Romano Prodi has an interview in the FT today, here are some of the points that struck me:
"Italy must raise its economic growth rate to at least the European Union average or it will be “lost”,"
This is a fairly dramtic statement, which at the end of the day doesn't mean too much. It is headline catching, that is all. It is of course true, and more true than I think Romano Prodi really appreciates.
"We have been 24th out of the 25 countries in the last five years”
Well, again this is true, but it seems to be more a politically convenient statement, since the other side were in office during those years. In fact the low growth phenomenon in Italy goes back to the early 90s, and thus both sides of the political divide could be thought to share responsibility if the garden has been 'untended'.
Perhaps one of the most debatable points is this:
“The real situation of Italian industry is not as bad as many think. We have a surplus in our balance of trade, if you take out energy imports"
I really don't see the logic behind this sentence. Italy needs, or doesn't need, energy? Is Italy planning to become energy self-sufficient in the foreseeable future? If not, energy is an import just like any other kind of raw material, and the reality would seem to be that Prodi is indirectly admitting that Italy is running a trade DEFICIT.
Now the reasoning behind Prodi's 'spin' could be that he anticipates energy prices could drop at some stage. Is this a realistic expectation? Well energy and commodity prices have fallen back somewhat in recent months, but this is a result, more than anything, of anticipated declining demand, as global growth slows, rather than increased supply. So once we get through the next recession and global growth hits newer and higher records (as the developing countries develop) energy prices could well be expected to rise once more. So Prodi is offering false hope here I think, and whats more, since the lower prices of the moment are due to slower growth this will also hit his number one Italian objective of more growth.
On a more general level Italy desperately needs a substantial trade surplus if it is to generate growth, since, as I have been systematically arguing on this blog, societies with a median age of 44 find it very hard to generate substantial growth in domestic demand, so strong exports are very much a necessity rather than a luxury.
Talking of which:
"In the footwear industry, a traditional Italian strength, “the number of shoes sold has halved in 10 years but revenues have increased. Even in this very simple industry there has been a concrete restructuring and we have placed ourselves in the luxury bracket”.
Just how sustainable is this move up the value chain in traditional product manufacture? (Design would be another thing). This strategy has been employed by textile manufacturers here in Spain, and there are now an increasing number of complaints from those manufacturers about rising Chinese competition in this area too. This is hardly surprising, since China is itself struggling to move up the value chain, and while the Chinese may have started out with low end, low quality, products, they will undoubtedly not stop at this point any more than the Europeans or the Japanese did. It could well be a good idea to start bearing that in mind now.
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?
7 comments:
Edward you seem to more interested in posting "opinions", whether they be Wolfgang Munchau's or Prodi's, rather than hard data. This is disappointing because so much of their opinions are changeable and irrelevant.
Here is a link to some hard data on Italy which you might like to take the time to study and comment on:
LINK
Italy has recently regained its position as number one tourist destination. I didn't see any comment on that on your blog, maybe it's worth investigating.
You might like to compare and contrast Italy's trade performance and the relative trade performances of the U.K. and the U.S., or whatever country you propose as a positive economic model.
Over time Italy has remained competitive. It has seen the emergence of a trade deficit following the recent spike in OIL prices. It takes time for a country to adjust to relative price changes but Italy has adjusted successfully to higher energy prices BEFORE and has NEVER run a substantial trade deficit for an extended period of time. These are facts which you can check.
Thanks for the link to the OECD stats page for Italy. Lot's of interesting information there, including the point alluded to in the article that Italy is running a Current Account DEFICIT, despite Prodi's obfuscation. Wasn't that factual enough for you?
"Italy has recently regained its position as number one tourist destination."
No, well I'm not really a tourism specialist either, maybe you could fill us in a bit on the significance of this. I mean here in Spain the number of visitors and overnight stays has been climbing steadily, while the value added per individual tourist has been declining, hence the tourist industry, despite being an apparent 'success' is in almost permanent crisis.
The fact that Italy is running a substantial deficit in services suggests something similar might be happening. Anyone out there know anything about this?
