And The Budget IS Passed

I don't suppose this issue had been in doubt in recent weeks, but it is at least one more hurdle over.

Italian Prime Minister Romano Prodi's government survived a confidence vote and passed its first spending package as lawmakers approved plans to cut debt and reduce taxes on low incomes by raising them on higher ones.

The Chamber of Deputies voted by 337 to 262 to pass the budget law. Prodi's government would have collapsed had it lost the ballot because a confidence vote was tied to it.

So now the budget is about to become law. The next step will be to see to extent to which it is effective in achieving its objectives. Standard and Poor's don't seem too convinced:

Standard & Poor's and Fitch Rating cut Italy's creditworthiness on Oct. 19, almost three weeks after the government presented the budget proposal. S&P last week said the budget would fail to cut debt.

The big issue is the extent of dependence on increased taxes and more efficient collection of revenue rather than addressing the structural problems in the spending programme.

Confindustria, perhaps expectedly, are not very convinced either, but I was rather surprised by this:

Italy's largest employers' group, Confindustria, this week said the ``restrictive'' budget would hurt growth next year. Confindustria predicted the economy could grow as little as 1.1 percent after expanding 1.8 percent in 2006. The spending plan will shave 0.3 percentage points from a potential growth of 1.4 percent, the lobby said.

and the following point certainly raised an eyebrow here:

"The deficit may reach 6 percent of GDP this year, up from 4.1 percent in 2005, the government says."

6% of GDP. Well if correct this would certainly explain some of the growth spurt. I haven't seen this number mentioned before, in fact the indications had been the exact opposite, that the deficit would be less than anticipated due to the increased revenue. So is this for real, or is it simply Bloomberg. Anyone out there know?

Consumer Confidence Up Again In December

The only think you can say with any degree of certainty about Italian consumer confidence of late, is that it is volatile. In September it was up, in October it was down, in November it was back up again, and now in December it is way up, to the highest reading since 2002:

Italian consumer confidence leaped in December to a 4 1/2-year high as economic growth accelerates.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, rose to 113.6, the highest since June 2002, from a revised 109.3 in November.


So the Italian consumer coming into xmas is feeling good, and this is encouraging news, but we still need to see what sorts of readings we get going into 2007 before we can decide whether this is a real recovery, or an above trend boom. As readers know, I have my doubts.

One factor which undoubtedly has been influencing the high spirits is the recent employment data:

Italy's jobless rate unexpectedly dropped to a 14-year low in the third quarter after companies hired more part-time female staffers and foreign workers were legalized.

The unemployment rate fell to 6.8 percent from a revised 6.9 percent in the second quarter, the Rome-based National Statistics Office said in a statement today.

Of course this is data from the third quarter so there is no necessary match with confidence in December, but it would appear from the confidence level that the positive employment trend continues.

In part the improved employment situation seems to come from more part-time female labour being employed, and in part it seems to come from an inward flow of migrants, with the numbers of migrants being employed rising by 13.6% year-on-year (to a total now of 1.5 million).

But before we all start to cheer too loudly, we should think about this:

"Growth in Italy's $1.8 trillion economy will slow to 1.4 percent in 2007 after expanding 1.7 percent this year, according to the latest forecast on Nov. 6 by the European Commission. This compares with the 2.6 percent growth rate of the thirteen countries sharing the euro, and puts Italy on track to lag its partners for an 11th year in 2007."

So even though growth in Italy has improved markedly this year, it still doesn't seem to have gone above 1.7% and the relative position in growth terms of Italy in the EU seems unchanged.

What Are The Christian Democrats Up To?

A couple of weeks ago I had this post on the decision of the Christian Democrats to separate themselves off from the Berlusconi opposition. In the course of that post I suggested:

it is hard to see just how genuine and realistic Casini's initiative is, but if it does move forward it is, of course, just the kind of thing Italy needs. This move would seem to have two consequences.

Firstly Prodi's coalition suddenly becomes more governable, since the majority is now no longer necessarily a wafer-thin one. Also Prodi is now so dependent on the left of his coalition. This may become important as we move into 2007.

Secondly in the longer run this may provoke a 'realignment of the centre'.


