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Southern Europe: The New East?

Crisis Commonalities between Southern and Eastern Europe

The crisis of 2008–9 marked a watershed for the southern EU countries, perhaps even more so than for Eastern Europe. Evaluating the recent upheavals in European history is no easy task for the contemporary historian, as many problems, such as the euro crisis, remain unresolved; they are uncompleted processes that elude appraisal. Looking ahead (which is not the historian’s specialty), it is hard to predict whether the southern EU countries will manage to permanently exit from the crisis or whether they will slide ever further behind the rest of Europe.

This chapter will compare the two macrounits of Eastern Europe and Southern Europe as well as the individual countries and societies within them. Special attention will be paid to Italy and Poland, since they are economically the most important countries in both larger regions. (Greece received far more coverage in the international media due to its destructive potential for the euro but, with its horrendous national debt, structural problems, weak industry, and low tax revenue, it is an exceptional case.) Maintaining the focus on social history, the chapter will consider the crisis and attempts to overcome it “from below.” One central argument proposed is that, while the older generation and pensioners bore the brunt of the neoliberal reform programs launched in Eastern Europe in 1989, the crisis in Southern Europe has been dealt with at the expense of the younger generations. This thesis sets the two time frames of the analysis: on the one hand, it will make a diachronic comparison of the period after 1989 and the period after 2008–9; on the other, it will compare contemporaneous reactions in various countries and societies to the recent crisis.

The focus on Italy also has practical reasons. (The other southern EU countries are considered mainly in comparative contexts.) As a historian, it is a boon to be able to read key sources in the original language. During a three-year stint at the European University Institute in Florence (a think tank and the only EU university) in 2007–10, I witnessed the outbreak of the financial, budget, and economic crisis firsthand and gained initial impressions of the deeper political and social causes.

In 2007, when almost all seemed to be well in Southern Europe, Italy was ruled by the former president of the European Commission, Romano Prodi, a social-democratic political realist. Since Prodi’s arrival in office, Italy’s national debt had been reduced and unemployment brought down lower than in Germany and most of the new EU countries. Italy’s only major concern was slow economic growth—it had the lowest rate in Europe. Prices were remarkably high; filling a shopping cart at the supermarket cost around a fifth more than in Germany. Rent, telephone costs—in short, everyday life—was more expensive. Labor, on the other hand, was far cheaper. My wife and I advertised for a babysitter and were inundated with replies—from undergraduate and postgraduate students, even qualified educators, and many other working people who wanted or needed to supplement their incomes. We became acquainted with other downsides of life in Italy: sprawling suburbs of crumbling apartment blocks; the ubiquitous stifling traffic, squeezed onto congested roads; and the disturbing contrast of private wealth displayed alongside decaying schools and nurseries.

A year later, la crisi struck. Initially, Italy’s economic slump was similar to Germany’s, but in contrast to the Federal Republic, it precipitated a change of government. Silvio Berlusconi resumed power, less on account of his—rapidly dwindling—charisma than the decline of the Left in Italy and the lack of political alternatives. From the start of his third term in office, Berlusconi put more effort into evading prosecution for tax evasion and corruption than actively combating the crisis. In any case, with its high national debt, Italy did not have the means to launch a spending program like Germany’s. But this did not prevent the country from paying into the European Union’s joint emergency fund to come to Greece’s aid. In 2010, the Italian government introduced its first austerity program in a bid to contain the euro crisis. The stability law (legge di stabilità) led to major cuts in education. Universities and schools were forced to slash four billion euros, or 8 percent of their total budget.1 In spite of these cuts, concern over Italy’s national debt, which already amounted to more than 100 percent of its GDP, sent the interest rates on government bonds soaring, and necessitated one austerity package after the next to deal with the additional costs. To make matters worse, the government could no longer pay its bills: its outstanding commercial debt rose to almost one hundred billion euros (in addition to the country’s two-trillion-euro national debt) and caused an unprecedented wave of bankruptcies.2

La crisi gnawed at the Italian economy for over five years. Industrial production dropped by almost 25 percent; Italy experienced the longest recession since the Second World War. Though more protracted, Italy’s decline was almost as dramatic as Poland’s in 1990 or Czechoslovakia’s in 1991, following the collapse of communism.3 After 2008–9, Italy’s per capita GDP fell by about 10 percent to the level it had been in the mid-nineties.

The central question this chapter asks is: Are the southern countries of the European Union taking the place of the East? Both these EU peripheries were especially badly hit by the crisis of 2008–9 and its aftereffects (with the aforementioned exception of Poland). The new EU member states were particularly vulnerable to the global financial crisis whereas the southern EU states struggled with the budget and euro crises. Despite these differences, the recession has in many respects had similar consequences: unemployment and poverty have increased, social inequality and other economic and social problems have dramatically worsened.

