Sustainable Growth Italy Interview

Austerity is the Wrong Framework: Why Italy needs a Shift Towards Investments and Growth

Expert interview with Giulio Guarini, analysing key parameters of the current economic situation in Italy and identifying ways out of the crisis


"Colosseum, in Renovierung" (CC BY 2.0) by alexanderferdinand


The political mainstream thinks that this crisis is conjunctural, not structural. But the trouble with austerity policies is, that they increase the crisis in a cumulative way. With austerity one can only enlarge the probability to maintain the crisis, not to rule out it. And politicians don’t solve this problem – they preserve it.


The interview was conducted with Giulio Guarini, Assistant Professor of Political Economy at Tuscia University in Viterbo, Italy with a Degree and PhD at Sapienza University (Rome) in Economics. He furthermore was visiting Sussex University (2000), Oxford University (2004), and Nice University (2013, 2014, 2015) and has published various articles in national and international journals. His current research focuses on Economic Development, Innovation, Social Inclusion, and Ecological Sustainability.

What are the most tangible and visible consequences of the global financial crisis in Italy? What do you consider to be the biggest economic challenge for your country since the beginning of the financial crisis?

There is a problem of increasing social exclusion, especially for the poor and young. During the crisis structural problems within Italy emerged also along the north-south axis. The challenge is to seize these structural problems – but the institutions don’t see these topics. The crisis is structural, not conjunctural. For the world, for Europe, but also for Italy structural change is necessary. Before the crisis, Italy was among the main European economies. Italy grew, but it was still losing to Germany, France and UK. Nowadays other countries are more resilient than Italy. For example, there is a problem of labour productivity, which is quite constant. Before the crisis it grew, but the German or the French growth was still higher. The crisis increased these structural problems – they seem to have suddenly emerged, but they were hidden there before.

 

How has the perception of problems and challenges changed since the crisis broke out? What was of concern before 2008 and what is of concern now?

After the crisis, Italian economic policy followed the austerity approach. Italy is the biggest follower of the European Commission in that sense. The political mainstream thinks that this crisis is conjunctural, not structural. The problem now with austerity policies is that they worsened the crisis in a cumulative way. Sticking to austerity is therefore a delusive course of action, but in mainstream economics structural problems of the crisis were not recognized: financial capital, economic inequalities or reduction of the role of the state. With austerity one can only increase the probability to maintain the crisis, not to overcome the problem. It is the main problem. And politicians don’t solve this problem – they maintain it.

 

Which role do you think the EU and national governments should play in boosting Inclusive Growth?

Speaking about economic growth – economic growth that is sustainable – there is a strong conflict between the regional European policies and the European Commission. In the regional policies you have strategies to promote smart green sustainable growth, there are many instruments to make this goal possible. The problem is that the European Commission strategy is the opposite – because austerity weakens the base of the regional EUROPE 2020 strategy. It is a good strategy but to implement it you have to change the initial policies. It is impossible to implement it with austerity policies. EUROPE 2020 speaks of public investment in R&D and innovation as main instruments for competition, but in national policies the main instruments to become competitive are reforms of labour markets. This is a conflict, this is the main paradox of the European context. That means that this conflict is the same for all countries: governments that follow austerity and regions that follow Europe 2020 without having money and resources to apply it. The problem is not coordination – you could increase coordination for austerity, for example. The core of the problem is the austerity.

Environmental innovations need many investments but usually they are private, whereas the first engine has to be public. It’s impossible to wait for the private investments as there are too many risks and uncertainty of revenues. In industrial policy it is impossible to set up unreal terms. Environmental policies remain fiscal policies, with subsidies and incentives. In Italy this approach was not pursued sufficiently. For example, before the crisis there were many incentives for solar panels, but some people used them for speculation. Without investments in innovations Italy now imports solar panels from China. And the problem is to promote innovation, without it you cannot induce structural change for green growth. It is impossible without industrial policies.

 

Do you think economic growth, sustainable development and social inclusion are possible to combine within the framework of one political agenda for Europe?

The social aspect of growth is another problem, depending on if one wants to speak of growth from the supply or demand side. In terms of innovation it was the supply side. Turning it around, we will be talking about the demand side: pursuing inclusive growth in order to invest in society. Employment is the main channel – good employment in terms of wages. Today we face the phenomenon of the working poor. Having a job is not sufficient any more and this is an example of neoliberal austerity policy, a problem of this era and this time.
The term growth itself does not bear any specific meaning. As you can have growth without additional employment or growth connected to a severe increase of emissions, it does not have any intrinsic value. Instead of speaking of growth policy, the term of development policy is more meaningful, as it includes social and environmental aspects. Increasing the quantity of production only leads to an increase of produced commodities, of which some are valuable to society while others are not.

