Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said 'stuff happens', and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley's Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: "with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw"?).
"If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view."
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo's reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930's and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.
This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival 'escape strategy'?
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?
Monday, June 20, 2005
Thursday, June 09, 2005
I think one of the topics for next years election in Italy is just being decided. Romano Prodi (former President of the EU Commission) has just spoken out against Sinascalco. He is in favour of making cuts. Prodi is quoted as saying that:
"Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision......The government lost control of current expenditure. The situation is very serious.''
Prodi is about to become the whipping boy, having to go into an election with the 'popular' policy of making widespread spending cuts.
Incidentally,
Anatole Kaletsky has some very harsh words to say about the Brussels leadership and all this. I don't entirely agree with his general economic analysis (I don't think eg devaluation is a quick solve all policy in the way he seems to) but he certainly makes some strong points:
"The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call ?deniability?. The anti-euro claims are partly designed to shift blame for Italy?s problems on to Romano Prodi, the former Commission President who is now Berlusconi?s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe?s politicians ? and they bring me back to the comparison between Britain after Black Wednesday and Europe today."
"The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth."
"These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe?s ?democratic deficit? because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can?t."
"If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment. "
"Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision......The government lost control of current expenditure. The situation is very serious.''
Prodi is about to become the whipping boy, having to go into an election with the 'popular' policy of making widespread spending cuts.
Incidentally,
Anatole Kaletsky has some very harsh words to say about the Brussels leadership and all this. I don't entirely agree with his general economic analysis (I don't think eg devaluation is a quick solve all policy in the way he seems to) but he certainly makes some strong points:
"The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call ?deniability?. The anti-euro claims are partly designed to shift blame for Italy?s problems on to Romano Prodi, the former Commission President who is now Berlusconi?s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe?s politicians ? and they bring me back to the comparison between Britain after Black Wednesday and Europe today."
"The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth."
"These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe?s ?democratic deficit? because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can?t."
"If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment. "
Tuesday, June 07, 2005
Referendum in Italy
Fooled you, it's not about the euro :). Italy is about to have a referendum (next Sunday in fact), the topic: artificial insemination and embryo research. Benedict XVI has just spoken out against. In fact this has started me looking into the referendum situation in Italy. It seems they have quite a lot. Constitutionally they need 500,000 signatures, or 5 regional councils to back the call. Maroni is about to start collecting signatures.
Italy: Aging But Saving?
This is a very convenient moment to put up this post. Alan Greenspan has just admitted that he's human like the rest of us, and that he doesn't have a very good explanation for why long-term interest rates have been falling at a time when he and his Fed colleagues have been busy raising short-term rates. I think he's being a bit coy here, since I'm sure he has some idea. Among other things he will be well aware of the contents of a speech made recently by Ben Bernanke, a US economist who is considered high on the list of possible Greenspan successors.
What Bernanke said in the speech ( The Global Savings Glut ) was this:
"Iwill argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving."
Later in the speech he spells this out in more detail:
"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad"
Now this speech has caused a fair degree of controversy due to the fact that it mainly has been seen as an apologetics for the high US current account deficit (which it - in part - is). But I would also argue that it has a deeper significance, in that this speech marks the arrival on the official agenda of what I would term the New Economic Paradigm: that is the idea that amongst the many important macro economic variables, one, population age structure, has a pride of place whose importance has not been sufficiently appreciated before.
Indeed, when I said Greenspan was being rather coy, I was retaining something up my sleeve, since I am aware that both Greenspan and Bernanke attended this conference at Jacksons Hole last summer where a prominent place was given to this paper from David Bloom, one of the evident 'brains' behind the New Economic Paradigm.
Undoubtedly the principal economic vital statistic for these theorists is the median age of any given population, and the most important information to have on hand when it comes to examining other *dependent* variables (like savings, investment, consumption, balance of payments, fiscal balance, labour force participation or productivity) is the age structure of the population.
Briefly put, what is argued is that each society has a prime saving age (for cultural reasons this may vary from one society to another): in the case of Italy (which we are considering here) this age group appears to be 35-64. The 65 plus age group progressively has more and more tendency to dis-save.
The other salient detail is the location of the 'boom generation': that generation which marks the inflection point in the demographic pyramid. Essentially the passage of this cohort into the dis-saving age group marks an important watershed in the evolution of any modern society.
Now for a specific case: Italy. The Management Consultants McKinsey and Co recently produced a report The Coming Demographic Deficit. You have to register on site to read the full report, but it is free and well worth it.
One of the chapters is dedicated to Italy. Below I reproduce the chapter summary which is pretty self-explanatory. The point is, whichever way you look at it the wealth producing capacity of Italy has peaked, and this is why that fiscal deficit is so important, the longer the deficit grows and accumulates, the greater the burden of paying it off. Perhaps before signing off here, and letting you get onto the McKinsey material, I could suggest why *I* think it is that there is so much liquidity, and such strong downward pressure on long term interest rates: simply put, for the reasons Bernanke suggests. Increased savings supply on the one hand, and diminished investment opportunities on the other, demand, side.
