Now Back in September I said this:
Italian consumers appear to be feeling good. This is welcome news, but as an economist I have to ask myself whether this feelgood effect is sustainable.
And as I would also say, you shouldn't read too much into consumer confidence indexes which are known to be highly volatile, so I won't (in this sense the investor sentiment indexes are much more revealing). All I would say is that Italian consumer confidence isn't holding where it was, and this does seem to be coherent with the underlying fundamentals.
Now Paris often suggests I offer a one sided reading of things, so I would be interested to hear anything that anyone else may have to say.
I would just point out that both Claus Vistesen and I have been arguing for some time now that the Eurozone is slowing, and that there isn't going to be a Goldilocks recovery, and that the ECB is seriously out of touch with reality on this point. No doubt at some stage they too will correct.
Figures on French consumer spending out today simply fill in a few more details in the picture.
Italian consumer confidence fell in October from a four-year high on concern that higher taxes included in the government's budget plan and rising interest rates will leave households with less to spend.
The Rome-based Isae Institute's index, based on a poll of 2,000 households, dropped to 108.6 in September, from a 4-year- high of 110.1 in August. The reading was lower than the 109.8 median forecast of 19 economists surveyed by Bloomberg News.
``The uncertainty surrounding the 2007 budget, and the perception that the government is raising taxes likely had an impact,'' Matteo Radaelli an economist at Rasbank SpA in Milan said. ``Higher interest rates, which make mortgage payments more of a burden, may also have affected confidence.''
The drop in Italian confidence reflected growing pessimism in Europe. French consumer spending on manufactured goods declined the most in 10 years in September, a government report said today. German investor confidence fell to the lowest in 13 years in October, an Oct. 17 report by the ZEW Center for European Economic Research showed.
Italians were more pessimistic about the prospects for growth with the index on the outlook for the economy falling to 97.0 from 100.1, Isae said. Perception of personal wealth was also negative with the index declining to 113.0 from 115.6, the lowest in six months.
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?
Tuesday, October 24, 2006
2007 Budget Debate Reaching Critical Moment?
Now I know Hans would say that all of this has still got a long way to run, and I am sure he is right. But I also think that the contents of the budget are a lot more critical than many inside Italy may have previously realised. I think the action taken by the ratings agencies is pretty significant, to some extent they have stepped in where the weaknesses evident in the EU Commission's ability to manage the Stability and Growth Pact have become only too apparent. So the debate is now a serious one, and Prodi's threat to call a vote of confidence appears to be in earnest (wasn't it only yesterday that Wolfgang Munchau was assuring us that the coalition was shaky, "but not about to collapse". He may well still be right, but he may also underestimate just how difficult it will be for the electoral base of the left to swallow the budget cuts).
Romano Prodi, Italy’s prime minister, on Monday summoned all ministers and political party leaders in his centre-left coalition to a showdown meeting to win parliamentary approval for his contentious 2007 budget.
The meeting, to be held next Saturday, will take place as Mr Prodi battles to assert his authority over his coalition, and as centre-left leaders issue almost daily denials that there is a plot afoot to topple him and install a new premier.
We are talking about common work in parliament to ensure that we can arrive at the fastest possible approval of the budget,” Mr Prodi told reporters.
He said the meeting – unprecedented since his victory in last April’s general election – would decide whether to cut short debate on the budget by attaching it to a confidence vote that, if lost, would cause the government’s fall.
Mr Prodi insists that this time he intends to serve a full five-year term as premier, but the uproar over his 2007 budget has exposed tensions in his coalition, a jumble of Catholic centrists, reformist socialists, Greens, communists and others.
Mr Prodi’s vulnerability is made more acute by the fact that, like Tommaso Padoa-Schioppa, finance minister, he is a non-party technocrat in a political culture where party traditions and loyalties count for a great deal.
In order to steer the budget through parliament’s upper house, where the government has a mere one-seat majority over the opposition, Mr Prodi and Mr Padoa-Schioppa must rely on the support of small leftist parties with a few seats each.
Anyone else got a take on this?
Romano Prodi, Italy’s prime minister, on Monday summoned all ministers and political party leaders in his centre-left coalition to a showdown meeting to win parliamentary approval for his contentious 2007 budget.
