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Wither Italy?

by Metatone Fri Aug 22nd, 2014 at 04:42:03 PM EST

For those who notice, the bad pun is intentional...

From Pieria - an alarming piece that suggests Italian is basically doomed:

Italian Tragedy

Anyone with an interest in government finances and public spending must, by now, have developed a morbid fascination with Italy.

The country slid into recession again this month, wiping out not only its post-recession growth but much of its growth since it joined the Euro.

 Chart via Matt O'Brien at the Washington Post.

The pattern of Italy's GDP growth has become detached from that of the rest of the G7. Since the crash, all the other major economies have grown, albeit at different rates. Italy, though, is on a severe downward slide.

Chart via Ben Chu.

Some people blame the Euro for this but Italy was in trouble before it joined the single currency. Both Italy and the UK crashed out of the ERM in 1992. For the UK, this was the start of a decade of high growth but Italy's economy stalled in the years after and grew much more slowly for the rest of the decade. Briefly, in 1991, Italy overtook Britain and France to become the world's 4th largest economy. Since then, though, it has been a tale of slow decline.

The Italian government had borrowed heavily during the boom years and the slowdown saw its debt-to-GDP levels steadily rise.

Chart via Paul Krugman

This excellent piece by Economics Help explains the story in detail. The upshot, though, was that by the start of the recession, Italy's debt was way ahead of most of the other major economies.

Source: IMF World Economic Outlook 2014

But here's the twist. Italy reduced its deficits drastically in the 1990s. For many years now, it has run a primary surplus. This means that, before debt interest, its government revenue is higher than its public spending. Unlike many other countries, including Britain and the USA, it is not borrowing to fund public services and social security.

Chart via Igor Di Giovanni

It is, however, having to borrow to fund the debt repayments on its historic borrowing which is why, despite its primary surplus, it is still running a deficit and its debt is still going up.

Well worth reading to get the key points on the weakness of investment etc.

Some key points, which I didn't want to block quote up there, because that would be too much:

Italian Tragedy

Who's going to provide the investment to grow Italy's economy again? Its private sector is dominated by small firms who are traditionally reluctant to invest, its state running a primary surplus just to keep up with its debt and its educated people are leaving the country.

It's difficult to see how Italy will get out of this mess. Some say it should leave the Euro but to do so would be a de facto default with horrendous consequences for the rest of Europe. In any case, the country's other structural problems would still be there if it left the Eurozone. It could even speed up the brain-drain as rich Italians pick up their Euros and run.

More austerity is unlikely to help either. Italy's public sector finances have been running a surplus for over a decade. As Edward Hugh says, it would need to run a 6.6 percent surplus for another decade just to get its debt down to 60 percent of GDP. With a shrinking economy, falling tax revenues and a fleeing intelligentsia, this looks improbable.

The speed of Italy's decline is astonishing. Italians once celebrated displacing Britain and France as the world's 4th largest economy. Now, a mere twenty or so years later, a knackered state, with hardening arteries and on ECB medication, is trying to outrun a rising tide of debt, and losing. It is a depressing and rather frightening story.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Aug 23rd, 2014 at 04:54:16 AM EST
And some figures from Edward Hugh:

Italian Tragedy

The situation of the Italian economy is simply dramatic. Recently, a study has appeared which reveals how the current crisis (2007-2013) is in many ways much worse than the 1929-1934 contraction. In the present crisis, investments have collapsed by 27.6% in the five year period, against 12.8% in the interwar depression. GDP has declined by 6.9% against 5.1%. Italy, with the second largest manufacturing sector in Europe after Germany, has lost about 24% of its industrial production, going back to the 1980s level. No data is currently showing any sign of recovery. From the beginning of this year, the country has lost over 31,000 companies. Every day 167 retail units are lost, signalling an authentic disintegration of the retail sector. The automotive sector, a crucially important one for the Italian economy, has been constantly contracting: from about 2.5 million cars sold in 2007, sales in 2012 reached only the 1.4 million mark (the 1979 level) and they are still contracting this year. Construction, the other pillar of the national economy, is in rout: the 14% slump in 2012 is only the last in a series of difficult years. Home sales have dropped by 29% in 2012 against the already miserable 2011, to the 1985 level of 444,000 units, about half the number of 2006. Of course, the consequences of this economic disaster in terms of loss of employment are dire: unemployment is now at almost 12% and growing fast.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Aug 23rd, 2014 at 04:54:39 AM EST
[ Parent ]
Italian Debt Crisis | Economics Help

Italy was one of the most enthusiastic supporters of the Euro. It was hoped joining the Euro, would tie the Italian economy to the fortunes of the stronger northern nations. However, with bond yields rising and austerity measures failing to solve debt crisis - whilst simultaneously angering the electorate, people are now starting to talk of leaving the Euro (once considered a form of economic blasphemy) in Italy.

The tragedy is that Italy is not Greece.

  • Combined public and private debt is 260pc of GDP, similar to Germany and much lower than France, Spain, or the UK (UK total debt). With private wealth of €8.6 trillion, Italians are richer per capita than Germans.
  • Italy scores top on the IMF's long-term debt sustainability indicator at 4.1, ahead of Germany 4.6, France 7.9, the UK 13.3, Japan 14.3, and the US 17.
  • Italy has a primary budget deficit of 4% - something the UK is no where near. The fact that Italy is in debt crisis is partly a reflection of long standing debt problems, but more significantly it is a result of the Euro straight jacket which Italy finds itself in.

If Italy could devalue it would help boost exports and improve economic growth.

If Italy has an independent Central Bank to print money to buy bonds, Italy wouldn't be seeing crippling bond yields. This might give it the opportunity to grow out of the debt. But, instead they are being forced into policies of austerity which are exacerbating the crisis rather than solving it.

Too many thieves at the trough for 40 years, Italians strangely passive or gullible, the mob installing itself at the heart of everything remunerative during the Andreotti years, followed by Berlusconi era of football, trash TV and bridges to nowhere, The Church sitting on its shoulder blocking women's and gay's rights, welcome to the museum of beauty and majesty, administrated by a pack of howler monkeys while its wealth is plundered and stashed offshore.

Opening a business is a nightmare, taxes on business are cruel, and taxes on the average Joe even crueller.

The media is completely 'in the bag', the people have been dumbed down to almost American levels.

Scoundrels and mountebanks, crooks and liars...

The only glimmer of hope for Italy=✩✩✩✩✩

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Aug 23rd, 2014 at 07:50:49 AM EST
"If Italy has an independent Central Bank to print money to buy bonds, Italy wouldn't be seeing crippling bond yields. This might give it the opportunity to grow out of the debt."

I agree that having a Central Bank would help a lot.
But it's hard to talk about the opportunities for Italy to grow out of debt without at least a passing mention of things like secular stagnation in much of the developed world, and demographics in Italy (the whole of the Eurozone is affected, but Italy particularly so).

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Aug 23rd, 2014 at 11:40:10 AM EST
[ Parent ]
what an incredibly depressing diary.  i love italy.  sorry to read it is going to pieces.

are there significant different differences between regions?  are there some that are doing well, while are others are doing particularly badly?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Sun Aug 24th, 2014 at 05:41:26 AM EST
For those who notice, the bad pun is intentional...
Ah, okay :P

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Mon Aug 25th, 2014 at 08:03:50 AM EST
Some people blame the Euro for this but Italy was in trouble before it joined the single currency.

But how has joining the Euro helped in any way. That is like saying "They were injured before they were suffocated."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 25th, 2014 at 04:05:08 PM EST

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