The terms of Italy's 2007 draft budget were agreed by Romano Prodi's cabinet yesterday:
"The budget includes 20 billion euros ($25 billion) in spending cuts and 13.4 billion euros in revenue-raising measures, including tax increases, to bring the deficit within the European Union's limit of 3 percent of gross domestic product for the first time in five years."
The details aren't all yet clear, but obviously the package is a mixture of spending reductions and revenue raising.
The EU is watching to see if Italy sticks to its pledge to bring the deficit down to 2.8 percent of GDP next year from as much as 4.8 percent this year. The budget includes deficit- cutting measures worth about 15 billion euros, Finance Minister Tommaso Padoa-Schioppa said.
Part of the debate is about the proposed changes in personal taxation:
The changes to income-tax rates reverse cuts made by Berlusconi in 2004 that particularly benefited middle-income earners. Prodi plans to increase income taxes for those who earn more than 55,000 euros per year, while reducing them for those who make less than 40,000 euros per year. Details of the new rates will be announced before Oct. 2, Deputy Prime Minister Enrico Letta said.
and part is about the level of cuts in education, pensions and health care. The hard part for Prodi will be to hold his coalition together:
The state will cut spending on health care by 3 billion euros, on funding to local service agencies, which now will be free to levy their own taxes, by 4.6 billion euros, and on pensions by 9.5 billion euros, Padoa-Schioppa said.
However:
About 5 billion euros counted as a pension reduction is actually the transfer of severance pay to the state pension agency INPS, a move that could be rejected by the EU's accounting watchdog Eurostat, Padoa-Schioppa said.
Of course apart from passing the scrutiny of the EU Commission all this now has to go to the Chamber of Deputies and even more importantly to the Senate.
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?
Saturday, September 30, 2006
Wolfgang Munchau and the Eurozone
Wolfgang Munchau has indirectly joined in the latest debate on the blogs about the future of the Eurozone:
"The long-term viability of the eurozone has become a hotly debated topic. The blogs are full of it."
The debate on the blogs was adequately covered by Sebastien Dullien here (and here and by me here).
Wolfgang makes 2 points:
1) That the Zone itself will not disintegrate:
What are the circumstances under which the eurozone could disintegrate? In practice, that would happen only if either Germany or France decided to quit. A departure by Italy or Spain, or both, would not suffice. However, it is extremely difficult to construct even a purely theoretical scenario under which it would make sense for France or Germany to reintroduce national currencies. A decision to quit would never pay off for the quitter in the short run. The administrative costs would be crippling, financial markets would be in turmoil and the quitter would almost certainly have to pay higher risk premiums on its bonds.
Basically I completely agree with him. It is extraordinarily unlikely that the Zone itself will disappear. There is however a secondary problem which Wolfgang doesn't consider which is what would happen if Germany hits ongoing deflation (a la Japan). This is not an entirely unconceivable outcome since it was clearly the German economy which was most at risk last time we were on deflation alert. Now in this case the ECB ought to follow a Japan-style zero interest rate policy, but this does leave us with the issue of how this would affect France, Spain, Ireland etc. No easy answer here.
2) The possibility that Italy might leave. Wolfgang is certainly much more guarded here, and doesn't exclude this possibility:
whether it is conceivable that one or more member countries could leave the eurozone without destroying the monetary union. The answer is yes, it is conceivable, but I would not bet my life savings on it. The second question is whether monetary union itself could collapse and member states revert to national currencies. My answer to that question is unequivocal: no, forget it.
Most hypothetical exit scenarios involve Italy, which has suffered from a large and persistent loss of competitiveness, as measured by the real exchange rate. So what would happen if Italy left or was forced out? Do not believe anyone who claims to know the answer. There is no script for such an event. In particular, it is not clear whether a country that left the eurozone would also have to leave the European Union.
I agree with him. No-one knows where this would lead us, although we can make some intelligent guesses. Even though it is not clear, I doubt in the extreme that Italy would leave the EU. That I really do find inconceivable, and there would be no necessity since, remember, 13 of the current members of the EU are already outside the zone.
"The long-term viability of the eurozone has become a hotly debated topic. The blogs are full of it."
The debate on the blogs was adequately covered by Sebastien Dullien here (and here and by me here).