Is it possible to divide the social, political and economic sphere? Some economists want to develop a strict framework, high boundaries between the social and the economic – it is impossible. You can have growth that increases inequalities. So the problem is an etymological problem, but also a political problem. The end of my analysis is: an increase of production -or growth- of valuable commodities and a decrease of production -or degrowth – for bad commodities. Commodities are goods not only for the consumers – also for the environment, for the workers that work inside of production. When speaking of sustainability one can mean social sustainability regarding consumers, workers or environmental sustainability. In sustainability we also have to face the timing, the intergenerational equity. The problem is to tell which commodities are “goods” and which are “bads” for whom – us and other generations. The problems are the trade-offs between environmental and social issues. The interesting challenge is to overcome these trade-offs. Why does the society have to decide between more employment and less pollution? In this sense this economic system is not flexible. We have a society withs goals that the economic system at the moment cannot achieve. This is the main dilemma. To make an economic system adequate to the social instance. This economic system has better answers to other questions. It’s like a machine with a wrong, different program. Like journalists doing interviews with bad questions and ending up with bad answers.

The problem of the economic system now is the framework – or setting the topics and the issues with a wrong framework. Within the language of economists and politicians the term of competition is frequently used . In the past this term was used for firms. Now this term is used for countries, regions, cities. It is quite strange, because in general you can be competitive either because you increase revenues or you decrease costs. But for a society it is neoliberalism – because you can become competitive with decreasing costs, i.e. wages, or certain rights. Political economy was born to promote human beings, nowadays economics is an instrument for competition. The main challenge is to change the economic system in order to increase the quality of life and in the end to delete the trade-offs between quality of life and economic sustainability.

What opportunities could the energy transition (i.e. turning to RES and green industries) bring for your country?

It is interesting to analyse innovation from the environmental point of view. There are many complementaries between standard and green innovations. General innovations are one of the instruments to overcome crisis. Green innovations will sustain the general change to innovation. There is a problem of possible externalities. For green innovation you have to invest a lot in R&D – which is positive for the environment and other sectors. In green firms or firms that decide to implement green technologies working conditions often are better as environmental innovations are more complex than standard innovations. Workers who manage them have a higher amount of human capital, more skills, possibly leading to higher wages. This is another factor that can tackle crisis – to improve working conditions. Innovation of new goods can open new markets, too. So there are many positive externalities if you follow the green growth trajectory. Green Growth is not a second step to be added in retrospect. You cannot have growth and then have it greened. Green must be pervasive.

Are there any specific risks on the way to the decarbonisation of the economy?

The problem of the environmental change is a structural change – not only within the economic system, but also within cultural and social systems. First of all, you have to change the mentality of people. When you speak about those problems in the crisis period – the environmental issues are a sort of luxury goods. There is not much sensibility for these problems. The framework is not presented in environmental way. Politicians should bring about relevant public investment policy. In short term you can focus on the fields where there are no trade-offs. For example, the quality of product: you can improve the environment, but you can also create a large market. You have to refrain from signing the TTIP, for example. You should present environmental policy as a way to reduce risks for health, as a good instrument to promote tourism. You have to develop the fields where in the short term there are no trade-offs between employment, economic sustainability, profits and environment.

What measures you think would be most effective to stimulate growth: more public investment (i.e. in social policy or job creation) or introducing incentives for the private sector?

Austerity is the core problem. If you reduce public expenditure you have to increase private investments. But it is difficult – in the environmental field a company cannot alone find revenues in the short time. The first step always has to be the public investment that can face uncertainty and the risk of high costs. But nowadays there is a problem of privatization of the state – a lack of foresight.
When we speak of public investments we do not always mean building connections between the firms. If there are good instruments in environmental challenges that help to share the costs of environmental investments, then the role of the state is not only provision of money but also of other sorts of help.

Environmental challenges are characterized by complexity and uncertainty: the uncertainty of the revenue and the complexity of competences and skills. The implementation of green technologies needs changes in organisational terms, not only process transformation terms.

If you introduce standards and promote industrial policy, like inter-firms networks or instruments for firms to allow them to react to the new environmental regulations by understanding them as an opportunity, these regulations can be economically sustainable for those firms.

But there is a relevant role, the state should be playing: not only should it introduce regulations, but also to support and accompany the change of the companies. Otherwise they will not start to innovate, they will only keep to fulfilling the standards and there would not be any structural change.

 


 

Interview conducted by Maria Skóra.