The meeting, to be held next Saturday, will take place as Mr Prodi battles to assert his authority over his coalition, and as centre-left leaders issue almost daily denials that there is a plot afoot to topple him and install a new premier.
We are talking about common work in parliament to ensure that we can arrive at the fastest possible approval of the budget,” Mr Prodi told reporters.
He said the meeting – unprecedented since his victory in last April’s general election – would decide whether to cut short debate on the budget by attaching it to a confidence vote that, if lost, would cause the government’s fall.
Mr Prodi insists that this time he intends to serve a full five-year term as premier, but the uproar over his 2007 budget has exposed tensions in his coalition, a jumble of Catholic centrists, reformist socialists, Greens, communists and others.
Mr Prodi’s vulnerability is made more acute by the fact that, like Tommaso Padoa-Schioppa, finance minister, he is a non-party technocrat in a political culture where party traditions and loyalties count for a great deal.
In order to steer the budget through parliament’s upper house, where the government has a mere one-seat majority over the opposition, Mr Prodi and Mr Padoa-Schioppa must rely on the support of small leftist parties with a few seats each.
Anyone else got a take on this?
Monday, October 23, 2006
Accounting For The Costs of Ageing
One of the big underlying issues in the debate over the 2007 budget and the associated problem of the sustainability of public finances in Italy is the question of pending liabilities in pensions, health care and the social security system. Earlier this week we had some discussion on this topic. Paris also provided a couple of useful links giving details of the current pensions state of play (and here, hat-tip to FxTalks. In the coming days we will try and do something more systematic about the Italian pensions system, since I entirely agree with Paris that the pensions system (and the various other related issues) form a big part of the 'Italian question'.
For today I am simply putting up a post I just wrote for the Demography Matters blog, about a new set of accounting proposals for how to classify incurred liabilities, which are due to appear in the US today. Now the US may seem to be a very, very long way from Italy, but I think the proposals are interesting, and valid for the reasons I explain below. I also think that the OECD objections are predicatable, but nothing like so valid. The issue is: do electors have a right to know what is in store for them? Of course the problem is seen as being that 'you can't tell the people outright what is going to happen', you need to use the euphemism 'reform process' and you also need to keep changing the target as you move. But this, as we can see, is the approach that just isn't working, since electors are merely lulled into complacency by this, with the reforms being normally too few and too late. So maybe facing up to the truth is what we really need to do, since maybe this way, and only just maybe, we could avoid a disastrous default in some obscure country or other. Nothing in life is ever 100% definitely inevitable, except death of course, and even that finality can be postponed considerably, depending on just how you live.
Accounting For The Costs of Ageing
This article which appears in todays FT seems to me to raise issues which are extremely important, indeed it gets to the heart of the matter:
A radical new approach to government accounting that would require the US administration to account for the cost of future social security payments year by year as people build up entitlements will be proposed on Monday.
The proposal by the federal accounting standards advisory board (FASAB) – which would also require the government to account for benefits accrued under Medicare and other social insurance programmes in the same way – is unprecedented internationally. It would radically change the presentation of US government finances, in effect bringing forward the cost of rapidly increasing social security and Medicare obligations and greatly increasing the reported fiscal deficit.
As the FT notes the proposal is unprecedented internationally, but is exactly what is needed. Assessing sustainability in public finances involves having relatively accurate knowledge of two things: accumulated liabilities, and future rates of economic growth. The 'unprecedented' component in the FASB proposals would go a long way towards improving the situation vis-a-vis the first item, the second one, of course, still needs a lot of thought and work.
The FT has obtained a copy of the FASAB preliminary views paper which will be released on Monday. In it, the independent board majority argues that “for social insurance programmes an expense is incurred and a liability arises when participants substantially meet eligibility requirements during their working lives”.
By contrast, the government representatives argue that the liability arises only when the benefit amount is “due and payable” as under current accounting rules.
The majority independent directors want the government to start providing for the future cost of social security and other benefits when workers become fully insured after 10 years in covered employment.
They say the current arrangement is “flawed” because it “fails?.?.?.?to recognise the accruing cost of social insurance programmes in each reporting period”.