Wolfgang makes 2 points:
1) That the Zone itself will not disintegrate:
What are the circumstances under which the eurozone could disintegrate? In practice, that would happen only if either Germany or France decided to quit. A departure by Italy or Spain, or both, would not suffice. However, it is extremely difficult to construct even a purely theoretical scenario under which it would make sense for France or Germany to reintroduce national currencies. A decision to quit would never pay off for the quitter in the short run. The administrative costs would be crippling, financial markets would be in turmoil and the quitter would almost certainly have to pay higher risk premiums on its bonds.
Basically I completely agree with him. It is extraordinarily unlikely that the Zone itself will disappear. There is however a secondary problem which Wolfgang doesn't consider which is what would happen if Germany hits ongoing deflation (a la Japan). This is not an entirely unconceivable outcome since it was clearly the German economy which was most at risk last time we were on deflation alert. Now in this case the ECB ought to follow a Japan-style zero interest rate policy, but this does leave us with the issue of how this would affect France, Spain, Ireland etc. No easy answer here.
2) The possibility that Italy might leave. Wolfgang is certainly much more guarded here, and doesn't exclude this possibility:
whether it is conceivable that one or more member countries could leave the eurozone without destroying the monetary union. The answer is yes, it is conceivable, but I would not bet my life savings on it. The second question is whether monetary union itself could collapse and member states revert to national currencies. My answer to that question is unequivocal: no, forget it.
Most hypothetical exit scenarios involve Italy, which has suffered from a large and persistent loss of competitiveness, as measured by the real exchange rate. So what would happen if Italy left or was forced out? Do not believe anyone who claims to know the answer. There is no script for such an event. In particular, it is not clear whether a country that left the eurozone would also have to leave the European Union.
I agree with him. No-one knows where this would lead us, although we can make some intelligent guesses. Even though it is not clear, I doubt in the extreme that Italy would leave the EU. That I really do find inconceivable, and there would be no necessity since, remember, 13 of the current members of the EU are already outside the zone.
Friday, September 29, 2006
Prodi Under Fire
Far be it from me to defend Romano Prodi's ignorance about what was actually happening in his cabinet office, what seems to me to be interesting about the controversy is the way the guns are out and pointing in his direction. I imagine we will see a lot more of this as things hot up.
Romano Prodi, Italy’s prime minister, on Thursday rejected accusations that he had acted improperly in a controversy involving Telecom Italia, the nation’s biggest telecommunications group.
Addressing parliament for the first time since the affair erupted almost three weeks ago, Mr Prodi denied that he had known about a report, written by one of his advisers, that recommended Telecom Italia’s partial renationalisation.
The affair has put Mr Prodi on the defensive at a difficult time for his centre-left coalition. It has a precarious majority in parliament’s upper house and is riddled with disputes over Italy’s 2007 budget, due for cabinet approval on Friday.
Apart from raising questions about Mr Prodi’s control over the activities of his own office, the affair has stirred suspicions that the government, for all its reformist rhetoric, cannot resist the temptation to interfere in the private sector.
Romano Prodi, Italy’s prime minister, on Thursday rejected accusations that he had acted improperly in a controversy involving Telecom Italia, the nation’s biggest telecommunications group.
Addressing parliament for the first time since the affair erupted almost three weeks ago, Mr Prodi denied that he had known about a report, written by one of his advisers, that recommended Telecom Italia’s partial renationalisation.
The affair has put Mr Prodi on the defensive at a difficult time for his centre-left coalition. It has a precarious majority in parliament’s upper house and is riddled with disputes over Italy’s 2007 budget, due for cabinet approval on Friday.
Apart from raising questions about Mr Prodi’s control over the activities of his own office, the affair has stirred suspicions that the government, for all its reformist rhetoric, cannot resist the temptation to interfere in the private sector.
Thursday, September 28, 2006
The Battle Is About To Commence
The FT this morning has a piece about the looming battle over next years budget:
Romano Prodi, Italy's prime minister, struggled on Wednesday to keep intact his planned deficit-cutting 2007 budget as moderates and leftwingers in his ruling coalition fought each other over his proposals to slash public spending.
Communists and other radicals insisted they would not endorse cuts in expenditure on schools and local government, while centrists voiced concern that the budget was drifting in the direction of higher taxes rather than spending cuts.
Bloomberg also covers the story.
As the FT also points out:
Italy's budget, due for cabinet approval on Friday, is the country's most important since it joined the eurozone in 1999, because the nation's public finances and international competitiveness have significantly deteriorated over the past eight years.
So 2007 is going to be a very hard road for Italy to travel. In some ways the moment of truth time is coming. Again the FT:
"Italy remains at risk of seeing its sovereign debt downgraded by credit rating agencies if its forthcoming budget is not rigorous enough."
