Germany isn't the only EU country where serious ongoing economic problems are leading to political gridlock. Italy's situation is no better, and arguably worse. This 'worse' aspect was pushed into the headlines yesterday by the resignation of Economy Minister Domenico Siniscalco. This is sending shock waves throughout the entire Italian political system. It still isn't clear at the time of writing whether the Berlusconi government can survive, especially given the gravity of the underlying problem which is the need to make severe budget cuts when Italy is in a prolonged recession and elections loom sometime next spring.
Essentially Siniscalco quit because of continuing government infighting over the 2006 budget and over the administration?s failure to force the resignation of Bank of Italy Governor Antonio Fazio following the scandal produced by accusations that he showed bias against Dutch bank ABN AMRO during a takeover battle for the Italian Banca Antonveneta SpA.
Both these issues are serious. The Bank of Italy problem may be getting most of the headline coverage, but the issues over the competitiveness of the economy and the state of the budget are possibly even more important. Italy's public debt currently stands at over 105% of GDP, (and the overall situation is described by some as 'worse than Botswana'). This years annual deficit will certainly be over the 3% SGP limit and Italy has already had an excess deficit procedure initiated against it by the EU Commission. Effectively the Italian government has been given two years to enter a path of serious structural deficit reduction. This is what produces the recurring political crisis.
Italy is also facing a campaign for a referendum on the question of a return to the Lira lead by Berlusconi's coalition partners in the Northern League. It isn't entirely clear where Berlusconi himself actually stands in all this, indeed in a party rally on July 28 he described the euro as a 'disaster' for Italy.
Also it is important to note that Siniscalco's resignation comes after a long battle with the EU's Eurostat over the fiability of Italy's official statistics, and Siniscalco, it seems, has not been entirely excempt from criticism in this affair: maybe he just decided enough was enough. Basta. And I entirely endorse the sentiment.
Update: The Economist now has a general outine of the issues posed by Siniscalco's departure, and this article from Reuter's describes the incredible staying power of Antonio Fazio. Fazio it will be remembered was also under fire in an earlier 'houshold name' Italian scandal: the Parmalat affair. On that occassion he 'saw off' Siniscalco's predecessor Giulio Tremonti (who is incidentally stongly tipped to replace Sinascalco).
The IMF WEO report cited in my post on the German deficit aslo has this to say on Italy:
"The IMF staff?s assessment of present budgetary policies, particularly in the largest countries, suggests they fall far short of meeting this requirement, with most showing little improvement or a deterioration in 2005?06; in particular, in Italy, significant?and as yet unidentified?adjustment will be required to reduce the general government deficit to the authorities? target of 3.8 percent of GDP in 2006. This will pose a key test of the revised Stability and Growth Pact procedures, and it will be important that the additional flexibility they allow is not used as an excuse to postpone adjustment altogether."
As they say "it will be important that ....not used as an excuse", but Siniscalco's departure hardly inspires confidence that the opportunity won't be seized.
Update 2: Reuters has just announced that Tremonti will be the next Italian Economy Minister, in which case it might be just worth reading this piece from International Herald Tribune just to bring everyone up to speed on the fact that it was Tremonti who was instrumental in ousting former WTO head and then Foreign Minister Renato Ruggiero following the scandal which occurred on the day the euro was to be introduced in Italy. It will be recalled that Ruggiero was sacked after saying he was "filled with sadness" by his fellow ministers' lack of commitment to the new single currency and to European integration. The fellow minister he was referring to was, of course, Giulio Tremonti.
Just to rub it in, lets go back to early January 2004:
While Ruggiero, a europhile diplomat and former head of the World Trade Organization, has pushed for a continuation of strong, pro-European policies, others like economy minister Giulio Tremonti have adopted a more eurosceptic stance.
Berlusconi is also trying to encourage his country to be more enthusiastic about the euro, which was introduced in 12 countries on January 1. It lags behind other countries in the eurozone with only 10 percent of cash transactions being carried out in the euro, the most recent figures reveal.
Long queues formed outside banks, stations and post offices during the introduction of the coins and notes, and citizens complained about a shortage of the currency. The figure compares unfavourably with other nations. The average figure in the eurozone is 20 percent with some individual countries being as high as 50 percent.
But one EU spokesman said it was not surprising that Italians were using the new currency less, as fewer cash dispensers were converted ahead of the changeover and many businesses chose not to receive euros in advance.
Berlusconi's office tried to calm nerves by issuing a statement which hailed the creation of the euro and stressed the prime minister's pro-European credentials
Italy Economy Real Time Data Charts
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?
