the unitary cost of labour... a particularly effective measure because it is not influenced by the pricing policies applied by companies which can vary over time and on the markets".
It appears that between the first quarter of 2001 and the last quarter of 2011, the cost of labor in Italy grew by 23 per cent compared to its commercial partners, while in Germany it fell, in relative terms, by 9,7 percentage points. What explains the significant increase in the Italian cost?
AND BEYOND…
A country becomes more competitive if average hourly wages fall compared to that of its competitors, if average labor productivity rises, if corporate tax contributions for social security fall in relative terms, if tax revenues rise on consumption and if the nominal exchange rate with respect to total trade falls. In this context, a country can improve its competitiveness thanks to a sort of "fiscal devaluation", i.e. with the increase in VAT which does not weigh on exports but affects imports and by reducing the social security contributions paid by companies, from which domestic companies benefit but not foreign producers.
THE COST OF LABOR
The evolution of the average cost of labor in Italy and in Germany in the last decade shows that in the year 2000, the cost of an hour of work in Germany was about double that in Italy (19 euro against 10,9), while during the following decade nominal hourly wages came very close, even if not completely: in Italy they grew by 39,5% against 21,1% in Germany.
PRODUCTIVITY
But labor productivity has not followed wage trends. Indeed, it has been demonstrated that labor productivity stagnated in Italy (+2,7% for the entire decade) while it grew significantly in Germany (+16,7%). As a result, net of taxes, the Labor costs rose 232,5 percent more than in Germany.
SOCIAL CONTRIBUTIONS PAID BY COMPANIES
As regards the average burden of contributions paid by companies, the difference between Italy and Germany is impressive, even if stable over time (the Italian percentage fell by two points between 2000 and 2012 against one point in Germany).
VAT TREND
Consumption taxes present a different dynamic. Professor Manasse's tables compare the VAT revenues of Italy and Germany. Since 2006, Germany has significantly increased the dependence of tax revenues on VAT, operating a "discal devaluation" in the order of one percentage point. Italy, between 2006 and 2009, did the exact opposite. However, over the decade, the changes were relatively small.
HOW THE LOSS OF COMPETITIVENESS IS EXPLAINED
The unit cost of labor rose by 35,3% in Italy against 3,17 in Germany, with a loss of more than 32%. The most consistent reason for the loss concerns the dynamic hourly cost of labour, which grew in Italy by 18,4% more than in Germany. As long as the Italian hourly labor cost was significantly lower in Italy there was a partial convergence between the two countries. But the problem is that labor productivity has grown much less (14 percentage points) in Italy than in Germany. The impact of the tax structure on competitiveness was much less.
In summary, concludes Manasse's analysis, in a "rapidly changing world" where trade barriers have fallen and our partners have focused on innovation with great energy and speed, the Italian reform inertia has caused a competitive gap that the crisis has dramatically brought to light and which will probably have long-lasting consequences.
