Inflation and employment, the ECB's little masterpiece

Over the past four years, Italy has had an employment boom and no one saw it coming. All politicians were convinced that hard times were coming, either because of the ECB 's restrictive monetary policy or the government's restrictive fiscal policy. Or both. In July 2022, the ECB raised refinancing rates for the first time in years. Inflation in the euro area was skyrocketing, close to 9%, with core inflation over 4%. The ECB's intervention, although late, was inevitable: a strong signal was needed to bring expectations back under control and avoid an escalation in long-term rates, which would have made the future disinflation process more costly.

But Italian politics saw black. “With rates too high, there is a risk of recession”, Antonio Tajani (June 2023). “The ECB, against the evidence of its own studies and common sense, announces that it wants to raise rates again”, Matteo Salvini (June 2023). “The reasons for inflation are external, not internal to the EU, while the risk that is clear to everyone is recession”, Adolfo Urso (June 2023). Someone had seen it before everyone else, already in April 2022, like Alberto Bagnai (Lega): “On January 3, I told you that recession was upon us and I explained why, SO now the recession has arrived”. In reality, the recession never arrived, just like the decline of the euro. The government attacked the ECB's monetary policy and thought it could contain inflation with surreal price control programs. So, if the recession had arrived it would have been Christine Lagarde 's fault, but since the ECB's policy worked , the Meloni government said that the drop in inflation was due to its "tricolour trolley".

The opposition was also on the same wavelength. Andrea Orlando , of the Democratic Party, said in December 2022: “Lagarde risks sending Europe into a deep recession to cool inflation. We must get out of this monetarist trap and try to save the economy by moving beyond the obsession with monetary policy based exclusively on the manipulation of interest rates”. It was not clear what “interest rate manipulation” was and what the alternative was, but fortunately there was no need to experiment with it. And some progressive economists also thought like Orlando and the government: “I also think that the ECB’s monetary policy is excessively restrictive and will cause an unnecessary recession”, said Andrea Roventini , former fantasy minister of the Economy under Luigi Di Maio (December 2022).

Three years later, the verdict is unequivocal: the ECB has produced a small masterpiece. Inflation has returned to normal and economic activity has not been significantly affected. Indeed, the European labor market has shown signs of surprising vitality. In Italy, Istat data tell of a real boom in employment. Over the past four years, employment has grown by about half a million units per year. In the latest survey alone, the trend increase marked +578 thousand jobs. Italy had never recorded 24.3 million employed people. This record is accompanied by numerous records: female employment, permanent contracts, male and female employment rates, 25-54 age group, reduction in inactivity and increase in the workforce. The unemployment rate is just a whisker away from its historic low. Despite a few shadows – most of the employment growth has been concentrated among the over-50s and real wages are still recovering – the cyclical picture is among the most positive of recent decades.

When the Draghi government lifted the ban on layoffs in June 2021 (Italy was the only OECD country to introduce such a rule), the CGIL and UIL predicted a “social bomb” of “one million layoffs”: in the following months, in reality, there were almost 600,000 more people employed, almost all with permanent contracts. Similar catastrophes were announced later, when the government decided to end the Superbonus: “200,000 unemployed will follow,” predicted former Labor Minister Orlando in November 2023. Since then, there have been 550,000 more people employed, all with permanent contracts. Only a year ago, Pasquale Tridico , former president of INPS and soon to become a M5S MEP, said that employment is growing but “the hours worked are not.” Pierluigi Bersani , in October 2024, relaunched by saying that "we have a reduction in hours worked". While Maurizio Landini - who with the Cgil accompanied these four years of employment boom with four general strikes - still says today that "there has been an increase in precariousness that is unprecedented". All unfounded statements: Istat certifies that hours worked have increased (index at 117.2 at the end of 2024, with a base of 100 in the year 2021) while temporary workers have decreased not only in relation to permanent workers, but also in absolute value.

Such a prolonged and widespread expansionary phase has not been seen for a long time, and the cycle seems to show no signs of slowing down. Both the monetary action and the fiscal adjustment plan have been the target of criticism, but they have proven to be some of the most effective macroeconomic moves in recent years, achieving lower inflation, economic growth and strong employment growth. Is there anyone who has the courage to admit they were wrong?

More on these topics: