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Italy Agrees to Throw Grandparents into Poverty

"The Damned are taken to Hell and received by Demons" by Luca Signorelli and his school (1499-1504); San Brizio Chapel, Cathedral of Orvieto, Italy (photo: Georges Jansoone)

What you have to understand about Italy right now is that they have a budget in primary balance (meaning everything but the payment on existing debt). The measures that I will explain below are designed to get the budget into a surplus, to start paying down some of their past debt. The debt-to-GDP ratio, the more important statistic, would go down in a primary balanced budget situation anyway, but this is something different. The powers controlling Italy, namely the EU, have decided that this time of imminent recession in Europe is a perfect backdrop to start paying down Italian debt, at odds with all economic theory.

With that in mind, consider what Italy plans to do to its citizens:

Telling Italians that the fate of their country and the euro was at stake, Prime Minister Mario Monti unveiled a radical and ambitious package of spending cuts and tax increases on Sunday, including deeply unpopular moves like raising the country’s retirement age […]

Mr. Monti’s proposals include reintroducing an unpopular property tax that Mr. Berlusconi abolished in 2008 to fulfill a campaign promise. The new measures would also prohibit cash transactions above 1,000 euros ($1,340), in the hope of making tax evasion harder; raise the country’s value-added tax by two points to 23 percent starting in September; and give incentives to businesses to hire new workers.

The country’s new welfare minister, Elsa Fornero, a pension expert, choked with emotion at the news conference as she explained how Italians would be asked to sacrifice today in order to make the pension system less “arbitrary” and “more equitable” for future generations.

The standard retirement age, now 60 for many women and 65 for most men, would quickly rise to 62 and 66, with incentives to keep working until age 70; the standard age for women would eventually rise to match that for men. Pensions would be based on the number of years of contributions, not on the worker’s salary at the time of retirement, as is common now.

Pension benefits will no longer get indexed to inflation, too, under these reforms. If there’s an economic theory that says Italy has to raise the retirement age and slash pension benefits right now, giving less money to elderly pensioners who will spend it and increasing the labor force, I’d like to see it. The real reason for this is to deliver “confidence” to the EU of a commitment to austerity, which will maybe persuade the ECB to operate as a central bank.

It’s all well and good to blackmail Italy into these reforms, but since they were ALREADY in a primary budget balance before them, it’s simply not true that Italy’s problems had to do with profligate spending. And the only thing you lose with these reforms is any chance for economic growth. Even if the ECB steps in, and even if the leading EU nations agree on Eurobonds (essentially to co-sign loans among all the Eurozone countries, leveling borrowing costs), you still have a currency union where several of the countries cannot grow, pretty much by design.

The welfare minister who cried at the thought of forcing old pensioners into poverty had a choice, by the way. She could have resigned rather than play a role in this mess.

More from Al Jazeera.

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Italy Agrees to Throw Grandparents into Poverty

What you have to understand about Italy right now is that they have a budget in primary balance (meaning everything but the payment on existing debt). The measures that I will explain below are designed to get the budget into a surplus, to start paying down some of their past debt. The debt-to-GDP ratio, the more important statistic, would go down in a primary balanced budget situation anyway, but this is something different. The powers controlling Italy, namely the EU, have decided that this time of imminent recession in Europe is a perfect backdrop to start paying down Italian debt, at odds with all economic theory.

With that in mind, consider what Italy plans to do to its citizens:

Telling Italians that the fate of their country and the euro was at stake, Prime Minister Mario Monti unveiled a radical and ambitious package of spending cuts and tax increases on Sunday, including deeply unpopular moves like raising the country’s retirement age […]

Mr. Monti’s proposals include reintroducing an unpopular property tax that Mr. Berlusconi abolished in 2008 to fulfill a campaign promise. The new measures would also prohibit cash transactions above 1,000 euros ($1,340), in the hope of making tax evasion harder; raise the country’s value-added tax by two points to 23 percent starting in September; and give incentives to businesses to hire new workers.

The country’s new welfare minister, Elsa Fornero, a pension expert, choked with emotion at the news conference as she explained how Italians would be asked to sacrifice today in order to make the pension system less “arbitrary” and “more equitable” for future generations.

The standard retirement age, now 60 for many women and 65 for most men, would quickly rise to 62 and 66, with incentives to keep working until age 70; the standard age for women would eventually rise to match that for men. Pensions would be based on the number of years of contributions, not on the worker’s salary at the time of retirement, as is common now.

Pension benefits will no longer get indexed to inflation, too, under these reforms. If there’s an economic theory that says Italy has to raise the retirement age and slash pension benefits right now, giving less money to elderly pensioners who will spend it and increasing the labor force, I’d like to see it. The real reason for this is to deliver “confidence” to the EU of a commitment to austerity, which will maybe persuade the ECB to operate as a central bank.

It’s all well and good to blackmail Italy into these reforms, but since they were ALREADY in a primary budget balance before them, it’s simply not true that Italy’s problems had to do with profligate spending. And the only thing you lose with these reforms is any chance for economic growth. Even if the ECB steps in, and even if the leading EU nations agree on Eurobonds (essentially to co-sign loans among all the Eurozone countries, leveling borrowing costs), you still have a currency union where several of the countries cannot grow, pretty much by design.

The welfare minister who cried at the thought of forcing old pensioners into poverty had a choice, by the way. She could have resigned rather than play a role in this mess.

More from Al Jazeera.

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David Dayen

David Dayen