Are Italian voters right that austerity isn't working?
Austerity's bite was a primary factor in the strong showing by Beppe Grillo and Silvio Berlusconi in national elections. And now some experts say that austerity is hurting Italy's economy.
London — There was little doubt that austerity – and opposition to it – would play a major role in Italy's national elections, and play a role austerity did. The campaign yielded results well beyond expectations for both of the parties that campaigned heavily against austerity measures: Beppe Grillo's Five Star Movement and Silvio Berlusconi's People of Freedom.
But while ordinary citizens have been crying for help since immediately after austerity was first introduced, now experts are joining the chorus, and warning that the kind of austerity policies currently enacted in southern Europe may not be working.
The strength of the Italian opposition to austerity – backed by Europe and former technocrat Prime Minister Mario Monti – was underscored by the unexpected successes of Mr. Grillo and Mr. Berlusconi in the weekend's elections. The Five Star Movement, a protest party that in 2008 did not even exist, became the country's second largest. And the People of Freedom, despite being led by scandal-tainted ex-premier Berlusconi, made up a 10-plus percent gap in the elections final months to end up falling short of its rival Democratic Party by a half percentage point. Mr. Monti's party secured less than 10 percent of the vote. [Editor's note: The story has been updated to reflect the final results for the Five Star Movement.]
"Italian voters showed their opposition to this kind of austerity measures. They do not understand them, and honestly I cannot blame them," says Ugo Arrigo, a professor of government finance at the Bicocca University of Milan.
And experts say their opposition is born out by the measures' results.
"I think it is fairly safe to recognize that austerity policies have, at least so far, not worked," says Tim Vlandas, a political economy researcher at the London School of Economics. "This is especially true in Greece, where after significant overall reductions in fiscal spending, the debt level is as high and unsustainable as before."
Following in Greece's steps, where a depressed economy and worsening public finances are creating a vicious loop, is in fact the worst nightmare of most Italians. And while Italy is not in the same situation as its Mediterranean neighbor, "the austerity measures enacted by Italy have improved public finances only marginally, while contributing to a stubborn recession" according to Mr. Arrigo.
Data released last December by the Bank of Italy show in fact that, instead of contracting, the Italian government's shortfall had widened in the first 10 months of 2012 compared to previous years.
In 2012, the shortfall – the difference between how much the government spends and how much it receives from taxes and other sources – reached €75 billion ($98 billion). For the comparable periods in 2011 and 2010, instead, it stood at €65 billion ($85 billion) and €73 billion ($95 billion) respectively. And the debt to GDP ratio also grew under Monti's cabinet, going from 120 percent to a staggering 127 percent.
A large part of the problem is that Italian businesses and citizens reduced spending much more than was forecast when austerity measures were announced, a behavior that economic models failed to predict and that seems to have replicated in other EU countries.
"Cutting public spending in a downturn is always risky, but it is especially so when all of Europe is tightening fiscal policy at the same time. The principal reason why public deficits have risen across Europe is because private sector demand has contracted sharply," says Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank.
"Put another way, fiscal deficits are the not the cause of the crisis but a consequence of it," he says, adding that "the European Commission grossly underestimated the impact of fiscal austerity programs of this magnitude."
And while Greece is currently going down a spiral dive of shrinking economic activity and increasing austerity, other countries have the opportunity to learn from such experience. Italian voters might have sensed that similar policies would have led the nation down a similar path, and have sent a clear message against it.