Thursday, September 22, 2005
Tuesday, June 28, 2005
Coup de Grace for Italy, or for the SGP?
Well I got it wrong (or so it seems). Someone has 'leaked' to the FT the news that Italy will be 'given two years grace' on the deficit problem. If this is confirmed I suppose it shows that the Commission fears more the Italian voters than it does the international financial markets. Obviously a 'to the letter of the law' application of the revised SGP would present Italy with hard economic decisions (which she will face anyway), but not applying it tests yet one more time the credibility of the EU's institutions. It depends I suppose which you think is more damaging in the long run.
Here's a short extract from the FT article:
"The move, to be announced on Wednesday by the European Commission, offers some breathing space to the embattled government, on Monday confronted with worrying evidence of a prolonged recession.
A survey by Confindustria, the employers' association, indicated that industrial production in the first half of the year had fallen 0.7 per cent from the preceding half-year.
Production also declined narrowly this month from May, pointing to a possible third consecutive quarter of declining gross domestic product and therefore keeping the economy in recession. The numbers offered a fresh glimpse of the scale of the task facing Silvio Berlusconi and his government in reviving Italy's ailing economy and turning around the state's budgetary crisis. Rome has already admitted that it will breach the stability pact's deficit ceiling of 3 per cent of GDP this year, and probably next year as well.
Here's a short extract from the FT article:
"The move, to be announced on Wednesday by the European Commission, offers some breathing space to the embattled government, on Monday confronted with worrying evidence of a prolonged recession.
A survey by Confindustria, the employers' association, indicated that industrial production in the first half of the year had fallen 0.7 per cent from the preceding half-year.
Production also declined narrowly this month from May, pointing to a possible third consecutive quarter of declining gross domestic product and therefore keeping the economy in recession. The numbers offered a fresh glimpse of the scale of the task facing Silvio Berlusconi and his government in reviving Italy's ailing economy and turning around the state's budgetary crisis. Rome has already admitted that it will breach the stability pact's deficit ceiling of 3 per cent of GDP this year, and probably next year as well.
Friday, June 24, 2005
In Lira, or in Euros?
Even if it is a debatable question whether or not the Iraq war is bogged down in a quagmire, Italy's economy evidently is. And no-one has even gotten round to offering a plan 'b', not even Tony Blair himself. So the silence is deafening, and this simply leads to increased speculation. Berlusconi only pronounced publicy on the issue last Tuesday, nearly three weeks after Maroni's referendum call. Latest on the list of those taking a long hard look is Bloomberg's Mark Gilbert, who has dug out an old paper by legal expert on international financial systems Hal Scott.
The key points:
``Countries have kept their own payment systems, government debt instruments, central banks, and the lion's share of their foreign-exchange reserves,'' wrote Hal Scott, professor of international financial systems at Harvard Law School, in a 1998 paper. ``It is almost as if the EMU countries have hedged their bets on EMU by retaining the key institutions needed to re- establish their own currency and monetary policies if need be.''
Scott's paper, titled ``When the Euro Falls Apart,'' went on to ask ``would foreign law, if applicable, such as the law of the U.S. or Germany, enforce the re-denomination or provide instead that the contracts must be honored in euros or are breached if not honored in euros? This is far from clear given the lack of precedents.''
As Gilbert notes:
"The thing about sovereign debt, though, is that the sovereign can do just about anything it likes on its domestic debt, because it enacts the laws that govern those securities. That's how Russia was able to stop paying the $40 billion it owed investors in 1998, and Argentina could default on $95 billion of bonds in 2002 and settle its accounts at 25 cents on the dollar."
Stephen King, head of global economic research at HSBC Holdings Plc in London, togave the following analysis to Bloomberg reporter Sebastian Boyd earlier this week:
"For Italy the choice is increasingly stark. The first choice would be an aggressive tightening of fiscal policy, large tax increases followed by cuts in public spending, and I don't really see the political will for that at the moment. The second choice would be some kind of bond default. The third choice would be an implicit bond default, by creating a system under which it could leave the euro. That would be very difficult to do.''
More or less I agree with this outline. My guess is that choice one will be tried and found to fail. Maybe then some attempt will be made to have a go at number 2. This failing, as it would, we will finally get round to option three.
I watched Argentina systematically from the late 90's on. In Argentina terms my best guess is that we are more or less in 1998 (the default came in 2001). The count down has commenced.