Subsequently I have received a couple of interesting mails from Manuel Alvarez-Rivera (who runs the more than useful Election Resources site).

Manuel draws attention to two points of current interest in the Italian political situation:

1/ The Electoral Ballots Recount Issue (see here)

A second partial vote recount was ordered on Thursday amid claims that Italy's hard-fought and extremely close general election last April was marred by vote rigging.

The election committee in the lower house of the Italian parliament decided that all the House votes - blank, contested, spoiled as well as the good ones - should be counted again in 10% of polling stations.

On this Manuel is duly skeptical:

I'm somewhat skeptical as to the fraud claims on account of the significantly lower invalid vote figures, for a couple of reasons.

First, the decrease in the number of invalid votes could be explained by mechanical factors such as a simplified voting procedure, and most importantly political factors. To be specific, given the momentous choice between Berlusconi or Prodi, many Italian voters might have concluded it was no time to waste their votes by spoiling them or casting them blank.

Second, the 2006 invalid poll is by no means unprecedented: in both relative and absolute terms, the figures are almost identical to the corresponding totals for the 1976 election, which was a momentous choice as well, between the Christian Democrats and the Italian Communist Party (PCI). In light of the latter fact, it would seem to me that either those making the fraud claims weren't aware of this, or that they were but decided not to let a pesky fact get in the way of a sensational story.

Incidentally, if last April's Senate election in Italy had been carried out by straight PR (that is, without regional majority prizes), the overall distribution of seats would have been identical to that obtained under Italy's current electoral system. The reason for this is very simple: in eleven of the seventeen regions with PR + majority prize, the winning coalition won by itself more than 55% of the seats, and no majority prize was awarded. Meanwhile, the remaining six regions were evenly split between Berlusconi and Prodi, and as it happened the majority prizes awarded in these (which in all cases amounted to just one or two extra seats per region for the winning group) cancelled each other out. In all, the whole thing turned out to be yet another Berlusconi electoral scheme that didn't quite work out as planned.

Now there's going to be a partial recount for the Chamber election as well.

The center-left - which agreed to the recount - appears wholly unconcerned: they feel (quite correctly in my humble opinion) this is a tempest in a teapot, and that little if any changes in the results are going to come out of it. Not surprisingly, Berlusconi expects the outcome will be overturned, insisting once again he really won the election, Prodi's government is illegitimate and all the usual nonsense.

2/ Political Realignments in Italy

Manuel has this to say:

Concerning political realigments, here's a very interesting link (in Italian).

At any rate, I agree completely with your assessment of the situation. I wouldn't be surprised if the UdC were to find its way into Prodi's government, although it would be a hard sell for the far left, all them more so given the right-wing tendencies of some UdC leaders - such as Rocco Buttiglione. Moreover, right now Prodi can't afford to lose the Refounded Communists in favor of UdC, since such a move could cost the government its fragile Senate majority.

In Italy it is said the Christian Democrats have the uncanny virtue of never being too far from the centers of power, so it will be interesting to see what happens. Incidentally, Mastella and Casini used to be close allies a few years ago, when both led one of the UdC's preceding parties, the CCD.

My gut feeling is that it's no coincidence that the UDC left the House of Freedoms just days after Berlusconi's fainting spell. Casini et al have probably come to the conclusion that the days of Silvio Berlusconi as a major political figure are numbered, and that without him his party (which acts more like a Fininvest company than a real political party) may collapse altogether. Since a good many of Berlusconi's Forza Italia voters are former Christian Democrats, it would make sense that if such an event comes to happen, many Forza Italia's voters would gravitate towards a centrist alliance dominated by (who else?) the Christian Democrats.

Global Insight's Italy Forecast

Paola sent me the Global Insight forecast for Italy which is worth the read.

The general story is already a reasonably well known one:

Italy’s economy continued to strengthen in the third quarter of 2006, although it was primarily due to a steep inventory build-up, according to a final estimate from the statistics bureau, ISTAT. Real GDP grew by 0.3% quarter-on-quarter (q/q) after having risen 0.6% (upwardly revised from 0.5% q/q) in the second quarter of the year. The economy performed as expected, and thus Global Insight still expects real GDP to grow by 1.7% in 2006, its strongest performance since 2001. The annual comparison was still solid, with real GDP rising by 1.7% year-on-year (y/y), unchanged from the second and first quarters of 2006.