In view of these parallels, the chapter will begin by taking stock. It will compare durations and extents of the recession in the various regions and countries in question. Second, it will explore the political and social responses to the crisis, especially labor migration. A third topic of comparison will be international (stereotypical) perceptions of Eastern and Southern Europe. Without wishing to consolidate stereotypes, I cannot deny my personal impressions of the satellite towns surrounding Rome, Naples, Palermo, and Cagliari. Compared to the high-rise suburbs there, the prefabricated residential estates in the poorest regions of Poland seem cheerful and neat. The Mediterranean light dispels the gray, but illuminates a stark and disturbing contrast with the chic, affluent middle-class districts that exist in all the above cities (but not in those of eastern Poland, such as Białystok or Rzeszow).

Comparisons usually aim to identify differences and similarities, and to formulate generalizing and individualizing hypotheses. Below, I will endeavor to take comparison a step further by asking: Is there a connection between the economic development in the new EU countries and the situation in the crisis-torn countries of the EU’s south? It is still too early to support this thesis with the findings of scholarly research into recent economic history.4 Nevertheless, a number of indicators point to a connection between the economic gulf separating Germany and Southern Europe and the proliferation of economic interrelations within the expanded EU, and specifically between Germany and East Central Europe. This spread of economic ties is evidence of a process of “small-scale globalization.”

Although almost all the new EU countries were plunged into a deeper recession than the fifteen original members, they recovered faster. Foreign investments soon began to flow again, albeit not as abundantly as before 2007—expectations had been revised from overoptimistic to more realistic. As figure 8.1 shows, from 2010, the countries of East Central Europe achieved higher growth rates than Italy and Greece. With labor costs and taxes still low, their prospects for further economic recovery are good. But their neoliberal orientation comes at a high social cost, and causes other difficulties for the erstwhile reform front-runners. In Slovenia and the Czech Republic, for instance, rising prices and salaries have necessitated a different economic strategy than in the nineties. These countries are caught in the “middle income trap”; it took them many years to overcome the crisis. Slovenia also struggled with a homemade banking crisis. But it managed to recover without a eurozone rescue package and the social cuts this would have entailed.

Fig. 8.1.  Economic growth in Southern and East Central European EU states 2007–2013. Source: Eurostat Regionalstatistik (Tabelle tsdec100).

The southern EU states have no such prospects of recovery. Greece has been in unparalleled economic distress since 2010. Its per capita GDP has fallen by over 30 percent in that time. The Greek crisis has proven far lengthier and more severe than the economic slump experienced by the Eastern European countries in the early nineties (see fig. 8.2). The recession in Italy has also lasted longer than that in Poland or the Czech Republic after 1989.

The decline in economic performance has further compounded the debt crisis. Italy’s national debt rose to 134 percent of GDP in 2014, from 105 percent in 2005. Even Hungary, the most heavily indebted new EU member country, is sitting comparatively pretty with a debt-to-GDP ratio of 78 percent.5 It remains to be seen if Italy can escape this trap. In purely mathematical terms, it can succeed if the economy grows robustly and tax revenues increase. But exactly the reverse has been the case since the crisis of 2008–9: The austerity policy has slowed domestic demand—an inevitable state of affairs where the state accounts for over 50 percent of the GDP. While Germany and Austria have stabilized their economies by increasing exports, Italy has so far been beaten by the strong international—particularly German—competition.

Fig. 8.2.  Crisis trajectories: East Central Europe after 1990 and Greece/Italy after 2008. Source: WIIW Report 2012 (Table I/1.5); Eurostat, ongoing releases.

Even before the crisis, Italy had been overtaken by Germany in a number of respects. It had failed to forge as many economic links and secure as many cost advantages in the new EU countries as German companies such as Volkswagen and Bosch. Back in the early nineties, Italian industry was a major investor in Eastern Europe. One example is Fiat in Poland; Italian banks and insurance companies such as Unicredit and Generali also expanded into the region. Small enterprises had ventured into Eastern Europe even earlier. One of the first private restaurants to open in Kraków was an Italian trattoria in 1991. The improvement in the quality of restaurants, cafés, and bakeries is one of the most remarkable achievements of transformation in all of Eastern Europe. Italian boutiques also flourished.

