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 At A Glance - January 2008
Welcome to the Italian Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented on the blog. In what follows you can find charts for Italian male life expectancy, median age, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Basically this data provides a summary of the argument which we are presenting on this blog, which is that in order to understand Italy's long term and ongoing economic malaise you need to understand something about Italian demography, and it's macroeconomic consequences. Please click on thumbnails for better viewing.
With such weak internal consumption growth Italy badly needs to run a trade surplus to obtain the economic growth necessary to make public finances sustainable. In this Italy is similar to Germany and Japan, and different from domestic consumer driven economies like the UK, France and Ireland. Long term fertility and life expectancy really do matter, since they condition labour force growth
and consumption patterns, and with these productivity and the growth of internal credit and consumer demand. Above left you can find Italy's ferility rate, and above right the evolution of the 25 to 49 age group, which has just passed it historic peak. On either side here you can see charts for recent quarterly GDPand long run annual GDP.
Arguably these are all the data points you need to understand my lengthy post on The Euro Area and Italy's De-Facto Dependence On Exports, as well as why it is that the danger Italy may once more fall into recession presents us with the difficulty of what the credit ratings agencies will say about the resulting impact on the government debt situation.
2008 Forecasts: The OECD in December revised their 2007 Italian forecast down to 1.8%, and the 2008 one down to 1.3%. Confindustria also revised their forecast down in December, arguing that growth would slow to 1 percent in 2008 from an 1.8 percent this year, citing factors like the rising cost of food and oil and the rise of the euro against the dollar. Such numbers are clearly not encouraging, but arguably downside risk for 2008 is greater even than either the OECD or the Confindustria forecasts reflect Morgan Stanley's Vladimir Pillona is somewhat more sanguine. While presenting the MS central forceast for Italian economic growth to slow to 1.0%Y in 2008, from 1.8%Y in 2007, he goes on to note that "even annual GDP growth of 0.5%Y next year has a significant possibility of occurring, as shown by our model’s forecast error bands".
I personally will be very surprised if we still see calendar year 2008 anything like as high as 1.8%, but more to the point even 1.3% may be rather on the high side if we get a significant deterioration in the external environment, especially in Eastern Europe on which Italy is fairly dependent, and where the Italian banking sector has significant exposure. So that puts me much nearer to Pillona's "basement bargain" number of 0.5% than to any of the others. One of the reasons for my pessimism relates to my assessment of Italy's current trend growth rate, and to the level of fiscal and monetary tightening which may be operating on the economy even as it slows. During 2007 the Italian govenment has been running a fiscal deficit of comfortably below the 3% of GDP required by the EU commission. But since this fortunate situation was in part acheieved by the use of one off measures, and in part by the strong tax inflow from the above trend growth, the government will need to maintain a comparatively tight fiscal stance to keep things on course, and any attempt to further loosen may run into real problems with the EU commission and the credit rating agencies. And as I keep arguing, it is very hard to see an accomodative monetary posture from the ECB in the near future. The IMF in their October World Economic Outlook came in with a similar figure of 1.3% for 2008, the Economist Intelligence Unit is forecasting 1.7% in 2007 and 1.4 in 2008, and the latter 2008 figure was also endorsed by the EU commission in its November forecast.
As I indicate, my own view is well to the downside of all this. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Italy's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Italy will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on Italian exports, and high oil and food prices will maintain pressure on the inflation front, at least in the firts half of 2008. At the same time, and despite rumours that Romano Prodi's government is compemplating a large tax cutting package, I anticipate that the fiscal environment will remain tight. Italy's large (106% GDP) accumulated debt, and the vigilance from the gentlmen at Standard and Poor's and the other credit rating agencies more or less guarantee that.
As most of the forecasts suggest, we have been seeing growth which is somewhat above trend during the upswing in the last couple of years, so it would not be surprising if we now saw some below trend growth. Trend growth (over a 5 year average) in Italy may even have fallen into the 0.5 to 1% range, so if I have to put a number I would say 0.7% with a definite "downside risk" tag attached. The nearest forecast to this that I have seen is the 1% one from the Morgan Stanley GEF team. The implications of such sustained low growth are, I think, important, since if Italy cannot find the way to raise trend growth up towards the 2% mark there is simply no way the government debt can be stabilised and sustained. And with each passing year we have one year less to crunch time.
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