They do however pick up the inventory issue:

The breakdown of GDP by expenditure revealed that solid consumer spending growth and a sharp rise in inventories were the major growth drivers in the third quarter, which offset a large drag from net exports. A marked rise in inventories boosted the overall q/q growth rate by 1.3 percentage points in the third quarter. We believe that the increase in stocks was not deliberate, and was probably the result of lower-than-expected export sales in the third quarter. This could imply a downwards correction in inventory levels in the final quarter of 2006 that would dampen overall economic growth to just 0.1% q/q from the reported 0.3% q/q in the third quarter.

In particular part of the inventory issue obviously exists in the automobile sector, where sales actually declined in the third quarter year on year (even if Fiat did increase its market share):

Retail sales were relatively subdued in the third quarter, while demand for new cars weakened. Indeed, the average level of new registrations contracted by 5.6% y/y in the third quarter, after having climbed 6.8% y/y in the second.

The rise of the euro has clearly been taking its toll:

Net exports weakened significantly, lowering the overall GDP quarterly growth rate by 1.0 percentage point in the third quarter, after making a welcome positive contribution in the first half of 2006. Exports of goods and services contracted 1.7% q/q (but were still up by 3.3% y/y) in the third quarter, after rising very healthily in the first half 2006. The decline in export sales was partly a technical correction after several quarters of strong growth and the result of the steady appreciation of the euro, which has strengthened from an average of US$1.20 in the first quarter to US$1.27 by end-September. A stronger euro hits the Italian export sector hard, making it more difficult to compete with low-cost producers in Eastern Europe and the Far East. Italy specialises in highly price-elastic goods, notably clothing and footwear, as well as capital equipment. In the first half 2006, Italian export sales had been lifted by the relatively healthy global growth and stronger demand across the Eurozone, coupled with the markedly softer euro in the second half of 2005 and the first quarter of 2006. Meanwhile, growth in imports of goods and services strengthened from 0.2% q/q and 3.2% y/y in the second quarter, to 2.1% q/q and 5.4% y/y in the third quarter, reflecting firmer consumer spending.

Strangely there is relatively little discussion in the forecast of the budget deficit situation and the ongoing fiscal tightening that will be required. Juts this bried comment:

The fallout from the 2007 budget process is expected to have a negative impact on both growth and already fragile consumer confidence. The higher tax burden for top income earners and the unpopularity of the 2007 budget will continue to hurt consumer confidence well into 2007. It is likely that some cautious consumers could choose to save rather than spend the additional disposable income as they expect the economy to stumble again, while believing that additional fiscal tightening measures are inevitable.

In contrast the economists over at Global Insight have clearly bought the rise-and- rise euro story, and see this having a much more considerable impact on Italian growth than the fiscal restraint:

Real GDP growth is expected to fall back to 1.3% again in 2007, before accelerating gently to 1.4% in 2008. The slowdown will reflect the prospect of the euro making substantial gains against the U.S. dollar in the vicinity of US$1.40 by the end of 2007 and US$1.48 by end-2008. Consequently, export growth is projected to fall sharply in 2007 and remain subdued in 2008.

Really I think these numbers are way too high, and as we can see the euro is already starting to fall back from the recent highs. Obviously over at Global Insight they would do well to read Claus Vistesen a bit more often. And those who are already reading Claus regularly, might enjoy this post from James Hamilton, who is in many ways saying something similar.

Made In Italy At Chinese Prices?

New Economist has a post linking to a recent paper by Francesco Daveri on Italian productivity, and by this somewhat circuitous route (being directed by a comment towards a blog called Business Hackers on my way) I found this article in Spiegel Online about how the arrival of Chinese migrants was changing the face, and economic substructure, of Prato:

Outsiders have long since made their way into Prato....new home to 2,000 Chinese entrepreneurs and an army of low-wage workers, 25,000 strong, which is growing rapidly in front of the walls of this small city of 180,000. One in five of the workers is undocumented and, officially at least, isn't even here. Meanwhile Prato's citizens look on and curse their new neighbors as sewing machines rattle through the night.