However, Italy’s dynamic appearance on the “emerging markets” soon lost momentum. This is illustrated by statistics on the inflow of foreign direct investments. Italy usually ranks fourth or fifth among foreign countries investing in Eastern European states and the former Soviet Union (except in Poland), often behind its much smaller neighbor Austria. In some national statistics, Italy is not listed as an investor at all.6 That does not imply that the Italian economy missed the boat on Eastern Europe. Italy is a leading investor in the Adriatic states of Albania, Montenegro, and Croatia (in Albania, after Greece; in Montenegro, after Russia). But these countries have profited least from the European boom of the last twenty-five years, and are small markets. In a sense, then, Italy’s FDI flowed in the wrong direction. In total, between 70 and 90 percent of the FDI in the new EU countries came from the old member states of the European Union;7 further proof of the process of “small-scale globalization.”

Compared to Germany, the Italian (or French, for that matter) industries active in the rising economies of Eastern Europe have the distinct disadvantage of longer transport distances. While Volkswagen’s Polish production sites are virtually on the company’s doorstep, the distance between Tychy in southern Poland (the site of the largest and most modern Fiat plant) and the parent plant in Turin is considerable.

Initially, however, Germany’s geographical proximity to Eastern Europe caused some difficulties. To take another example from the automobile industry, the new factories built by Volkswagen and its suppliers in Poland, the Czech Republic, Slovakia, and Hungary, cost at least one hundred thousand jobs at German production sites.8 But in the long term, not only companies like Volkswagen but the entire German economy profited from industry’s expansion into Eastern Europe. By taking advantage of cheaper manufacturing, turnovers were increased and profits swelled. This structural change took place at a time when economies worldwide were buoyant. Apart from the dip after 2001, the world economy boomed in the fifteen years between 1992 and 2007, bolstering the export-oriented German economy along with it. Since 2008, the global economy has not been robust enough to moderate the crisis in Italy in the same way—by compensating the lack of internal with greater external demand.

Moreover, Italy’s industry centers on products that require little technological expertise to manufacture, such as textiles, shoes, and furniture. These can be more cheaply produced in Eastern or Southeastern Europe, or even more so in Asia. Intra-European and global competition has also placed considerable pressure on the other southern EU member countries. Portugal lost much of its textile production to Romania and Bulgaria even before the European Union expanded eastward.9 This trend accelerated after the introduction of the euro, which pushed unit labor costs upward in Portugal and the other southern countries.

German trade unions confronted the cost problem head-on. Unemployment was relatively high in Germany around the turn of the millennium, and German workers were informed by their staff committees of how much less their Polish, Czech, or Hungarian colleagues earned. Consequently, they approached the employers’ associations with the offer of dropping pay raise demands in exchange for job guarantees. In this way, a “social pact” was concluded, based on the kind of “old” corporatist structures that were widely condemned in the neoliberal epoch, and which made German industry more competitive than southern European or French industry. This can be regarded as a further example of cotransformation.

Another factor affecting location decisions is the educational background of the local population. In this respect, too, the southern European states have fallen behind. In the Program for International Student Assessment scheme of ranking national education systems, Italy is a clear laggard.10(The launch of PISA in 2000 created a new international market, where confidence in the—not necessarily market-oriented—education systems was influenced not least by when and how the participating countries adjusted to the competition. For this and other reasons, PISA warrants some healthy skepticism.) Moreover, Italy is dragging its feet in the digital revolution. In terms of internet expansion, it ranks third lowest in Europe, just ahead of Romania and Bulgaria.11

Italy’s regression to a “low-tech” country (though this only really applies to the south; the northern Lombardy and Piedmont regions are economically advanced) is all the more striking in contrast with its position in the eighties. Italy was the fifth-strongest Western industrial economy, ranking only behind the United States, Japan, West Germany, and France. It was a strong contender on the electronics and computer market. The Piedmont-based typewriter manufacturer Olivetti produced several successful personal computers and—even more sensationally—a laptop as early as 1982–83. Olivetti held the second-highest market share, after IBM, in Europe.12 (Some PCs were still made in Germany at the time, too.) In 1997, however, the company finally caved in to the fierce competition from the United States and Asia and discontinued its personal computer line. Olivetti’s retreat from the computer market was, then, caused by the pressure of global competition rather than developments in Eastern Europe. Meanwhile, in other fields, such as vehicle construction, Italy struggled to keep pace with Germany and other parts of Europe.

As the economic gulf between Germany and Italy widens, the more the latter becomes a contender of the new EU member states. Labor costs in these countries are hard to beat, especially in Romania and Bulgaria. Devaluing the national currency to increase competitiveness is no longer an option for Italy since it adopted the euro. While the crisis-torn countries of Southern Europe are bound by the euro to Germany’s financial and economic policies, the new EU states have become the extended workbench of German industry, enabling it to produce at low costs. This constellation has helped Germany to acquire a perhaps overwhelming level of economic power in Europe.