The key points:
``Countries have kept their own payment systems, government debt instruments, central banks, and the lion's share of their foreign-exchange reserves,'' wrote Hal Scott, professor of international financial systems at Harvard Law School, in a 1998 paper. ``It is almost as if the EMU countries have hedged their bets on EMU by retaining the key institutions needed to re- establish their own currency and monetary policies if need be.''
Scott's paper, titled ``When the Euro Falls Apart,'' went on to ask ``would foreign law, if applicable, such as the law of the U.S. or Germany, enforce the re-denomination or provide instead that the contracts must be honored in euros or are breached if not honored in euros? This is far from clear given the lack of precedents.''
As Gilbert notes:
"The thing about sovereign debt, though, is that the sovereign can do just about anything it likes on its domestic debt, because it enacts the laws that govern those securities. That's how Russia was able to stop paying the $40 billion it owed investors in 1998, and Argentina could default on $95 billion of bonds in 2002 and settle its accounts at 25 cents on the dollar."
Stephen King, head of global economic research at HSBC Holdings Plc in London, togave the following analysis to Bloomberg reporter Sebastian Boyd earlier this week:
"For Italy the choice is increasingly stark. The first choice would be an aggressive tightening of fiscal policy, large tax increases followed by cuts in public spending, and I don't really see the political will for that at the moment. The second choice would be some kind of bond default. The third choice would be an implicit bond default, by creating a system under which it could leave the euro. That would be very difficult to do.''
More or less I agree with this outline. My guess is that choice one will be tried and found to fail. Maybe then some attempt will be made to have a go at number 2. This failing, as it would, we will finally get round to option three.
I watched Argentina systematically from the late 90's on. In Argentina terms my best guess is that we are more or less in 1998 (the default came in 2001). The count down has commenced.
Monday, June 20, 2005
Italy: Devaluation or Deflation
Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said 'stuff happens', and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley's Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: "with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw"?).
"If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view."
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo's reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930's and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.
This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival 'escape strategy'?
"If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view."
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo's reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930's and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.
This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival 'escape strategy'?
Devaluation or Deflation?
Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said 'stuff happens', and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley's Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: "with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw"?).
"If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view."
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo's reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930's and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.
This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival 'escape strategy'?
"If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view."
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo's reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930's and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.
This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival 'escape strategy'?
Thursday, June 09, 2005
I think one of the topics for next years election in Italy is just being decided. Romano Prodi (former President of the EU Commission) has just spoken out against Sinascalco. He is in favour of making cuts. Prodi is quoted as saying that:
"Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision......The government lost control of current expenditure. The situation is very serious.''
Prodi is about to become the whipping boy, having to go into an election with the 'popular' policy of making widespread spending cuts.
Incidentally,
Anatole Kaletsky has some very harsh words to say about the Brussels leadership and all this. I don't entirely agree with his general economic analysis (I don't think eg devaluation is a quick solve all policy in the way he seems to) but he certainly makes some strong points:
"The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call ?deniability?. The anti-euro claims are partly designed to shift blame for Italy?s problems on to Romano Prodi, the former Commission President who is now Berlusconi?s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe?s politicians ? and they bring me back to the comparison between Britain after Black Wednesday and Europe today."
"The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth."
"These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe?s ?democratic deficit? because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can?t."
"If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment. "
"Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision......The government lost control of current expenditure. The situation is very serious.''
Prodi is about to become the whipping boy, having to go into an election with the 'popular' policy of making widespread spending cuts.
Incidentally,
Anatole Kaletsky has some very harsh words to say about the Brussels leadership and all this. I don't entirely agree with his general economic analysis (I don't think eg devaluation is a quick solve all policy in the way he seems to) but he certainly makes some strong points:
"The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call ?deniability?. The anti-euro claims are partly designed to shift blame for Italy?s problems on to Romano Prodi, the former Commission President who is now Berlusconi?s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe?s politicians ? and they bring me back to the comparison between Britain after Black Wednesday and Europe today."
"The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth."
"These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe?s ?democratic deficit? because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can?t."
"If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment. "
Tuesday, June 07, 2005
Referendum in Italy
Fooled you, it's not about the euro :). Italy is about to have a referendum (next Sunday in fact), the topic: artificial insemination and embryo research. Benedict XVI has just spoken out against. In fact this has started me looking into the referendum situation in Italy. It seems they have quite a lot. Constitutionally they need 500,000 signatures, or 5 regional councils to back the call. Maroni is about to start collecting signatures.
Italy: Aging But Saving?