Prato's residents call the immigrant neighborhood, which has grown rapidly in the last five or six years in an area once inhabited by local factory workers, "San Pechino," or St. Beijing. When the first Chinese, their suitcases filled with cash, arrived in the early 1990s and leased their factories, the Italians laughed at them. But now that their numbers have quadrupled and they own a quarter of the city's textile businesses, where they make "Made in Italy" fashion at "Made in China" prices -- often illegally -- the newspapers are full of op-ed pieces about the "yellow invasion," low-wage competition and the Chinese mafia. The president of the city's chamber of commerce, who also happens to own a textile business, says: "We underestimated them. What they're doing here is called unfair competition. We need a battalion, an operation like the one in Iraq, to keep them under control."

Prato's residents are now frantically asking themselves questions to which they have no answers. Who are these Chinese? What is their objective?
continue reading Spiegel online

Well placing carefully to one side the paranoia which seems to be revealed by the last sentences, what I find slightly worrying about the situation brought to light in this article is the way some parts of the Italian economy seem to be sliding down the value chain, just as China itself is starting to move up it. Expanding activity in this kind of manufacturing industry is a dubious enough thing to do with global prices as they are in any event, but doing so by allowing the needs of the tax system to support the spending demands of the elderly population to be flouted in just this kind of way is quite another.

There is considerable evidence for the existence of this kind of activity here in Spain too (and I imagine in Greece). But really bringing in undocumented workers to create work which would otherwise be unprofitable (and note that I support inward migration where it has some kind of rationale) seems to be a more or less pointless activity. At best you are renting the land to allow your overseas competitors to get even nearer their market of interest.

In the long run none of this has much future, since as I say, this kind of activity is simply not cost effective in Europe any more, and all it does is create unnecessary resentment among ordinary Italians who cannot understand what the hell is going on.

One example of where all of this can lead is to be found in the Spanish town of Elche (in the Community of Valencia):

The Chinese community in Spain has not yet forgotten the events that took place in Elche, Europe's shoe capital, on September 16, 2004.

That night, a group of Spanish shoemakers set on fire the factories of Chinese entrepreneurs. Local shoe industry workers say the Chinese competitors were playing dirty by offering cheap products distributed in Spain and the rest of Europe but manufactured across the world. Those criticisms, not limited to Spain or the shoe industry, clearly illustrate concerns in Europe with cheap Chinese products.

Now what seems to be happening is that attempts to contain the flow of products by the use of quotas are being got round by renting land and premisses, and importing workers to do the production within the EU. All of this is very difficult to control since, as China Economic Review notes, it is taking place in areas where a blind eye has traditionally been turned to underground economic activity, and it is now virtually impossible to start having an 'eyes wide open' policy overnight, too many other people might be 'found out' at the same time:

Elche, in the east of Spain, is close to Valencia and not far south of Barcelona. It is a city of 200,000 people that has lived for decades on the returns from its shoe industry. For most of this time, it has been known as a place that lives outside labor and tax laws. Employees have often worked illegally without fixed salaries or social security.

Half a century ago, US shoe companies moved their production there, only to transfer it later to markets with even cheaper labor such as India, China and Vietnam.

Invaded by migrants from all over the world (mainly South America, Eastern Europe and Sub-Saharan Africa), European societies are not coping well with change. Europe's economies are struggling to overcome the structural challenges derived from the WTO's Agreement on Textiles and Clothing. In some cases, manufacturers don't even need to move production to China. Chinese workers will work in the heart of Europe for a fraction of the wages European workers demand.

In Elche, Chinese shoemakers have set up warehouses and sell shoes at one tenth the price of locally made products.

Now to be clear, my beef here is not about immigration. My beef is about a degenerate application of public policy and how it always ends up acting against everyone's interests in the long run. We need migrants here to do work with a real economic basis behind it (to meet our man- and woman-power shortages and to help pay our health and pensions system) but, frankly, we don't need this, unless, that is, the respective local councils and governments are willing to pay the retraining costs of these soon to be displaced workers, once the regulations are applied and the no-longer profitable enterprises closed.

Naturally I will post on the somewhat more interesting arguments from Francesco Daveri on Italian productivity (the real variety) under separate cover.