Italy’s place in the sun

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Its table manners exquisite where Washington is concerned, the New York Times sometimes casts aside euphemism and speaks candidly about the foreign policy of other governments. On Friday it contained a worthwhile article.

Quoting a liberal politician, it described how direct commercial exposure to North African ‘unrest’ is concentrated in Southern Europe: ‘France has Tunisia; Spain, Morocco; and Italy, Libya.’

Of course, by ‘Libya’ the politician basically meant that country’s energy resources.

Mussolini’s colonial government, short of petroleum, may notoriously have squandered the plentiful reserves across the Strait of Sicily. Agip neglected to drill during the war, finding it more profitable to supply the North African colony with imported oil from Romania.

But postwar Christian Democracy was not so neglectful.

Thus, today, by ‘Italy’ the politician meant the giant firm Eni, which is heavily tied up in exploration, production, refining, transport (through its subsidiary Snam Rete), infrastructure (through Saipem), marketing and (as Agip) distribution of Libyan oil and natural gas.

Italy absorbs around one quarter of Libyan oil exports. The Greenstream pipeline, running across the Mediterranean to Sicily, delivers natural gas to mainland Europe. That supply route, together with Algerian natural gas, provides the chief alternative to Russian-fuelled electricity generation for those unlucky European countries without North Sea frontage.

Libyan exploration and operating concessions are also held by French supermajor Total, German companies Wintershall (a subsidiary of BASF) and RWE Dea, US supermajor ConocoPhillips, Russia’s Gazprom, Spain’s Repsol, and assorted smaller US, Austrian and other companies. (Australian firm Woodside recently announced it would not seek to renew its large exploration and production contract.)

The fate of these concessions, should Gaddafi fall, is uncertain. The official opposition, based in Benghazi, contains many old regime figures. That means already-existing close relationships, and also dirty laundry that no side will want aired. A TNC spokesman has pledged that existing contracts ‘cannot be changed.’

But the final say on the matter may well fall to the airpower of NATO and the US Sixth Fleet, Marine expeditionary units, the British and Dutch special forces, and the Bundeswehr.

As the NYT article says, Eni plays a decisive role in the formation of Italy’s geopolitical stance. Italian military involvement in Afghanistan’s ISAF, and in the invasion of Iraq, are unthinkable without it. The company has interests in the Caspian Sea oil basin, claims in the politically-sensitive offshore oil and gas fields in the Timor Sea, and soon a downstream role in liquefied natural gas production in Australia’s Queensland, destined for export markets in East Asia.

The operations of Eni and a few other major Italian firms may range far afield, with the resulting accrual of shareholder income and political influence back home.

But the political capacity of the Italian state in Europe has been diminished by the hollowing out of the country’s industrial base. Since 1979, the old heavy industry, capital-goods (transport, machinery, chemicals, electronics) and durable goods (automobiles, household appliances) sectors have shrunk alarmingly.

Competitive devaluation of the lira was prevented, first (and only partially) by the European Monetary System, then by monetary union during the past decade. Intra-European market share was consequently determined by the ability to minimize unit labour costs (i.e. to increase productivity faster than wages). Unfortunately for Italian exporters, technical innovation had slowed down as the share of profits that was productively re-invested in plant and machinery fell.

Europe’s productive activity was thus increasingly concentrated in Germany, away from its erstwhile industrial challengers in Italy and France. A corporatist state, and the opening of vast labour reserves to the east, allowed trade unions to impose deflationary conditions on German employees. The country thus developed huge surpluses in merchandise trade. So, to a lesser extent, did the Benelux countries (particularly the Netherlands), Austria, Scandinavia, Switzerland and the Czech Republic.

A rump of small and medium-sized manufacturing firms in Emilia-Romagna and Veneto did manage to survive and prosper. But their output was almost exclusively consumer goods (furniture, clothing, footwear, textiles, leather goods and food). These Italian producers had to compete for European markets with low-cost output from China, Japan, South Korea and Taiwan. Italy too has held wage costs down – in Western Europe, it was bettered only by Germany. But its export-oriented firms stood little chance of success against East Asian competitors. Italian furniture, textile, garment and footwear production was thus increasingly outsourced to Albania and Romania.

The reflux of dividends and interest payments was not sufficient to overcome the structural trade deficit. Accordingly, in the twenty-first century, Italy (together another former exporting power, France) developed systemic current-account deficits.

But France, unlike Italy and just like the UK, is home to a large and liquid financial sector (led by BNP-Paribas, Société Générale and other banks, rather than pension, mutual and insurance funds, as in other rentier-led economies).

This has been important as, given the combination of external deficits and sluggish private investment, these three countries have experienced over the last decade, government borrowing has been necessary.

Under the fiscal conditions for monetary union, laid down in the Maastricht framework and Stability and Growth Pact, the European Central Bank is barred from financing public borrowing. The private liquidity shortage of Italy’s smaller money market has therefore meant a lesser domestic capacity to absorb government deficits.

