The Last Crisis

Yet this clash isn’t just the result of coronavirus. To understand what’s going on we should turn back to August 5, 2011, when European Central Bank (ECB) president Jean-Claude Trichet and his anointed successor Mario Draghi sent the Italian government a letter dictating what economic policy Rome would have to pursue if it wanted help — the monetary-policy measures needed to prevent the interest rates on its public debt from ballooning.

The Trichet-Draghi letter listed a series of “structural reforms” Italy would have to enact, including the flexibilization of the labor market, the “liberalization” (privatization) of public services, and cuts to social protections. But this wasn’t just imported to Italy from the outside. Rather, it resonated with the project of a section of the Italian ruling classes who had long wanted to overcome the old Left-Right cleavage. Their plan was to join forces in a single alliance of all responsible and reasonable actors: namely, all those who backed neoliberal reforms.

In a now-infamous press conference on October 23, 2011, Angela Merkel and Nicolas Sarkozy openly declared their lack of confidence that Silvio Berlusconi’s government would be able to implement these reforms; on November 12, he resigned and, just four days later, Mario Monti replaced him as premier. Monti headed a technical executive (composed of unelected, nonparty figures) whose program consisted … of the very measures demanded in the Trichet-Draghi letter. The “bourgeois bloc” was born — an alliance that would remain in power until the March 2018 elections, through the administrations led by Monti, Enrico Letta, Matteo Renzi, and Paolo Gentiloni.

Why “bourgeois bloc”? This is our name for a project seeking to unite the middle and upper classes across the Left/Right cleavage while excluding the popular classes from the exchange between public support and public policy. Yet this alliance’s actions in government in fact left the middle classes in an ever more fragile and precarious condition — gradually shrinking the boundaries of this bloc to include only the most privileged.

This dynamic is often explained in terms of the austerity demanded by Brussels — which did, indeed, translate into a series of socially damaging measures. Minister Elsa Fornero was in tears in December 2011 as she presented the “necessary sacrifice” of the pensions reform she had just signed. But the bourgeois bloc’s actions were more than just an austerity agenda aimed at cutting the public debt.

Indeed, changes to the Labor Code and the Renzi government’s flexibilization of employment relations (the Jobs Act) — can’t be explained in terms of budgetary considerations alone. Rather, such measures indicated the bourgeois bloc’s real strategy, in which austerity provided the tools for a more ambitious project of completing the neoliberalization of Italian capitalism. This transition was already well underway, thanks to the right-wing and “center-left” governments that had alternated in office since the 1990s. But the bourgeois bloc finished the job.

The “reforming” actions of the governments of 2011–2018 strongly penalized the popular classes. But they also produced a growing immiseration and precaritization of the middle classes, who soon abandoned it electorally. Telling of this collapse were the fates of each of the four prime ministers who had led the bourgeois bloc. In 2013, Monti founded a party, Scelta Civica; it fell below 1 percent of the vote in the 2018 elections, not winning a single MP, and no longer exists. His successor as prime minister, Enrico Letta, has (temporarily?) retired from politics and now teaches at Paris’s Sciences Po. Renzi, who pushed Letta out of government to take the top job for himself, is no longer master of the Democratic Party; reduced to a minority position, he quit to form a new vehicle, Italia Viva, today credited with around 2 percent support. Meanwhile, his successor as premier, Gentiloni was appointed a European Commissioner, distancing him from the Italian political front-line.

Outside Enemy

The collapse of the bourgeois bloc had another effect — the stunning rise of the only two movements that had opposed it. In 2013 the Five Star Movement (M5S; a party which had never previously stood in nationwide elections) took a quarter of the vote and in 2018 it became the biggest party (32.7 percent). The Lega meanwhile surged from 4 percent in 2013 to 17 percent in 2018, hitting 34 percent at the 2019 European elections.