This is a very convenient moment to put up this post. Alan Greenspan has just admitted that he's human like the rest of us, and that he doesn't have a very good explanation for why long-term interest rates have been falling at a time when he and his Fed colleagues have been busy raising short-term rates. I think he's being a bit coy here, since I'm sure he has some idea. Among other things he will be well aware of the contents of a speech made recently by Ben Bernanke, a US economist who is considered high on the list of possible Greenspan successors.
What Bernanke said in the speech ( The Global Savings Glut ) was this:
"Iwill argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving."
Later in the speech he spells this out in more detail:
"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad"
Now this speech has caused a fair degree of controversy due to the fact that it mainly has been seen as an apologetics for the high US current account deficit (which it - in part - is). But I would also argue that it has a deeper significance, in that this speech marks the arrival on the official agenda of what I would term the New Economic Paradigm: that is the idea that amongst the many important macro economic variables, one, population age structure, has a pride of place whose importance has not been sufficiently appreciated before.
Indeed, when I said Greenspan was being rather coy, I was retaining something up my sleeve, since I am aware that both Greenspan and Bernanke attended this conference at Jacksons Hole last summer where a prominent place was given to this paper from David Bloom, one of the evident 'brains' behind the New Economic Paradigm.
Undoubtedly the principal economic vital statistic for these theorists is the median age of any given population, and the most important information to have on hand when it comes to examining other *dependent* variables (like savings, investment, consumption, balance of payments, fiscal balance, labour force participation or productivity) is the age structure of the population.
Briefly put, what is argued is that each society has a prime saving age (for cultural reasons this may vary from one society to another): in the case of Italy (which we are considering here) this age group appears to be 35-64. The 65 plus age group progressively has more and more tendency to dis-save.
The other salient detail is the location of the 'boom generation': that generation which marks the inflection point in the demographic pyramid. Essentially the passage of this cohort into the dis-saving age group marks an important watershed in the evolution of any modern society.
Now for a specific case: Italy. The Management Consultants McKinsey and Co recently produced a report The Coming Demographic Deficit. You have to register on site to read the full report, but it is free and well worth it.
One of the chapters is dedicated to Italy. Below I reproduce the chapter summary which is pretty self-explanatory. The point is, whichever way you look at it the wealth producing capacity of Italy has peaked, and this is why that fiscal deficit is so important, the longer the deficit grows and accumulates, the greater the burden of paying it off. Perhaps before signing off here, and letting you get onto the McKinsey material, I could suggest why *I* think it is that there is so much liquidity, and such strong downward pressure on long term interest rates: simply put, for the reasons Bernanke suggests. Increased savings supply on the one hand, and diminished investment opportunities on the other, demand, side.
"Demographic pressure is expected to continue to drive down Italian household savings flows, further slowing the growth rate of household net financial wealth accumulation, with potentially significant implications for economic growth in Italy. MGI's analysis suggests that ? absent dramatic changes in population trends, savings behavior, or rates of financial asset appreciation ? Italian household savings will decline at 1.7 percent annually over the next two decades, causing a sharp slowdown in the growth of household net financial wealth, from the historical rate of 3.4 percent over the 1986-2003 period to 0.9 percent through 2024. By 2024, this slowing growth will cause net financial wealth to fall some 39 percent, or ?1.8 trillion, below what it would have been had the higher 1986-2003 growth rates persisted".
"The demographic transition has been underway in Italy for the past two decades. Since 1986 the median age in Italy has surged up 7 years, and over the next two decades it is expected to increase another 9 years, reaching 51 in 2024. Italy will have more than an estimated one million people over the age of 90 by 2024."
"With its aging population and the number of working-age households continuing to grow more slowly than elderly households, the demographic structure of Italy will become increasingly less able to support wealth accumulation, a good proxy for economic well-being. Slower growth in wealth is likely to mean slower growth in future living standards. For the economy, there will be less household savings to support a fast-growing retiree population, and it will become more difficult to support domestic investment and sustain strong economic growth. The fact that the rest of the developed world is experiencing or is about to encounter similar aging trends means that Italy cannot rely on inflows of foreign savings to make up for its domestic shortfall."
"To navigate smoothly through this transition and to offset this strong demographic pressure, Italian households and their government will need to take steps to reverse the decrease in saving and to improve the returns that households obtain on their portfolios. Mitigating the demographic forces already at work in Italy will be challenging and will require sustained, coordinated efforts by the public and private sector".