Really it is very hard to just at this stage the importance of this threat. Much more than the credit rating agencies it is the response from the ECB which will be important if Italy fails to keep to the terms of the new version of the Stability and Growth Pact. Last year, we should remember, the ECB asserted that it would not accept government paper (bonds) in the future from any country which has not maintained at least an A- rating from one or more of the principal debt assesment agencies. So the threat may not be a hollow one, since if the ECB stop treating Italian paper at par, then this could easily, in and of itself, send Italy off on a default path.
These are not little issues.
Precisely for this reason I am rather sceptical that the ECB would be in any rush to actually carry out its threat. News from Japan though suggests that the climate may be changing. Japan, as is reasonably well known, also has a rapidly ageing population and a large government debt problem. In principle Japan was programmed to take some important steps (like Germany) to begin to correct the situation. The election of Shinzo Abe as prime minister has begun to put question marks over this process, and Standard and Poors have not been slow in reacting:
Japan may slow the pace of fiscal reforms under its new Prime Minister Shinzo Abe, ratings agency Standard & Poor's said on Wednesday, a day after he formed his new cabinet with a "no growth, no fiscal consolidation" policy.
The ratings agency questioned Abe's preference for growth policies over fiscal consolidation, saying his stance may lead to a deceleration of the pace of fiscal consolidation.
S&P currently has a positive outlook on Japan's rating.
But the direction of the sovereign rating depends largely on Abe's government's ability to pursue public sector reform pushed by his predecessor, the agency said.
"The two biggest constraints on the rating are Japan's fiscal position, which though improving remains weak, and its outstanding debt," said the report.
"Critical factors are therefore the pace of fiscal consolidation, the stability of the Japanese government bond market, and interest rates," it said.
Citing Japan's aim to achieve primary account balance in fiscal 2011 through spending cuts and revenue increases, the agency said how the new government meets the target is a major issue for the future direction of the sovereign rating.
So I would say that the issue of sovereign debt is now well up and over the radar, and that the agencies will be serious about downgrades.
The big problem is that EU institutions cried wolf for so long about the Stability and Growth pact that they have been left with a credibility problem. This has been doubly undesireable since it meant that during the relatively good years of 2002-2006 many countries were running deficits when they should have been aiming for balance or even - god forbid - surplus. Now the headwind may have changed, and may well be about to turn negative. The next two or three years ,may well be much harder than the last two or three.
I know that this view seems to go against the prevailing wisdom, but frankly many of the people making the 'euro growth engine call' simply haven't been thinking about the demographic dynamics of the situation. Claus Vistesen has been admirably covering all this, and a very useful point of entry is this post.
So the real question we are left with is what exactly is to be done? This is a very hard question, and I don't have any simple answers handy in my back pocket to pull out at the appropriate moment. Clearly Italy needs to move onto a sustainable fiscal path. It also needs to attach itself firmly to the EU Lisbon Reform agenda, and generate a consensus among the Italian population that the reforms are needed by getting across to the Italian people just why they are needed.
Naturally the political class in Italy isn't exactly an asset here.
Immigration undoubtedly forms another part of the picture, but this immigration (which is largely unskilled) needs to be coupled with an expanison of the high value services and new technology business sectors, so that a labour market environment can be created where the best of Italy's young talent can find work appropriate to their abilities, and thus help pull Italy out of this mess.
Over the summer I saw a film from the Italian director Paolo Virzì entitled Caterina va in città. The plot is summarised as follows:
When her father, Giancarlo (Sergio Castellitto) is transferred to Rome from the small country town of Montaldo Di Castro, Caterina (Alice Teghil), a 12 years old girl, discovers her new classmates, a totally new world, an ambient extremely divided politically. She starts developing her friendship with the "left side", represented by Margherita(Carolina Iaquaniello), and the right, Daniela (Federica Sbrenna) side of her class. She will lose herself, without knowing who she really is.
This is the problem I think, an ambient which is extremely divided politically where young Italians do not know 'who they really are'.
Romano Prodi, Italy's prime minister, struggled on Wednesday to keep intact his planned deficit-cutting 2007 budget as moderates and leftwingers in his ruling coalition fought each other over his proposals to slash public spending.
Communists and other radicals insisted they would not endorse cuts in expenditure on schools and local government, while centrists voiced concern that the budget was drifting in the direction of higher taxes rather than spending cuts.
Bloomberg also covers the story.