Large quantities of Italian public debt are accordingly held by banks and mutual funds in Germany and France. Following the credit crunch of 2008, Italy thus came increasingly to resemble the ‘insolvent’ peripheral economies of Spain, Portugal, Greece and Ireland.

At 116% of GDP, Italian public debt was the highest in the Eurozone. Borrowing costs rose and goodwill evaporated. Bond-yield spreads between Italy and German long-term sovereign debt securities rose to their highest-ever level. Governments of the PIIGS countries, as they now were called, were recast as debt collectors for private investors.

Italy’s status as a continental power had evaporated.

There’s one more aspect of Italy’s external relations that deserves attention at the moment: immigration. Following demographic transition, Italy’s birth rate has dropped below replacement level. As France’s workforce growth has stagnated, Italy’s employed population had, by the turn of the century, begun to decline.

Italian firms have thus grown increasingly reliant on immigration from Africa and eastern Europe. And their needs have been obliged: thanks to immigration from less-developed countries, Italy’s resident population is now growing at its fastest rate since the 1960s. The fertility rate too has crept slightly upwards over the past decade.

The supposed need to deal with this flow of immigrants has publicly legitimized an ominous growth in the arbitrary powers of the Italian state’s executive branch and its repressive apparatus.

In 2008, Prime Minister Berlusconi deployed 3000 troops on Italian streets to deal with the ‘national emergency’ of illegal immigration and street crime.

The Italian ruling elite thus proclaims its commitment to Festung Europa.

In reality, it is reliant on large-scale immigration for its current and future labour supplies. The aim of its “border protection” policies obviously is (1) to create a pliant low-wage workforce by hounding immigrants into a semi-criminal, degraded condition; (2) demogogically to blame the problems of Italian economy, administration and society on foreigners; (3) to use the supposed crisis as a means to normalize repressive measures that may be used in other circumstances.

Over the past decade, Libyan and Tunisian governments have assisted in this task, financed by Rome and Frontex.

As the productive capacity of the Italian economy stagnated over the last thirty years, so did the wages and employment prospects of the broad population. At the same time, slowed growth of the capital stock raised the rate of return on fixed investment, and thus increased the capital income of the propertied classes. External influence and great-power status – a time-honoured means of broadening popular support – was diminished.

How was the stability of Italy’s social order assured under such conditions?

The path followed elsewhere was barred.

Deindustrialization in other countries (US, UK, Australia etc.) had been accompanied by a ‘big bang’ in the financial sector. The employed population’s compulsory subscription to pension funds channelled savings into capital markets. As a result of this inflow, assets prices were bid up. The appreciation of paper wealth then provided collateral for increased household borrowing (the ‘wealth effect’). Consumption standards were thus maintained despite precarious employment and wage deflation. This was portrayed as the spoils being shared.

In Italy, the decline of industrial sectors did not coincide with a financial explosion. The broader population straightforwardly did not share in the prosperity of the wealthy elite.

The stupefying crassness of Italian media culture must be viewed in this context. So too should the open criminality of the political elite. The Prime Minister’s tycoon lifestyle of bacchanalian excess, exhibited publicly, gossiped over and scolded, has become the object of vicarious enjoyment. It thus contributes to political solidity, rather than, as commonly is supposed, undermining it.

Finally, so too does the scapegoating of foreigners (Roma, Africans, Chinese) as the cause of Italy’s social ills, just as the misure urgenti of the government’s austerity programme cut service provision, reduce public-sector wages and jobs, and lower corporate tax rates for “competitive” purposes.

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5 Responses to “Italy’s place in the sun”

  1. paul cockshott Says:

    I am very struck by the similarity of the graphs of unproductive use of profits and their effects on the rate of profit to those produced by the web analysis tool that one of my students did as a project two years ago.
    (http://compbio.dcs.gla.ac.uk/cgi-bin/profits/index.cgi)
    Your graphs show that the rise in profit rate in Italy is for the same reason as in the UK : a rundown of the real capital stock and a fall in the share of productive investment.

  2. Nick Says:

    Hi, Paul. Thanks for your comment and the useful link.

    Your graphs show that the rise in profit rate in Italy is for the same reason as in the UK : a rundown of the real capital stock and a fall in the share of productive investment.

    Interesting that you should mention this. I’m currently preparing a post on that very topic (i.e. Thatcher’s destruction of the UK’s productive base as North Sea oil came on line).

  3. paolomagrassi Says:

    LOL!

    The notion that ENI might tickle Italy’s (inexistent) military instincts is hilarious.

    Witness the situation in Libya, where at least three military powers are more active than Italy (Italy, and the Libyan people itself, would have been much better off if it invaded Libya last year, instead of laying red carpet for Gaddafi in Rome).

    As to the «resulting accrual of shareholder income and political influence back home», the NYT should take note that ENI’s market value has declined 30% over the past five years. (Perhaps the columnist was trying to be true to the motto of US journalism: «Oh God, never let the facts interfere with my opinions!», although this was meant to be ironic).

    Nice blog though. I’m going to subscribe. Paolo

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