What Bernanke said in the speech ( The Global Savings Glut ) was this:
"Iwill argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving."
Later in the speech he spells this out in more detail:
"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad"
Now this speech has caused a fair degree of controversy due to the fact that it mainly has been seen as an apologetics for the high US current account deficit (which it - in part - is). But I would also argue that it has a deeper significance, in that this speech marks the arrival on the official agenda of what I would term the New Economic Paradigm: that is the idea that amongst the many important macro economic variables, one, population age structure, has a pride of place whose importance has not been sufficiently appreciated before.
Indeed, when I said Greenspan was being rather coy, I was retaining something up my sleeve, since I am aware that both Greenspan and Bernanke attended this conference at Jacksons Hole last summer where a prominent place was given to this paper from David Bloom, one of the evident 'brains' behind the New Economic Paradigm.
Undoubtedly the principal economic vital statistic for these theorists is the median age of any given population, and the most important information to have on hand when it comes to examining other *dependent* variables (like savings, investment, consumption, balance of payments, fiscal balance, labour force participation or productivity) is the age structure of the population.
Briefly put, what is argued is that each society has a prime saving age (for cultural reasons this may vary from one society to another): in the case of Italy (which we are considering here) this age group appears to be 35-64. The 65 plus age group progressively has more and more tendency to dis-save.
The other salient detail is the location of the 'boom generation': that generation which marks the inflection point in the demographic pyramid. Essentially the passage of this cohort into the dis-saving age group marks an important watershed in the evolution of any modern society.
Now for a specific case: Italy. The Management Consultants McKinsey and Co recently produced a report The Coming Demographic Deficit. You have to register on site to read the full report, but it is free and well worth it.
One of the chapters is dedicated to Italy. Below I reproduce the chapter summary which is pretty self-explanatory. The point is, whichever way you look at it the wealth producing capacity of Italy has peaked, and this is why that fiscal deficit is so important, the longer the deficit grows and accumulates, the greater the burden of paying it off. Perhaps before signing off here, and letting you get onto the McKinsey material, I could suggest why *I* think it is that there is so much liquidity, and such strong downward pressure on long term interest rates: simply put, for the reasons Bernanke suggests. Increased savings supply on the one hand, and diminished investment opportunities on the other, demand, side.
"Demographic pressure is expected to continue to drive down Italian household savings flows, further slowing the growth rate of household net financial wealth accumulation, with potentially significant implications for economic growth in Italy. MGI's analysis suggests that ? absent dramatic changes in population trends, savings behavior, or rates of financial asset appreciation ? Italian household savings will decline at 1.7 percent annually over the next two decades, causing a sharp slowdown in the growth of household net financial wealth, from the historical rate of 3.4 percent over the 1986-2003 period to 0.9 percent through 2024. By 2024, this slowing growth will cause net financial wealth to fall some 39 percent, or ?1.8 trillion, below what it would have been had the higher 1986-2003 growth rates persisted".
"The demographic transition has been underway in Italy for the past two decades. Since 1986 the median age in Italy has surged up 7 years, and over the next two decades it is expected to increase another 9 years, reaching 51 in 2024. Italy will have more than an estimated one million people over the age of 90 by 2024."
"With its aging population and the number of working-age households continuing to grow more slowly than elderly households, the demographic structure of Italy will become increasingly less able to support wealth accumulation, a good proxy for economic well-being. Slower growth in wealth is likely to mean slower growth in future living standards. For the economy, there will be less household savings to support a fast-growing retiree population, and it will become more difficult to support domestic investment and sustain strong economic growth. The fact that the rest of the developed world is experiencing or is about to encounter similar aging trends means that Italy cannot rely on inflows of foreign savings to make up for its domestic shortfall."
"To navigate smoothly through this transition and to offset this strong demographic pressure, Italian households and their government will need to take steps to reverse the decrease in saving and to improve the returns that households obtain on their portfolios. Mitigating the demographic forces already at work in Italy will be challenging and will require sustained, coordinated efforts by the public and private sector".
Monday, June 06, 2005
Maroni Hits Back
Roberto Maroni is back in the Italian press again today, and with another interview. This interview is in ilResto del Carlino. (Interestingly enough they are running an online poll, and the result was running at 51.7% euro to 48.3% lira). Unfortunately the interview is in Italian. I have translated a few extracts under the fold. The big issue that he draws attention to (and I was flagging this in an earlier post) is the apparent desire of Berlusconi not to commit himself if he can help it.