Adopting the proposed new rule would bring the government more into line with the private sector, an approach that has considerable support within a section of the Republican party and may in this instance be of interest to Democrats too.
However, it would break with international public accounting practice, which essentially treats social insurance offered by sovereign governments as a political commitment to pay future benefits rather than a financial liability.
The Organisation for Economic Co-operation and Development has written to the FASAB saying it is “very concerned” about the proposed rule change.
The letter, signed by Barry Anderson, head of the OECD’s budgeting and public expenditures division, says that “classifying these transactions the same as private sector liabilities is wrong” and could confuse the public.
For today I am simply putting up a post I just wrote for the Demography Matters blog, about a new set of accounting proposals for how to classify incurred liabilities, which are due to appear in the US today. Now the US may seem to be a very, very long way from Italy, but I think the proposals are interesting, and valid for the reasons I explain below. I also think that the OECD objections are predicatable, but nothing like so valid. The issue is: do electors have a right to know what is in store for them? Of course the problem is seen as being that 'you can't tell the people outright what is going to happen', you need to use the euphemism 'reform process' and you also need to keep changing the target as you move. But this, as we can see, is the approach that just isn't working, since electors are merely lulled into complacency by this, with the reforms being normally too few and too late. So maybe facing up to the truth is what we really need to do, since maybe this way, and only just maybe, we could avoid a disastrous default in some obscure country or other. Nothing in life is ever 100% definitely inevitable, except death of course, and even that finality can be postponed considerably, depending on just how you live.
Accounting For The Costs of Ageing
This article which appears in todays FT seems to me to raise issues which are extremely important, indeed it gets to the heart of the matter:
A radical new approach to government accounting that would require the US administration to account for the cost of future social security payments year by year as people build up entitlements will be proposed on Monday.
The proposal by the federal accounting standards advisory board (FASAB) – which would also require the government to account for benefits accrued under Medicare and other social insurance programmes in the same way – is unprecedented internationally. It would radically change the presentation of US government finances, in effect bringing forward the cost of rapidly increasing social security and Medicare obligations and greatly increasing the reported fiscal deficit.
As the FT notes the proposal is unprecedented internationally, but is exactly what is needed. Assessing sustainability in public finances involves having relatively accurate knowledge of two things: accumulated liabilities, and future rates of economic growth. The 'unprecedented' component in the FASB proposals would go a long way towards improving the situation vis-a-vis the first item, the second one, of course, still needs a lot of thought and work.
The FT has obtained a copy of the FASAB preliminary views paper which will be released on Monday. In it, the independent board majority argues that “for social insurance programmes an expense is incurred and a liability arises when participants substantially meet eligibility requirements during their working lives”.
By contrast, the government representatives argue that the liability arises only when the benefit amount is “due and payable” as under current accounting rules.
The majority independent directors want the government to start providing for the future cost of social security and other benefits when workers become fully insured after 10 years in covered employment.
They say the current arrangement is “flawed” because it “fails?.?.?.?to recognise the accruing cost of social insurance programmes in each reporting period”.
Adopting the proposed new rule would bring the government more into line with the private sector, an approach that has considerable support within a section of the Republican party and may in this instance be of interest to Democrats too.
However, it would break with international public accounting practice, which essentially treats social insurance offered by sovereign governments as a political commitment to pay future benefits rather than a financial liability.
The Organisation for Economic Co-operation and Development has written to the FASAB saying it is “very concerned” about the proposed rule change.
The letter, signed by Barry Anderson, head of the OECD’s budgeting and public expenditures division, says that “classifying these transactions the same as private sector liabilities is wrong” and could confuse the public.
Wolfgang Munchau and the 2007 Budget
Wolfgang Munchau has another article today on the 2007 budget (behind the firewall). The title of the article is, in itself, revealing enough: Instead of reform, it is Italian politics as usual. Now even if you cannot actually access the full article, if you are a regular reader of IEW you will not find it hard to imagine which the issues are that have lead him to the conclusions he has drawn (and here).
Now we should also constantly keep in mind Hans's point, that nothing about this budget is yet final, and nothing will be until it is voted and passed into law at the end of the year, but still the initial impressions, as Mumchau indicates are not promising. The budget appears to be a horse-trading compromise which may (and only may, in the best of all possible circumstances) deliver the results which its architects hope for, but it will not address and rememdy the underlying structural issues which have lead public debt in Italy to its current sorry condition, and thus it provides no guarantee that further credit downgrades will not be forthcoming.