The euro crisis further compounded the economic imbalance. International investors turned away from Italy and its ailing public finances. At the height of the crisis in fall 2011, the interest rate spread between Italian and German government bonds, known in Italian as lo spread, rose to 5.74 percent.13 Even at around 1 percent (the level at the time of writing in early 2015), for every billion-euro debt, Italy has to pay almost one hundred billion euros more in interest over a ten-year period than Germany. It is only thanks to the European Central Bank’s decisive action that the interest rate spread was realigned to this level: the ECB first declared it would defend the euro at all costs, then directly intervened in “the market” by buying government bonds. Whether one regards the ECB’s work as admirable or questionable, it is confined to the field of monetary policy and cannot stand in for a comprehensive European economic policy. Alone, Italy and the other Southern European EU states do not have the means to support their economies and halt the downward spiral of recent years. The more prosperous countries Germany, Poland, Slovakia, and, to some extent, the Czech Republic, have taken precisely this Keynesian course since 2009.

Though widely regarded by the Italian public as the spawn of neoliberalism, recent austerity programs differ from the reform programs of the nineties.14 “Austerity” was only one of ten points on the Washington Consensus. Following neoliberal logic, it is just the start and should be followed by further reforms. Mario Monti’s governo tecnico tried to introduce a number of deregulation, liberalization, and privatization projects but had to abandon them halfway. Italy and the other southern European EU countries cannot, then, be grouped together with the Baltic states as examples of continued neoliberalism. Italy’s nonelected government of experts only went so far as to avert national bankruptcy and stabilize the budgetary situation.

Italy’s total debt is considerably higher than that of the new EU countries, and has forced the government to repeatedly raise taxation levels. This in turn depresses demand and therefore growth. On paper, the realignment of the interest rate spread on government bonds makes Italy’s capacity to service its national debt and overcome the worst economic crisis since 1945 more credible. But on the streets, many young unemployed seem to have given up all hope of finding a job. Unemployment among the young has risen to over 40 percent.15 In 2014, 20 percent of fifteen-to-twenty-four-year-olds (some 1.3 million people) neither had a job nor attended school or college. They are the so-called NEET, “not engaged in education, employment, or training.” While the younger generation has tremendous difficulties breaking into the employment market, more men and women over age fifty-five are employed in Italy than ever before. Since the outbreak of the crisis, employment in this age bracket has risen from 33 percent to over 40 percent.16 No doubt propelled by sheer necessity, this trend compounds the asymmetry between young and old.

Italy’s generational imbalance cannot be blamed on the neoliberal order. It has arisen from patriarchal structures in Italian society and, more concretely, the country’s protection regulations for permanent staff. In 2015, Matteo Renzi’s government at last relaxed Italy’s employment protection amid fierce protests. It is cheaper and easier to fire a young employee, or decline to extend a short-term contract, than to lay off an older member of staff and have to pay a compensation settlement, or to answer to an industrial tribunal. This generational imbalance marks another difference from the Eastern European situation in the early nineties: in the latter region, workers over age forty and pensioners were the worst affected by mass unemployment and social security cuts.

The regional gap in Italy has also widened—in this case, similarly to Poland, Hungary, Slovakia, and the Baltic states in the nineties. In the period 2008–10 alone, Italian industries cut 532,000 jobs. This trend has continued to the present.17 Over half these jobs were cut in southern Italy. Relative to the total number of people in employment, job losses in the Mezzogiorno were twice as high as in the north of Italy. More than that, the state has all but abandoned its regional policy to deal with the acute budget crisis. The tens of billions that Silvio Berlusconi pumped into the Italian structural fund for the South (Fondo per le aree sottoutilizzate, or FAS) since 2003, hoping to win voters in southern Italy, was largely consumed by immediate crisis management.

With fewer transfer payments arriving from Rome, the municipalities responsible for social expenditure are in turn forced to reduce their outgoings. In 2011–12, welfare benefits in southern Italy were 35 percent lower than in northern Italy.18 Social expenditure in the Mezzogiorno is about the same as in Poland, and not too far removed from the neoliberal regimes in Romania and Latvia. In theory, the government in Rome could alleviate the problem by increasing transfers to the South. But the fact that its extensive regional aid of the postwar period came to nothing is no incentive to launch a new spending program.19 The economy of southern Italy was in decline even before the crisis; long-term growth in the region had been around 0.5 percent lower than the Italian average since the mid-nineties. Southern Italy achieved a per capita GDP of around 79 percent of the EU average in 1995, falling to around 69 percent by 2007. (Overall, Italy’s purchasing-power adjusted, per capita GDP was 104 percent of the EU average prior to the crisis.) By 2012, the Mezzogiorno had a smaller purchasing-power adjusted GDP than Poland.20 In view of these figures, the south of Italy has indeed shifted toward the East, insofar as this region can be regarded as an integral unit.

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