Essentially Berlusconi has remained silent. No 'the euro is a unique success story' here. I imagine he just couldn't say this in Italy with the electoral base he has (I may of course have to eat my words). To date the only response has come - on his behalf one has to imagine - from Gianfranco Fini, Italy's Prime Minister and foreign minister, who said Maroni's proposal was made 'in a personal capacity' and did not reflect the opinion of the government. Fini said he did not share Maroni's opinion, 'but above all it is certainly not shared by Prime Minister Silvio Berlusconi'.
Maroni's response: that Fini is not a credible 'spokesperson' for Berlusconi. According to Maroni the only opinion that Berlusconi has expressed is that a return to the lira is not possible, not that he wouldn't consider it desireable. The main opinion Berlusconi seems to be expressing is a defence of Italian president Ciampi, who has been attacked by Maroni.
Maroni: Berlusconi ha preso posizione su un presunto attacco a Ciampi che non ha nulla a che vedere con l'euro
Berlusconi has taken a position against a supposed attack on Ciampi, a matter which has nothing to do with the euro.
Interviewer: E stato Fini a dire che il premier ? contrario all ipotesi-lira.
Fini has said that the premier is contrary to the lira hypothesis.
Maroni: Non mi risulta che Fini faccia il portavoce di Berlusconi. E comunque non ? vero. Non ho bisogno degli interpreti per sapere cosa pensi. L'ho sentito questa mattina.
I don't believe that Fini is acting as a spokesperson for Berlusconi. So I don't think it's true. It isn't necessary to go to an interpreter to find out what he is thinking. I heard it (from Berlusconi himself) this morning.
Interviewer: Che cosa le ha detto?
What did he say?
Maroni: Era preoccupato per le reazioni sulla vicenda Ciampi, non per l?euro. Ha detto che secondo lui il ritorno alla lira non si pu? fare, ma non ? che ha aggiunto: perch? lo fate, state sbagliando.
He was worried about the reactions over Ciampi, not about the euro. He said that in his opinion a return to the lira wasn't possible, but he didn't add, if we did it, it would be a mistake.
Essentially Berlusconi has remained silent. No 'the euro is a unique success story' here. I imagine he just couldn't say this in Italy with the electoral base he has (I may of course have to eat my words). To date the only response has come - on his behalf one has to imagine - from Gianfranco Fini, Italy's Prime Minister and foreign minister, who said Maroni's proposal was made 'in a personal capacity' and did not reflect the opinion of the government. Fini said he did not share Maroni's opinion, 'but above all it is certainly not shared by Prime Minister Silvio Berlusconi'.
Maroni's response: that Fini is not a credible 'spokesperson' for Berlusconi. According to Maroni the only opinion that Berlusconi has expressed is that a return to the lira is not possible, not that he wouldn't consider it desireable. The main opinion Berlusconi seems to be expressing is a defence of Italian president Ciampi, who has been attacked by Maroni.
Maroni: Berlusconi ha preso posizione su un presunto attacco a Ciampi che non ha nulla a che vedere con l'euro
Berlusconi has taken a position against a supposed attack on Ciampi, a matter which has nothing to do with the euro.
Interviewer: E stato Fini a dire che il premier ? contrario all ipotesi-lira.
Fini has said that the premier is contrary to the lira hypothesis.
Maroni: Non mi risulta che Fini faccia il portavoce di Berlusconi. E comunque non ? vero. Non ho bisogno degli interpreti per sapere cosa pensi. L'ho sentito questa mattina.
I don't believe that Fini is acting as a spokesperson for Berlusconi. So I don't think it's true. It isn't necessary to go to an interpreter to find out what he is thinking. I heard it (from Berlusconi himself) this morning.
Interviewer: Che cosa le ha detto?
What did he say?
Maroni: Era preoccupato per le reazioni sulla vicenda Ciampi, non per l?euro. Ha detto che secondo lui il ritorno alla lira non si pu? fare, ma non ? che ha aggiunto: perch? lo fate, state sbagliando.
He was worried about the reactions over Ciampi, not about the euro. He said that in his opinion a return to the lira wasn't possible, but he didn't add, if we did it, it would be a mistake.
Friday, June 03, 2005
Maroni Update
Here's the FT's reading of the situation.
Note this extract: "As financial markets digested the remarks of Roberto Maroni, Italy's welfare minister, the interest rate differential between Italian and German bonds rose to 23 basis points, the widest spread since November 2002."