Instead of reform, it is Italian politics as usual
Last week, two credit rating agencies downgraded Italy’s sovereign debt to the same level as Botswana’s. The move by Standard & Poor’s and Fitch is more than a reaction to the centre-left government’s first budget after April’s general election. It is a sign of frustration with where Italy’s coalition is headed. After a short period during which the country appeared to recognise the urgency of its economic plight, we are now back to politics as usual in Rome. S&P lowered Italy’s long-term credit rating from AA- to A+, complaining that Romano Prodi, prime minister, is as inclined to muddle through as his predecessor was. Unfortunately, they are right.
Mr Prodi and Tommaso Padoa-Schioppa, finance minister, appear to have prioritised two goals in the difficult budget negotiations: to survive politically and to push the headline number of Italy’s deficit below 3 per cent of gross domestic product. There is a reasonable chance they will meet both targets. The coalition is shaky, but not about to collapse and the deficit is projected to fall from 4 per cent of GDP this year to 2.8 per cent in 2007. The bad news is how this has been accomplished.
Incidentally, there is just one other issue, Wolfgang Munchau, I know, is not really a macro economist, but I wouldn't be anything like as sanguine as he appears to be that "there is a reasonable chance they will meet both targets". The first to some extent depends on the second here, and the second depends on the outlook for the global and EU economies during 2007, a small detail which is currently far from clear, but I wouldn't be quite as optimistic as Munchau appears to be about growth in Italy in 2007. Also, assuming Hans to be right, and that there may well be some hard political battles out in front over the actual details of the budget then the political artithmetic may not be as stable as it currently appears. Trapped between the ratings agencies and the left of his coalition, that is where I would say Prodi is right now, and whether there is a navigable course to be steered between the two is just what we are about to find out.
Now we should also constantly keep in mind Hans's point, that nothing about this budget is yet final, and nothing will be until it is voted and passed into law at the end of the year, but still the initial impressions, as Mumchau indicates are not promising. The budget appears to be a horse-trading compromise which may (and only may, in the best of all possible circumstances) deliver the results which its architects hope for, but it will not address and rememdy the underlying structural issues which have lead public debt in Italy to its current sorry condition, and thus it provides no guarantee that further credit downgrades will not be forthcoming.
Instead of reform, it is Italian politics as usual
Last week, two credit rating agencies downgraded Italy’s sovereign debt to the same level as Botswana’s. The move by Standard & Poor’s and Fitch is more than a reaction to the centre-left government’s first budget after April’s general election. It is a sign of frustration with where Italy’s coalition is headed. After a short period during which the country appeared to recognise the urgency of its economic plight, we are now back to politics as usual in Rome. S&P lowered Italy’s long-term credit rating from AA- to A+, complaining that Romano Prodi, prime minister, is as inclined to muddle through as his predecessor was. Unfortunately, they are right.
Mr Prodi and Tommaso Padoa-Schioppa, finance minister, appear to have prioritised two goals in the difficult budget negotiations: to survive politically and to push the headline number of Italy’s deficit below 3 per cent of gross domestic product. There is a reasonable chance they will meet both targets. The coalition is shaky, but not about to collapse and the deficit is projected to fall from 4 per cent of GDP this year to 2.8 per cent in 2007. The bad news is how this has been accomplished.
Incidentally, there is just one other issue, Wolfgang Munchau, I know, is not really a macro economist, but I wouldn't be anything like as sanguine as he appears to be that "there is a reasonable chance they will meet both targets". The first to some extent depends on the second here, and the second depends on the outlook for the global and EU economies during 2007, a small detail which is currently far from clear, but I wouldn't be quite as optimistic as Munchau appears to be about growth in Italy in 2007. Also, assuming Hans to be right, and that there may well be some hard political battles out in front over the actual details of the budget then the political artithmetic may not be as stable as it currently appears. Trapped between the ratings agencies and the left of his coalition, that is where I would say Prodi is right now, and whether there is a navigable course to be steered between the two is just what we are about to find out.
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