Dr. Merkel came out of her meeting (M. Sarkozy was there too) with our new PM Prof. Monti by claiming (Ansa Italy-english) that “Monti showed us the plans and it was very impressive to see the structural reforms”.
It is a sad testimony of the level of English knolwedge in Italian society (and especially this time in Italian newsrooms) that the statement was translated as: “riforme impressionanti” (Ansa Italy-italian). It turns out that in Italian “impressionanti” has often a meaning like ”disturbing, scarying”, a negative slant. “Impressive” in Italian the way Merkel meant it would have rather been translated as “grande, di grande effetto”, with a positive slant.
So now half the Italian population is worried that something very scary might come out from reforms. The other half is obviously in favor of impressive reforms, no matter what is the translation.
In general reforms are always scary for some part of the population. Reforms “change” life as we have experienced it so far and as such they impact negatively or positively groups in society. We are still desperately looking for a reform that would make everybody happy and none sadder (we economists have even a name for this, i.e. a “Pareto improvement”) but, in the meantime, we acknowledge that a good reform is one that creates enough wealth to compensate losers so that everybody might theoretically gain from it (we call it, again, a “Marshall improvement”). Obviously when we do a reform that is Marshall improving we rarely end up compensating the losers with the additional created wealth and someone ends up losing.
Labor market reform, meant to make the rigid Italian labor market more flexible, is nowadays a hot topic in the Italian debate since the largest Italian party, the Democratic Party of the left, is divided within in its ranks as to whether go forward or stay put. The “way forward” is pushed also at the European level. The “stay put” is preferred by trade-unions.
So it looks like (as usual with reforms) a debate between conservatives and reformers, even within the left. But, let us now look at the conservatives position. I do like it, in the sense that I do understand the necessity for it to be aired in the public domain, for two reasons:
a) in a period in which it is hard to find (in Italy? only in Italy? in Europe? only in Europe?) somebody arguing for and representing the immediate (short-term) interests of a section of the working class, anyone willing to do it is fulfilling a needed role for society. We cannot silence those voices only because flexibility appears to be the fashionable word in the current debate. I say immediate (short-term) interests because one might well understand the argument by the free-market thinkers that in the long-term a more liberalized labor market might be a good thing (but Nobel Prize Robert Solow would disagree, I hope to show you in a next blog, even on this), but what about the short-run (see below point b)? Also, I said “a section of the working class” because clearly there are other groups, as the one of young unemployed, that can be damaged by the delaying of a labor market reform. But this does not go against the sanctity of some politicians doing the tough but noble job of defending the interests of those that would be damaged by more flexibility in labor markets.
b) Now, as a macroeconomist let me also add another thing. Are we really so sure that, at the right moment of the worse economic crisis of the Western world since 1930, it is the right moment to liberalize labor markets? Just at the moment in which aggregate demand by consumers is lagging we want to build this inevitable pressure that comes from precariousness and thus push Italian (European?) families to save more and consume less so as to insure against this added source of instability in workers’ life? To obtain gains that even according to the strong supporters of reform will only come in the long-term, do we really want to create more social instabilty now, at the risk of making our social tissue crumble and, with it, the chances of a successful reform? Aren’t reforms best introduced when the economic cycle is up, so that we can compensate properly the losers, when these losers are not in a moment of already great stress because of a crisis? Dont’ we know that most economic studies on happiness point to greater job uncertainty as one of the major factors of stress that a human being could have, even if he/she is working? Aren’t there other more important ways to create more and better jobs, like those that allow firms to hire more (for example: expansionary fiscal policy) or universities to graduate better and more students?
This is why I like the ones that enter this debate with an open mind, especially if they open their mind and heart to those who are possible privileged, yes like unionized workers, but still belong to the lower income strata of society. Policy-makers and reformists, I suggest you fix other issues first.