These are the numbers we will be following at Afoe moving forward. Maroni is a member of a Northern xenophobic party that wants an independent country for the north of Italy. But *note*: he is in the government, and responsible for an important part of the Lisbon agenda, labour reform. So this is not some complete outside crank. Bottom line: Berlusconi's government is an unstable coalation, and this very instability *is* cause for concern, especially since we have just seen mainstream politicians lose important votes in two of Europe's more stable democracies.
Basically I am a great admirer of the late Karl Popper, especially interms of his idea of science as being moved by daring conjectures, and then attempts at refuting them. When I came to the conclusion that demography might be more important for economic theory than it was fashionable to accept today, I tried to set myself an objective, a hypothesis whose confirmation, or absence of it, would help me decide if I was on the right lines.
Japan was already mired in crisis (we are talking about 2001 here), so I asked myself, if you are right what should happen next. Italy should enter a sudden and otherwise relatively unexplicable economic decline was my response. This is why I started the blog, and this is why I have maintained a continuing interest in Italy.
Having said that, I am not a reductionist. Italy's demographic problems form an important backdrop for the present 'embarrasment of difficulties', but of course it is by no means the only factor.
Another stab at what I think is the problem in Italy can be found in this post.
Note this extract: "As financial markets digested the remarks of Roberto Maroni, Italy's welfare minister, the interest rate differential between Italian and German bonds rose to 23 basis points, the widest spread since November 2002."
These are the numbers we will be following at Afoe moving forward. Maroni is a member of a Northern xenophobic party that wants an independent country for the north of Italy. But *note*: he is in the government, and responsible for an important part of the Lisbon agenda, labour reform. So this is not some complete outside crank. Bottom line: Berlusconi's government is an unstable coalation, and this very instability *is* cause for concern, especially since we have just seen mainstream politicians lose important votes in two of Europe's more stable democracies.
Basically I am a great admirer of the late Karl Popper, especially interms of his idea of science as being moved by daring conjectures, and then attempts at refuting them. When I came to the conclusion that demography might be more important for economic theory than it was fashionable to accept today, I tried to set myself an objective, a hypothesis whose confirmation, or absence of it, would help me decide if I was on the right lines.
Japan was already mired in crisis (we are talking about 2001 here), so I asked myself, if you are right what should happen next. Italy should enter a sudden and otherwise relatively unexplicable economic decline was my response. This is why I started the blog, and this is why I have maintained a continuing interest in Italy.
Having said that, I am not a reductionist. Italy's demographic problems form an important backdrop for the present 'embarrasment of difficulties', but of course it is by no means the only factor.
Another stab at what I think is the problem in Italy can be found in this post.
Italian Referendum Call
But in this case the vote would be about Italy's continuing membership of the euro-zone, rather than the EU constitution. Now before going any further, I feel the need to advise extreme caution in the face of such developments.
In the first place the call comes from the Italian Labor Minister - and member of the separatist Liga Del Norte - Robert Maroni: It was made in an interview published by the Italian newspaper La Repubblica. He was not making a statement on behalf of the government, he was in all probability 'electioneering'. (See Fran's post: those politicians).
Apart from the political dimension, it is important to remember that Italy is now in an economic crisis which is every bit as profound, if not more profound, that that being experienced by Germany.
Quickly summarised Italy's problems are:
* What appears to be enduring economic stagnation
* An outdated economic structure (poor product mix)
* Lack of competitiveness and a deteriorating balance of payments
* A currency which is too high to recover competitiveness
* A rate of interest which may be too high
* An extraordinarily poor productivity performance
* Massive and accelerating public debt (over 100% of GDP and rising)
* Europe's most rapidly ageing population
* A noted aversion for accepting immigrants
I will try and flesh this out a little more calmly over the weekend. But in broad brush strokes this is it. Now, vis-a-vis the euro, it is unsurprising that Maroni should choose today to make this statement, since Economics Commissioner Joaquim Almunia has set June 7th 'D' day for initiating a formal excess deficits procedure against Italy and Portugal. As I indicated before the French vote there is every reason to imagine that the new version of the pact will be strictly enforced (this was emphasised by Almunia's presence at yesterday's ECB press conference), especially after the French and Dutch votes and the need to convince everyone that 'the euro *is* a huge success.
Secondly, the ECB yesterday gave no indication of having any inclination of coming to Italy's assistance by lowering the refinance rate.
So it may well be that some Italian politicians can see that it's 'game over'.
Add to this the fact that some people in Italy were extremely relucltant about the euro even on from first day, and you have all the ingredients of an ongoing problem.
Remember too that with elections coming next year, someone may try and make this an election issue.