"Demographic pressure is expected to continue to drive down Italian household savings flows, further slowing the growth rate of household net financial wealth accumulation, with potentially significant implications for economic growth in Italy. MGI's analysis suggests that ? absent dramatic changes in population trends, savings behavior, or rates of financial asset appreciation ? Italian household savings will decline at 1.7 percent annually over the next two decades, causing a sharp slowdown in the growth of household net financial wealth, from the historical rate of 3.4 percent over the 1986-2003 period to 0.9 percent through 2024. By 2024, this slowing growth will cause net financial wealth to fall some 39 percent, or ?1.8 trillion, below what it would have been had the higher 1986-2003 growth rates persisted".
"The demographic transition has been underway in Italy for the past two decades. Since 1986 the median age in Italy has surged up 7 years, and over the next two decades it is expected to increase another 9 years, reaching 51 in 2024. Italy will have more than an estimated one million people over the age of 90 by 2024."
"With its aging population and the number of working-age households continuing to grow more slowly than elderly households, the demographic structure of Italy will become increasingly less able to support wealth accumulation, a good proxy for economic well-being. Slower growth in wealth is likely to mean slower growth in future living standards. For the economy, there will be less household savings to support a fast-growing retiree population, and it will become more difficult to support domestic investment and sustain strong economic growth. The fact that the rest of the developed world is experiencing or is about to encounter similar aging trends means that Italy cannot rely on inflows of foreign savings to make up for its domestic shortfall."
"To navigate smoothly through this transition and to offset this strong demographic pressure, Italian households and their government will need to take steps to reverse the decrease in saving and to improve the returns that households obtain on their portfolios. Mitigating the demographic forces already at work in Italy will be challenging and will require sustained, coordinated efforts by the public and private sector".
What Bernanke said in the speech ( The Global Savings Glut ) was this:
"Iwill argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving."
Later in the speech he spells this out in more detail:
"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad"
Now this speech has caused a fair degree of controversy due to the fact that it mainly has been seen as an apologetics for the high US current account deficit (which it - in part - is). But I would also argue that it has a deeper significance, in that this speech marks the arrival on the official agenda of what I would term the New Economic Paradigm: that is the idea that amongst the many important macro economic variables, one, population age structure, has a pride of place whose importance has not been sufficiently appreciated before.
Indeed, when I said Greenspan was being rather coy, I was retaining something up my sleeve, since I am aware that both Greenspan and Bernanke attended this conference at Jacksons Hole last summer where a prominent place was given to this paper from David Bloom, one of the evident 'brains' behind the New Economic Paradigm.
Undoubtedly the principal economic vital statistic for these theorists is the median age of any given population, and the most important information to have on hand when it comes to examining other *dependent* variables (like savings, investment, consumption, balance of payments, fiscal balance, labour force participation or productivity) is the age structure of the population.
Briefly put, what is argued is that each society has a prime saving age (for cultural reasons this may vary from one society to another): in the case of Italy (which we are considering here) this age group appears to be 35-64. The 65 plus age group progressively has more and more tendency to dis-save.
The other salient detail is the location of the 'boom generation': that generation which marks the inflection point in the demographic pyramid. Essentially the passage of this cohort into the dis-saving age group marks an important watershed in the evolution of any modern society.
Now for a specific case: Italy. The Management Consultants McKinsey and Co recently produced a report The Coming Demographic Deficit. You have to register on site to read the full report, but it is free and well worth it.
One of the chapters is dedicated to Italy. Below I reproduce the chapter summary which is pretty self-explanatory. The point is, whichever way you look at it the wealth producing capacity of Italy has peaked, and this is why that fiscal deficit is so important, the longer the deficit grows and accumulates, the greater the burden of paying it off. Perhaps before signing off here, and letting you get onto the McKinsey material, I could suggest why *I* think it is that there is so much liquidity, and such strong downward pressure on long term interest rates: simply put, for the reasons Bernanke suggests. Increased savings supply on the one hand, and diminished investment opportunities on the other, demand, side.
"Demographic pressure is expected to continue to drive down Italian household savings flows, further slowing the growth rate of household net financial wealth accumulation, with potentially significant implications for economic growth in Italy. MGI's analysis suggests that ? absent dramatic changes in population trends, savings behavior, or rates of financial asset appreciation ? Italian household savings will decline at 1.7 percent annually over the next two decades, causing a sharp slowdown in the growth of household net financial wealth, from the historical rate of 3.4 percent over the 1986-2003 period to 0.9 percent through 2024. By 2024, this slowing growth will cause net financial wealth to fall some 39 percent, or ?1.8 trillion, below what it would have been had the higher 1986-2003 growth rates persisted".
"The demographic transition has been underway in Italy for the past two decades. Since 1986 the median age in Italy has surged up 7 years, and over the next two decades it is expected to increase another 9 years, reaching 51 in 2024. Italy will have more than an estimated one million people over the age of 90 by 2024."
"With its aging population and the number of working-age households continuing to grow more slowly than elderly households, the demographic structure of Italy will become increasingly less able to support wealth accumulation, a good proxy for economic well-being. Slower growth in wealth is likely to mean slower growth in future living standards. For the economy, there will be less household savings to support a fast-growing retiree population, and it will become more difficult to support domestic investment and sustain strong economic growth. The fact that the rest of the developed world is experiencing or is about to encounter similar aging trends means that Italy cannot rely on inflows of foreign savings to make up for its domestic shortfall."
"To navigate smoothly through this transition and to offset this strong demographic pressure, Italian households and their government will need to take steps to reverse the decrease in saving and to improve the returns that households obtain on their portfolios. Mitigating the demographic forces already at work in Italy will be challenging and will require sustained, coordinated efforts by the public and private sector".
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