Oh, I'll put something up about the services and industrial output data a bit later, just to be fair and balanced.
Italy isn't running a substantial current account deficit, it has seen a deficit in recent months when oil was high, and that has since turned around. Current account deficits in the U.K. and the U.S. are at banana republic levels, savings are non-existent and the dependence on ongoing capital inflows is extreme. So maybe they should panic?
Nothing like that is happening in Italy. And as far as Tourism, that is a very important source of revenue for Italy:
LINK
I appreciate the attempt to write off the issue without actually knowing anything about it.
Here is a recent e-mail exchange with Wolfgang Manchau:
Sent: Friday, November 03, 2006 10:41 AM
Subject: Re: Morgan Stanley - Italy
I have discussed the possibility of debt default in an earlier article,
though not lately. I don't keep mentioning it, as you claim. A default-of-sorts would only occur in the unlikely scenario that Italy
decided to leave the eurozone. It would not be outright default, just a default to repay debts at a lower exchange. This would not affect domestic bondholders. Let me me stress this again: I do not believe that Italy is likely to leave the eurozone.
regards
Wolfgang Munchau
Hello,
I would like you to explain is the "default" possibility you keep mentioning. How is default even possible when 97% of the Government Debt is held in Italy? Italians for decades have kept the bulk of their savings in Government Debt. Do you seriously believe that at some point the Government will simply say: we are not paying this debt back? Or that the entire Italian population would suddenly boycott Italian debt? Why? They don't read the FT for one thing and even if they did habits of a lifetime are hard to change. Higher Government Yields in Italy, if anything, would only make Government Debt more attractive to Italian savers. Higher yields would not make default more likely.
Default to foreign creditors à la Argentina is one thing, internal default is something else altogether. And I don't think it is feasible. Not in Italy.
In my opinion even mentioning the "default" option undermines the
credibility of any analysis on Italy. But I would be interested in hearing why or how you think the "default" option is possible.
Regards,
Paris,
Thanks for bringing me up to speed on the specifics of Wolfgang Munchau's position. As you know I don't really agree with him: Italy will default. I don't say this lightly, and it is based on a factoring-in of the whole political process and the inability to respond to the challenge. It makes me very sad really, but as you know my call is based on the inbuilt realities of the ageing process. Really there is simply no way that either Italy or Japan can pay in the longer term. All I am saying really is that Italy will be the country where all this becomes clear, unfortunately for Italy. It is being indicated by history for the wrong kind of thing really.
Also it is important to note that I don't think that Wolfgang Munchau appreciates the macroeconomic dimensions of rising median ages, so it is really like making a forecast with only half the data available.
Thanks for the tourism link. As the article makes clear these results are really pretty appauling, and Italy has dropped to third place after France and Spain I see:
"L'Italia ha poi condiviso con Cipro un tasso di crescita tra i più bassi nel Mediterraneo nell'ultimo decennio,dopo la maglia nera che spetta a Malta (+0,5%). La Spagna ha dalla sua un buon 4,8%, la Francia si attesta sul 2,4% ma le performance migliori spettano a Croazia (19%),Egitto (11,7%), Turchia (11,1%)e Marocco (8,4%). Negli ultimi cinque anni l'Italia ha perso inoltre il 2,4%,mettendo a segno il peggior risultato dell'area mediterranea.
Quindi quest'anno i turisti stranieri in Italia dovrebbero attestarsi intorno a quota 40 milioni,ma la Spagna tocca i 60 milioni e la Francia gli 80."
and while this years results are somewhat better, the recent performance is very preoccupying:
"Buoni — come ha sottolineato Luigi Cabrini,responsabile per l'Europa dell'Unwto — anche i risultati relativi agli introiti valutari: l'Agenzia Onu ha stimato finora un incremento del 9,3 per cento.
I primi bilanci sono dunque positivi per il turismo nel 2006,ma arrivano dopo anni di progressiva perdita di competitività del sistema italiano e non sembrano al momento prefigurare una svolta radicale.