Background: The following Country Study From Ecfin (may 2005): Italy Stuck In A Rut
Summary
The Italian economy has shown weak growth ever since the beginning of the 1990s. More recently it has developed two particularly striking, interlinked symptoms: a discouraging performance by exports and the longest stagnation of output in the tradable goods sector in post-war history. In contrast to previous episodes of weak growth, the current difficulties are not caused by supply shocks such as excessive wage increases. On the contrary, the dismal export performance has fallen within a period of wage moderation, and, since the late 1990s, of buoyant employment growth. The persistent loss of export market share would seem to chiefly result from the unfavourable product specialisation of the Italian economy ? more recently coupled with a marked slowdown in productivity growth. Italy?s product specialisation, unlike that of countries such as Germany or France, has not significantly changed over past decades in reaction to global economic developments. Italian industry remains strong in traditional, low-skilled labourintensive sectors for which global demand is growing below average. The inertia is generally attributed to a number of structural factors which are hampering change, including low levels of R&D investment, low human capital, low competition ? issues that fall within the remit of the Lisbon strategy.
Also this weeks NTC Research PMI survey: the sharpest deterioration in 41 months in May,
and the OECD's latest economic outlook for Italy.
That's why when Maroni says "We're already heading towards Argentina, that's why we have to change direction," I'm inclined to believe he is in earnest.
In the first place the call comes from the Italian Labor Minister - and member of the separatist Liga Del Norte - Robert Maroni: It was made in an interview published by the Italian newspaper La Repubblica. He was not making a statement on behalf of the government, he was in all probability 'electioneering'. (See Fran's post: those politicians).
Apart from the political dimension, it is important to remember that Italy is now in an economic crisis which is every bit as profound, if not more profound, that that being experienced by Germany.
Quickly summarised Italy's problems are:
* What appears to be enduring economic stagnation
* An outdated economic structure (poor product mix)
* Lack of competitiveness and a deteriorating balance of payments
* A currency which is too high to recover competitiveness
* A rate of interest which may be too high
* An extraordinarily poor productivity performance
* Massive and accelerating public debt (over 100% of GDP and rising)
* Europe's most rapidly ageing population
* A noted aversion for accepting immigrants
I will try and flesh this out a little more calmly over the weekend. But in broad brush strokes this is it. Now, vis-a-vis the euro, it is unsurprising that Maroni should choose today to make this statement, since Economics Commissioner Joaquim Almunia has set June 7th 'D' day for initiating a formal excess deficits procedure against Italy and Portugal. As I indicated before the French vote there is every reason to imagine that the new version of the pact will be strictly enforced (this was emphasised by Almunia's presence at yesterday's ECB press conference), especially after the French and Dutch votes and the need to convince everyone that 'the euro *is* a huge success.
Secondly, the ECB yesterday gave no indication of having any inclination of coming to Italy's assistance by lowering the refinance rate.
So it may well be that some Italian politicians can see that it's 'game over'.
Add to this the fact that some people in Italy were extremely relucltant about the euro even on from first day, and you have all the ingredients of an ongoing problem.
Remember too that with elections coming next year, someone may try and make this an election issue.
Background: The following Country Study From Ecfin (may 2005): Italy Stuck In A Rut
Summary
The Italian economy has shown weak growth ever since the beginning of the 1990s. More recently it has developed two particularly striking, interlinked symptoms: a discouraging performance by exports and the longest stagnation of output in the tradable goods sector in post-war history. In contrast to previous episodes of weak growth, the current difficulties are not caused by supply shocks such as excessive wage increases. On the contrary, the dismal export performance has fallen within a period of wage moderation, and, since the late 1990s, of buoyant employment growth. The persistent loss of export market share would seem to chiefly result from the unfavourable product specialisation of the Italian economy ? more recently coupled with a marked slowdown in productivity growth. Italy?s product specialisation, unlike that of countries such as Germany or France, has not significantly changed over past decades in reaction to global economic developments. Italian industry remains strong in traditional, low-skilled labourintensive sectors for which global demand is growing below average. The inertia is generally attributed to a number of structural factors which are hampering change, including low levels of R&D investment, low human capital, low competition ? issues that fall within the remit of the Lisbon strategy.
Also this weeks NTC Research PMI survey: the sharpest deterioration in 41 months in May,
and the OECD's latest economic outlook for Italy.
That's why when Maroni says "We're already heading towards Argentina, that's why we have to change direction," I'm inclined to believe he is in earnest.
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