#EP2014, on the Italian results: a bet on wage-led growth wins elections

Partito Democratico (PD), led by 39 years old Matteo Renzi, is the clear winner of the European elections in Italy, obtaining over 40% of the overall preferences. This is a historic result for the party, whose electoral record never beat Enrico Berlinguer’s 33.3% in the 1980s. The vote underscores the free fall of Berlusconi’s (who couldn’t run because convicted) Forza Italia, and it marks a sound defeat for Beppe Grillo’s Movimento 5 Stelle.

The European elections climate in Italy has been surreal, to say the least. In my view, Grillo is responsible for pitching the election as a matter of internal politics, even though the composition of the Italian legislative branch won’t change because of the vote. As a consequence, the electorate saw the elections as a “referendum” on the government, of which Renzi is prime minister, and PD is running the show. One thing is for sure: Italians really like Renzi and what he’s doing (I’ll get to this, which is the juice of this post, in a couple of paragraphs).

The rise of Renzi as prime minister of Italy has been nothing short of unusual. The 2013 political elections saw Italy almost equally split between PD (29.5%), 5 Stelle (25.5%), and Berlusconi’s (29.1%) party. The outcome was a (short lived, it turned out) “national unity” government led by Enrico Letta, with the task of scoring a few key reforms before letting the Italians go back to the ballot box. This result was particularly grim for PD, then led by Enrico Bersani and running on a platform characterized by Europeism and fiscal responsibility. So much so that Bersani lost in the following primaries to Matteo Renzi. Renzi’s win in the primaries wiped out the previous PD leadership which, however, was firmly in control of the government and, it seems now clear, aimed at confining Renzi to irrelevance by keeping him away from governing the country. This contradiction led to the ousting of Letta’s government through a vote of no confidence by the very same PD which put him in charge (this happened before, when PD leader Walter Veltroni led the ousting of the then prime minister Romano Prodi: go figure).  Thus, on February 22, 2014 Renzi becomes prime minister (Presidente del Consiglio dei Ministri) and forms a new government without actually being elected. Put like that, looks like a good plot for “House of Cards”, which in Italian would read “Castello di Carte” (I hereby claim full authorship and copyright on such a show).

The guy realizes he has to deliver from the very beginning, because his position is unstable. He understands that the European vote will be an exam for his government. After years in which Italy’s legislative action was constrained by Silvio Berlusconi’s obsession with justice on the one hand, and the bumpy reactions of financial markets to political agendas on the other, Renzi chooses three areas for reform: the public administration, taxes, and justice. On taxes, he promises to lower taxes by 80 euros a month to Italians earning up to 1500 euros a month. We are talking about roughly 10 million people. As of today, their paychecks already reflect the higher disposable income (the hashtag #80euro on Twitter is pretty hot). As far as one can tell, the 80 euros in additional disposable income are budget neutral in the sense that they won’t affect the deficit/GDP ratio, which will remain within the parameters set by the Maastricht Treatise and the more recent fiscal compact.

Any heterodox economist I know would label (I would dare to say: salute) this reform as a bet on wage-led growth. In contemporary post-Keynesian economics jargon, an economy is wage-led if an increase in the share of wages in national income boosts aggregate demand and therefore generates GDP growth. In general, even most mainstream economists would agree that expansionary fiscal policy -higher government spending or lower taxes- appears to be effective at stimulating GDP in a recession. The question is by how much. The distributional twist added by post-Keynesians is that lower income people tend to have higher marginal propensities to consume than higher income earners, and therefore the additional consumption generated by a tax cut is bound to be larger if tax cuts are directed to lower incomes.

It is too early to assess the growth effect of Renzi’s reform. Further, it is not free of criticism: for instance, it affects only workers earning wages and not self-employed people, who are a considerable chunk of low income earners in Italy. It has been criticized as populist (which it probably is, but who cares), useless, cynical, you name it. But it is what it is: a redistribution toward wages.

Sure enough, a referendum on Renzi’s government gave him a sound victory because of his wage-led bet. Call it populist, call it cynical, but this is what we are talking about. We’ll see whether the economics of it will work. The politics, clearly, do.

A final remark: despite the discontinuity with the previous leadership, PD runs on a strong pro-Europe agenda. It is now the leading center-left party in Europe. The economic success or failure of Renzi’s wage-led bet will have far reaching consequences on the overall political direction of the EU.








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