These two parties opposed the bourgeois bloc — but, we should emphasize, they didn’t make neoliberal reforms the main reason for this opposition. This is especially true of the Lega, which inherited a center-right electorate previously seduced by Berlusconi’s promises that anyone could get rich in a society freed of burdensome state intervention. With the popular and middle classes facing immiseration, Matteo Salvini insisted that the reason the promise of the free market hadn’t been fulfilled owed to some external enemy — one whose identity has changed over time, from globalized finance to the Brussels bureaucracy, migrants, or now Germany.

Despite Salvini’s spectacular about-turns on such fundamental questions as Italy’s membership in the European Union and eurozone (proclaiming practically every possible position in just three years) his electorate can at least identify with his persistence in attributing Italian difficulties to some external enemy. The Lega’s “sovereigntism” is nothing but the angry insistence that the nation must be defended against this enemy — even if it is imaginary, or easily replaced with a different one. Salvini moreover avows his unshakeable faith in trickle-down economics. Even amid the current social and economic crisis the Lega has maintained its demand for a flat tax — meaning, the wholesale abandonment of redistribution-through-taxation and of the use of taxation to fund new public spending.

More ambiguous is M5S’s position on neoliberal reforms. In its early years, it often spoke of defending public services and fighting the precaritization of labor, yet its anti-elite theme rapidly fused with an anti-statist attitude. Hostile to a market logic but also to state intervention, the “neither Right nor Left” M5S proved incapable of outlining any real strategy. From June 2018 to September 2019, when the party ruled Italy in coalition with the Lega, Salvini had little trouble establishing his own hegemony. These parties’ coalition did not, then, revisit any of the neoliberal reforms from the previous period. Even the measures taken by the bourgeois bloc which had aroused the strongest opposition, namely the Fornero Bill on pensions and Renzi’s Jobs Act, were only very marginally amended.

Fresh Crisis

Coronavirus thus hit a country marked by a paradox. One thing is clear: Italian capitalism is now fully governed by neoliberal logic, considerably reducing its capacities for crisis-response. Cuts to health spending (€37 billion in the last decade) and the significant reduction of public hospitals’ role in favor of the private sector throw up obstacles to taking care of the sick, while the spread of precarity and the weak unemployment-benefits system very directly expose working Italians to the effects of the crisis. The decline of big industry in favor of small and medium businesses has fueled the likelihood of bankruptcies, while the mass privatizations of the last three decades prevent any real industrial policy to support production. Coronavirus thus offers a painful demonstration of how far neoliberal reforms have weakened Italian society.

But here lies the paradox: still today, these reforms remain in the background of political debate, which is wholly centered on how to finance the public spending the crisis demands. Of course, Italy does have urgent financial and monetary problems: but it is impressive to see how far employment relations, social protections, public services, the possibility of industrial policy — so many institutional spheres decisive to this crisis — remain absent from the debate. The reason is simple: the main parties of both government and opposition have no clear proposals on these themes. Even after Renzi’s split last summer, the Democratic Party has shied from any real critical assessment of the bourgeois-bloc period, and a large wing of the party insists that neoliberal reforms remain justified. Since September 2019 it has been in government together with M5S, after the Lega left the coalition. But M5S still parades its “neither Right nor Left” line, in practice translating into a complete lack of strategic vision. Deeply anchored in neoliberal ideology, the Lega has every interest in drawing the political dividing lines on other terrains.

The Italian debate thus revolves around just one theme: the financing of a debt which is now destined to climb by several dozen percent of GDP. Of course, this is an urgent, important problem. But even when they do address this theme, Italian politics and society seem more conditioned by past traumas than by any strategic vision for the future.