L'analisi dell'Agenzia Onu infatti ha messo in rilievo che nell'arco dell'ultimo decennio gli arrivi di turisti in Italia sono aumentati in media cumulata solo dell'1,6% mentre nell'intero Bacino del Mediterraneo la crescita è stata nettamente superiore: 4,4 per cento."
What a lamentable state of affairs. Thank you for bringing this to my attention. I should really have pointed out earlier (in the case of Fiat for example), I am really a macro economist, and not an industry and services sector analyst, but all this info you have at your fingertips is very useful.
We still don't know how this rise in tourists in 2006 worked out in revenue per person per night terms. I've a feeling that is the interesting data point.
"it has seen a deficit in recent months when oil was high,"
You see this is where the macroeconomics comes in Paris. As I explained in my post, oil is coming down since global growth is slowing. This is bad news for Italy, not good news. As Prodi says, Italy must grow or die. To get growth in an elderly society you need to export since internal demand is weaker. To get export growth you need faster global growth, which means that oil will be back up to the highs, which is I think where we started.
Tricky subject macroeconomics. It is sort of 'holistic'. But don't worry, as I say, Wofgang Munchau doesn't get this bit either, but then again, nor is he a macroeconomist. He's a political commentator isn't he, or at least that's what most of his articles seem to be about, the politics of eurozone decisions? I am more interested in the economics which lie behind them.
"Italy will default.... but as you know my call is based on the inbuilt realities of the ageing process.
As I explained in my post, oil is coming down since global growth is slowing. This is bad news for Italy, not good news. "
Let's cut to the chase here Edward. You think all the data out of Italy is bad, or should be, because of the "aging population". You seem to think that the solution is/was: have more babies. Bit primitive as a solution, but hey you're entitled to your opinion.
I don't think the situation in Italy is bad and I don't think you have the faintest idea of what you are talking about. You are simply trying to make ALL THE DATA fit your dismal point of view. Which is fair enough, it's just not empirical or scientific.
Which countries do you think are going to do really well? Iran? It has a very young population? East Timor? Idem. I don't think economic growth has ever been the result of mere population growth and I don't even think it's a critical factor.
Bottom line: you think the USD isn't going down, the Italian economy is in terminal decline and that the Italian Government will default. Those positions are pretty clear and more importantly VERIFIABLE over time. I disagree with you on every single point.
So let's just leave it at that. And verify what happens as we go forward.
"You seem to think that the solution is/was: have more babies."
I don't think even I was ever quite that simplistic. I may say that you need to correct the sharp buckling of the pyramid, and there are three ways of doing this, one of which is helping those who want them have more children (ie a real pro natal social policy), one is immigration, and one is everyone working longer.
But even then we aren't out of the woods, since there is a human capital and productivity component which immigration and elderly workers can't address.
So the situation is a complex one. But you are in a marvellous position Paris. Almost the whole educated world agrees with you in saying that demography doesn't matter to economics.
That, of course, doesn't make you all in the right, although I guess there is some sort of feeling of safety in numbers.
Of course what this means is that most policy is currently being made in absolute denial of what is actually happening, and then every now and again someone scratches their head and says, "you know it is curious, how consumer spending in Italy, Japan and Germany seems to be so persistently weak".
So this is why I think that something at some point is going to happen, since you can't live in denial forever. And at that point expecatations will change, and probably dramatically so.
"I don't think economic growth has ever been the result of mere population growth "
Paris, I don't know whether you don't want to try and understand what I am saying, or whther you really are having dificulty with this distinction, but I don't think I have ever once talked about population *growth*. What I talk about is age structure, and the shape of the pyramid, this is the key point. Of course I also use median age as a proxy for all kinds of things.
We had a population bulge. We live with the consequences. I don't think it's such a big deal and I don't want to see another. Other solutions will need to be found and I think they will be.
That's my position in a nutshell.
But let's stick with the verifiable tests:
Italy will default.
Italian economic growth will implode.
The USD will not fall.
Unless we stick with verifiable results none of this analysis is worth a dime.
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