Spain and Italy

Paola sent me this interesting link from the Charlemagne columnist at the Economist a couple of weeks back and I didn't have the time to comment on it. The comparison between the evolution in the political system in the two countries is an interesting and valid one. Spain has made great strides forward in terms of political maturity in recent years. Unfortunately the same cannot be said about Italy, and this is one of the reasons I am just not optimistic about Italy's capacity for addressing and resolving its substantial economic problems.

BOTH have centre-left coalition governments. Both are committed to European integration. Both are firm supporters of the draft European Union constitution. Both have low fertility, high immigration and declining competitiveness. And both are Latin, Mediterranean and used to taking siestas.

But now Spain and Italy are converging in a new way. For much of the past decade Spain's economy has been growing at around twice the EU average. At this rate, officials beam, Spain will surpass Italy in terms of GDP per head by 2009. If you account for the black economy (Italy does, Spain does not), Spaniards might be richer already. Yes, such claims should be treated with scepticism: in the mid-1980s, Italy boasted loudly and prematurely of overtaking Britain. But Spain's economy is already as big as Canada's (which is, like Italy, a G8 member). And if you add in demographic trends—an immigration boom is more than offsetting a shrinking native population—then the prime minister, José Luis Rodríguez Zapatero, is surely right to assert that Spain will soon join Britain, France, Germany and Italy in the club of Europe's big five countries............

The contrast is especially sharp right at this moment. Both Spain and Italy are in the process of pushing their annual budgets through parliament. But in Spain, says Francisco Fernández Marugán, the Socialist deputy whose job it is to shepherd the budget through the lower house, the coalition partners will add no more than €500m ($625m) to a budget of around €300 billion. In Italy the government agreed a spending plan unanimously at cabinet level. But when it went to parliament, there were 7,000 amendments, of which no fewer than 3,000 came from the ruling coalition. In Italy party and budget discipline alike seem unknown. In Spain they reinforce each other.

Of course, not everything is rosy in the garden of Spain. The fiscal situation is worse than it looks because two-thirds of public debt, attributable to regional governments, is not accounted for. Compared with Italy, Spain has few internationally competitive small firms. It is overly dependent on construction and is “enjoying” a housing boom. As a result, says José Luis Feito, at the employers' federation, the economy is highly vulnerable to higher interest rates, which are likely to be on their way.

Like Italy, Spain is stuck with high-cost, low-productivity businesses that are vulnerable to Chinese competition; poor schools; and low spending on research and development.............

Overall, however, economic success has produced a change in the public temperament of a country comparable only with that of Germany after the second world war, says Pedro Schwartz, a professor at the San Pablo CEU University in Madrid. For most of the 20th century, after defeat in the Spanish-American war of 1898 (known in Spain as “the disaster”), everybody's favourite topic was “the problem of Spain”. Italy was the model of a modernising Mediterranean state. “Spain is different”, as a tourist slogan of the 1960s used to put it.

Now Spain has self-confidence on steroids. Spanish companies are on acquisition sprees, first in Latin America, now in Europe. Two of Europe's top ten business schools are in Spain; Zara, one of the world's fastest-growing retailers, is based in Galicia. Spaniards no longer feel different; they want to be European. They showed it by being the first to vote for, and overwhelmingly approve, the EU constitution.

Of course Paris will undoubtedly want to wax long and lyrical on Spain's housing boom, but I would just point out that this is itself a direct product of the difficulties of managing a 'one size fits all' interest rate policy for the eurozone, and as such can hardly be blamed directly on the Spanish administration itself. Ironically though it is this boom which has produced the huge and unprecedented immigration is Spain (nearly 5 million people in 6 years) and this in and of itself has corrected the population pyramid problem substantially, at least for the time being. Call it the law of unintended consequences if you will. Now everything depends on how well Spain can leverage its comparative advantage vis-a-vis Latin America as the construction boom slows. This may not be easy, but at least it is still all left to play for, and of course Mr Bush has given Spain an enormous LA boost by agreeing to build that wall to 'separate' the US from Latin America.

I might also mention that Claus Vistesen had a relevant post on Spain's construction boom here.

Fiat One More Time

Well I'm sure Paris would never forgive me if I neglected to mention the fact that Fiat had another very good month in October. This is not 'sour grapes' or anything but I do think it is important to take note of the fact that this is partly being driven by substantial discount price offers, and also of the fact that it is the services sector which is the key to the modern developed economy since this now accounts for about 70% of total GDP.

On other fronts I would like to stress that I think the French poor third quarter performance is something of a statistical blip, and that fourth quarter results should be much better in France. This unfortunately cannot be said for Italy or Germany, and I am convinced that in the coming quarters we will see the important underlying weakness in these economies once more revealed.

On some of the theoretical reasons why this should be so, I have this rather provocative post on Demography Matters yesterday which some may find an interesting read.

Toyota Motor Corp., Fiat SpA and PSA Peugeot Citroen last month led the first gain in European car sales since May as they offered discounts to customers and attracted buyers to models released over the past year.

Sales rose 3.6 percent from a year earlier to 1.21 million vehicles, the Brussels-based European Automobile Manufacturers Association said in a statement today. Registrations for the first 10 months of the year advanced 0.4 percent to 13.1 million units.

``The gains show the strongest performers are those with the most recent model range supported by aggressive pricing and marketing efforts,'' said Thomas Ryard, an Amsterdam-based automotive analyst at Global Insight, a consulting company.

Toyota and Fiat discounted cars and found buyers for models such as the Japanese automaker's Yaris subcompact and RAV4 sport- utility vehicles and Turin, Italy-based Fiat's Grande Punto subcompact. Peugeot rose on rebates and on demand for cars such as the small 207 hatchback, which reached dealers in May.

Fiat's European market share through October jumped to 7.5 percent from 6.4 percent a year earlier. Its October sales rose 16 percent to 92,704 cars. In addition to the Grande Punto, the Alfa Romeo 159 sedan, introduced at the end of 2005, contributed to the gains. Fiat will release the Bravo compact model early next year.

Third Quarter Growth Slows in Italy

Well since this data falls broadly in line with what I have been saying, we could classify this in the no further comment department. Obviously the really interesting data will come in quarters one and two of 2007.

Italy's economy, Europe's fourth- largest, grew in the third quarter at half the pace of the previous three months, adding to signs that the expansion in the euro region is losing momentum.

Italy's gross domestic product increased 0.3 percent from the second quarter when it expanded a revised 0.6 percent, the European Union's statistics office in Luxembourg, said today. Growth was slower than the 0.5 percent median forecast of 31 economists polled by Bloomberg News.

Italian growth has trailed that of the economy of the dozen countries sharing the euro for at least a decade and continued to lag behind in the third quarter. Growth in the euro zone slowed to 0.5 percent in the period from 0.9 percent, suggesting five interest rate increases by the European Central Bank in the past year is slowing the expansion.....

Today's decline is the latest sign that European growth may be slowing in the fourth quarter. France's economy unexpectedly ground to a halt in the third quarter. Germany, the region's largest economy, grew a slower-than-expected 0.6 percent in the third quarter, about half the pace of the revised 1.1 percent rate of the previous three months, a government report showed today.

Of course all eyes now move over to the ECB to see just exactly what happens next. Claus Vistesen, who has also been covering the eurozone slowdown had a piece earlier in the week on the French data.