Here, it’s worth grasping the measure of the problem. If we estimated a drop in economic activity of around 10 percent (hardly a catastrophist prediction, in today’s climate), this would imply a direct fall in state income of around €90 billion. The plan before the crisis was for a deficit of €20 billion; added to which are the fiscal measures demanded by the crisis itself. For now, the Italian government has mobilized €50 billion, just for the first extreme-emergency measures; it’s too early to offer any precise forecast, but on these grounds we can imagine that it will have to find somewhere between €200 billion and €300 billion in new financing. Added to that is the need to renew the securities reaching maturity, of a public debt which exceeded €2.4 trillion even before the crisis. This could pose problems for a country already immersed in recession.

Financing the debt thus risks becoming a major challenge. Imaginable solutions included the mutualization of public debt within the European Union — a recurrent dream among convinced pro-Europeans, since it would imply a decisive leap toward a genuine political union. Yet there is nothing in the European Union’s past or in the current political dynamics that suggests this has any chance of being realized.

The second possibility was a European loan subject to conditionalities — which would translate, postcrisis, into public policies responding to the lenders’ interests more than to Italians’ social expectations. For instance, the European Stability Mechanism (ESM) could levy funds up to a hypothetical €700 billion — other institutional mechanisms can also be envisaged, in this same vein.

Yet such a possibility arouses powerful resistance in a country marked by the years of the bourgeois bloc. Only that segment of the Democratic Party which lays claim to the Monti, Letta, Renzi, and Gentiloni governments as a positive experience would be prepared to back a solution that meant prolonging the political dynamics of the last decade. For the same reason, M5S and the Lega — which built their electoral base opposing policies that responded to European “requirements” — are totally opposed to such a move. And most importantly, for a large part of the popular and middle classes, a plan for macroeconomic adjustment and institutional change dictated by European institutions will be experienced as the continuation of a nightmare they thought had only just ended.

The first solution is highly unlikely and the second widely rejected. Hence the quasi-consensus over a third possibility: an assumption of public debt largely financed by the ECB creating money. This solution has evident advantages — especially given the lack of limits on finance at low interest rates — but also drawbacks. Bizarrely enough, no one in Italy, from the far right to the remnants of the radical left, has thus far mentioned these drawbacks. But they are very real.

The first is that the ECB can buy public debt securities only on the secondary market. It’s true that, from the perspective of the spread between Italian and German bond yields (which impacts interest rates) this type of intervention practically equates to buying securities at the time of issue. Yet the liquidity issued by the ECB is directly recuperated by private agents — largely meaning banks and investment funds — who hold onto these securities. They count among the big winners of the operation, but are under no obligation to use all the new liquidity to buy new securities. On the contrary, experience teaches that part of the liquidity created by the ECB will be used for stock investments. These run a high risk of artificially propping up stock prices hit by the global collapse of activity — thus feeding bubbles of speculation and increasing the risk of future financial crises.

The second type of drawback of ECB financing more directly concerns Italy. I have suggested that a loan subject to conditionalities, like the possible EMS one, would meet with large — and understandable — resistance in Italian society and its political arena. But a public debt largely in the hands of the ECB would provoke the same kind of reaction.

Of course, we can hope the ECB would limit itself to its institutional role and never wield the enormous political power its role as the Italian state’s main creditor grants it. But here, too, experience suggests otherwise. Italians won’t have forgotten that the aforementioned Trichet-Draghi letter, which opened the way to the bourgeois bloc, was not signed by the European Commission or by Northern European prime ministers but by two ECB directors. If Italian public debt is financed by monetary creation by the ECB, this implies that, in the future, it will be impossible for any Italian government to break from the route which the ECB insists must be followed — on pain of the monetary tap being shut off and interest rates soaring.

This conditionality is implicit and thus easier to accept politically than a list of explicit conditions. But precisely because it is implicit, it completely evades any democratic control or negotiation process. Easier politically to push through, and more immediately accessible, on closer inspection the solution offered by ECB financing poses the same type of constraints as a loan granted by other European countries via ESM or other EU institutions. Things would obviously be different if, rather than the ECB enjoying total independence, it was subject to the political control of a European government. Yet here (and perhaps even more so if we start talking about mutualizing debts) we’re talking about science fiction more than reality.