As the FT also points out:
Italy's budget, due for cabinet approval on Friday, is the country's most important since it joined the eurozone in 1999, because the nation's public finances and international competitiveness have significantly deteriorated over the past eight years.
So 2007 is going to be a very hard road for Italy to travel. In some ways the moment of truth time is coming. Again the FT:
"Italy remains at risk of seeing its sovereign debt downgraded by credit rating agencies if its forthcoming budget is not rigorous enough."
Really it is very hard to just at this stage the importance of this threat. Much more than the credit rating agencies it is the response from the ECB which will be important if Italy fails to keep to the terms of the new version of the Stability and Growth Pact. Last year, we should remember, the ECB asserted that it would not accept government paper (bonds) in the future from any country which has not maintained at least an A- rating from one or more of the principal debt assesment agencies. So the threat may not be a hollow one, since if the ECB stop treating Italian paper at par, then this could easily, in and of itself, send Italy off on a default path.
These are not little issues.
Precisely for this reason I am rather sceptical that the ECB would be in any rush to actually carry out its threat. News from Japan though suggests that the climate may be changing. Japan, as is reasonably well known, also has a rapidly ageing population and a large government debt problem. In principle Japan was programmed to take some important steps (like Germany) to begin to correct the situation. The election of Shinzo Abe as prime minister has begun to put question marks over this process, and Standard and Poors have not been slow in reacting:
Japan may slow the pace of fiscal reforms under its new Prime Minister Shinzo Abe, ratings agency Standard & Poor's said on Wednesday, a day after he formed his new cabinet with a "no growth, no fiscal consolidation" policy.
The ratings agency questioned Abe's preference for growth policies over fiscal consolidation, saying his stance may lead to a deceleration of the pace of fiscal consolidation.
S&P currently has a positive outlook on Japan's rating.
But the direction of the sovereign rating depends largely on Abe's government's ability to pursue public sector reform pushed by his predecessor, the agency said.
"The two biggest constraints on the rating are Japan's fiscal position, which though improving remains weak, and its outstanding debt," said the report.
"Critical factors are therefore the pace of fiscal consolidation, the stability of the Japanese government bond market, and interest rates," it said.
Citing Japan's aim to achieve primary account balance in fiscal 2011 through spending cuts and revenue increases, the agency said how the new government meets the target is a major issue for the future direction of the sovereign rating.
So I would say that the issue of sovereign debt is now well up and over the radar, and that the agencies will be serious about downgrades.
The big problem is that EU institutions cried wolf for so long about the Stability and Growth pact that they have been left with a credibility problem. This has been doubly undesireable since it meant that during the relatively good years of 2002-2006 many countries were running deficits when they should have been aiming for balance or even - god forbid - surplus. Now the headwind may have changed, and may well be about to turn negative. The next two or three years ,may well be much harder than the last two or three.
I know that this view seems to go against the prevailing wisdom, but frankly many of the people making the 'euro growth engine call' simply haven't been thinking about the demographic dynamics of the situation. Claus Vistesen has been admirably covering all this, and a very useful point of entry is this post.
So the real question we are left with is what exactly is to be done? This is a very hard question, and I don't have any simple answers handy in my back pocket to pull out at the appropriate moment. Clearly Italy needs to move onto a sustainable fiscal path. It also needs to attach itself firmly to the EU Lisbon Reform agenda, and generate a consensus among the Italian population that the reforms are needed by getting across to the Italian people just why they are needed.
Naturally the political class in Italy isn't exactly an asset here.
Immigration undoubtedly forms another part of the picture, but this immigration (which is largely unskilled) needs to be coupled with an expanison of the high value services and new technology business sectors, so that a labour market environment can be created where the best of Italy's young talent can find work appropriate to their abilities, and thus help pull Italy out of this mess.
Over the summer I saw a film from the Italian director Paolo Virzì entitled Caterina va in città. The plot is summarised as follows:
When her father, Giancarlo (Sergio Castellitto) is transferred to Rome from the small country town of Montaldo Di Castro, Caterina (Alice Teghil), a 12 years old girl, discovers her new classmates, a totally new world, an ambient extremely divided politically. She starts developing her friendship with the "left side", represented by Margherita(Carolina Iaquaniello), and the right, Daniela (Federica Sbrenna) side of her class. She will lose herself, without knowing who she really is.
This is the problem I think, an ambient which is extremely divided politically where young Italians do not know 'who they really are'.