Italexit?

Given that EU solutions to the problem of financing the debt are so unsatisfactory, the further possibility worth discussing is the possibility of Italy leaving the euro and taking back its monetary sovereignty. Thus far, at least, no Italian political force has seriously worked in this direction.

The Lega has a habit of bringing up this possibility as elections approach, before swinging back toward very different positions whenever it is in government. After the Lega-M5S government formed in 2018, Salvini — who previously campaigned for Italexit —repeatedly declared that he’d “changed [his] mind” on the euro. Today, in reacting to this crisis, he has made clear his readiness to join a possible government of national unity led by … Mario Draghi. At times, the Lega does like to evoke a return to monetary sovereignty, promising a general tax cut and restored growth. This corresponds to the most heartfelt dream of part of the Lega’s base: to go back to the promises of a free and undistorted competition bringing individual enrichment.

But in the social bloc the Lega represents, an absolutely central place is taken up by small and medium business in Northern Italy. Strongly integrated into the German economic space, this part of the Lega’s base rejects any possibility of a rupture, fearing trade reprisals. As for M5S, in the past it, too, favored euro exit but now — like the Lega — hopes to “change the EU from within.” This is an objective shared by the most pro-European force, the Democrats — a convergence which renders unlikely any deliberate Italian break with the eurozone.

It should be added that an exit at the height of a recession would have very grave economic consequences. If Italy were to take back its monetary sovereignty, the massive monetization of public debt necessary in order to confront the crisis would imply a severe devaluation of the new currency. The risk of such a devaluation would be integrated into interest rates, thus producing a vicious cycle between rate rises, the need to further monetize the debt, and further devaluation — a cycle which only a restructuring of the debt could stop. But no political force dares insist on the importance of such restructuring — and the nationalization of the banking sector which would have to go with it.

Investor confidence in the sustainability of Italian debt, and thus the possibility of managing euro-exit in an orderly fashion, would be better in a period of growth. But here comes what we could call the euro paradox. When the economy is doing well, leaving would be simpler, but no one would think of doing so; when the economy is doing badly, the beneficial effects of monetary sovereignty become all the more apparent, but leaving becomes much more complicated.

Hence none of the imaginable scenarios seems to represent a both realistic and viable solution for Italy. Certain hypothetical proposals like the mutualization of the public debt or the imposition of democratic control over the ECB suppose institutional reforms which seem far off the horizon.

Financing through a European loan will soon spark powerful, hostile political reactions — reactions which will also manifest themselves, in the slightly longer term, when the ECB decides to wield the political power that it is accumulating by financing debt through monetary creation. There is, then, no great risk in predicting that the already widespread disenchantment with the European Union is bound to spread yet further in Italy in the coming period.

In this complicated conjuncture, the Left’s job must be to turn debate back to the structural reforms that marked Italy in recent decades — the deeper cause of its current difficulties. This is the direction in which it must orient the growing hostility toward the European Union, precisely by underlining the role that European integration has played in Italian capitalism’s transition toward the neoliberal model. Such a position would inevitably drive the Left to defend a return to monetary sovereignty — a move which would take on specific meaning in the framework of a more general program of rupture with neoliberalism.

Such a program would also very sharply distance it from the nationalist right, which threatens to be the big winner of the coming period. The nationalist right will present (and is already presenting) control of monetary creation as the instrument that will allow a way out of the crisis, continuing to cut taxes on capital and reduce the tax system’s redistributive function, all the while preserving the flexibility of the labor market. For the Left, monetary sovereignty must be made to serve strictly opposed objectives. There can be no ambiguity, no sympathy, and still less any common front with the nationalist right, which is today replacing the bourgeois bloc as neoliberalism’s main political base. Such a Left is, alas, not today part of the Italian political scene. We can only hope that it makes its return soon.