Wednesday, September 27, 2006
Italy and Global Competitiveness
The World Economic Forum have just published their Global Competitiveness Report 2006-2007 (hat-tip to New Economist).Italy continued its downward trend, dropping another four places to 42 in the Global Competitiveness Index. You can find the Italy country summary here (in Italian).
Of course, as New Economist says "one needs to take these rankings with a large pinch of salt. The annual WEFreport is a quirky compendium of disparate data of varying quality, along with opinions from their own survey", but still, no smoke with fire, as they say.
The Italian summary does not make for light family reading. According to Lopez-Claros, Chief Economist and Director of the Global Competitiveness Network:
"L'elenco dei problemi è lungo. Il contesto macroeconomico italiano è mediocre e i conti pubblici sono in disavanzo da 20 anni. La situazione di bilancio si è gravemente deteriorata dal 2000 e il debito pubblico, ben al di sopra del 100% del PIL, è tra i più alti al mondo. La grave situazione in cui versano le finanze pubbliche italiane può a sua volta riflettere problemi istituzionali più profondi, evidenziati dai pessimi risultati di variabili quali l'efficienza della spesa pubblica, l’onere della regolamentazione, l'inefficienza dei mercati del lavoro e, più in generale, la qualità delle istituzioni del settore pubblico."
There is, however, one small silver lining in that very dark cloud:
"Per contro le debolezze sopra elencate sono parzialmente compensate dal buon livello di preparazione tecnologica e dalla modernità delle imprese del settore privato, indice di una grande riserva di potenzialità non ancora sfruttate. Le riforme potrebbero contribuire a migliorare in misura significativa la posizione dell'Italia nei prossimi anni"
This is, of course, more a hope for things to come, rather than a proclamation of what has already been achieved. As he says the reform process can contribute to some realisation of these potential benefits, and we will be here, on IEW, watching to see how it all works out in practice.
Of course, as New Economist says "one needs to take these rankings with a large pinch of salt. The annual WEFreport is a quirky compendium of disparate data of varying quality, along with opinions from their own survey", but still, no smoke with fire, as they say.
The Italian summary does not make for light family reading. According to Lopez-Claros, Chief Economist and Director of the Global Competitiveness Network:
"L'elenco dei problemi è lungo. Il contesto macroeconomico italiano è mediocre e i conti pubblici sono in disavanzo da 20 anni. La situazione di bilancio si è gravemente deteriorata dal 2000 e il debito pubblico, ben al di sopra del 100% del PIL, è tra i più alti al mondo. La grave situazione in cui versano le finanze pubbliche italiane può a sua volta riflettere problemi istituzionali più profondi, evidenziati dai pessimi risultati di variabili quali l'efficienza della spesa pubblica, l’onere della regolamentazione, l'inefficienza dei mercati del lavoro e, più in generale, la qualità delle istituzioni del settore pubblico."
There is, however, one small silver lining in that very dark cloud:
"Per contro le debolezze sopra elencate sono parzialmente compensate dal buon livello di preparazione tecnologica e dalla modernità delle imprese del settore privato, indice di una grande riserva di potenzialità non ancora sfruttate. Le riforme potrebbero contribuire a migliorare in misura significativa la posizione dell'Italia nei prossimi anni"
This is, of course, more a hope for things to come, rather than a proclamation of what has already been achieved. As he says the reform process can contribute to some realisation of these potential benefits, and we will be here, on IEW, watching to see how it all works out in practice.
Welcome To Paola and Jon
Well, this blog just got a facelift, and in various senses of the term. In the first place I have just swept a new broom clean through the sidebar, and in the second the blog is expanding its reach and being joined by Paola Silli and Jon Worth. Paola is a young Italian economist currently studying in Canada while Jon is a website designer and prolific writer. Welcome to both of you.
With Jon and Paola joining the focus of the blog will also change. As Jon is at pains to point out he is *not* an economist, his interest is more in policy and the political process in Italy. Equally Paola can be in no way held responsible for my views, which have been pretty pronounced. So this is a step in the direction of pluralism and diversity. I hope it works, and that you, gentle reader, will enjoy it. 2007 promises to be a very interesting year indeed in Italy.
With Jon and Paola joining the focus of the blog will also change. As Jon is at pains to point out he is *not* an economist, his interest is more in policy and the political process in Italy. Equally Paola can be in no way held responsible for my views, which have been pretty pronounced. So this is a step in the direction of pluralism and diversity. I hope it works, and that you, gentle reader, will enjoy it. 2007 promises to be a very interesting year indeed in Italy.
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