Italy’s economic weakness contrasts sharply with Prime Minister Monti’s hyperbole

One of the issues in the Euro area situation has been that a range of countries have come under pressure. The situation started with the smaller economies but then showed signs of spreading to the larger and hence more systemically important ones. This poses an obvious problem in itself but has been added to by the way that the so-called rescue systems of the Euro area depend on the stronger nations bailing out the weaker ones. As the list of weaker nations increases the number of stronger nations to support them reduces too in a system I have labelled an unstable lifeboat.

The European Stability Mechanism

This is an improvement on its predecessor as it has some capital behind it even if some of the capital is supposed to be provided by countries who plainly have no ability to do so. For example Greece will have to borrow the money to pay her share in an example of the type of financial engineering which got us into this mess rather than one which may help us out of it. The dangers of this are illustrated from an EFSF Newsletter.

The ESM will have a total subscribed capital of €700 billion comprising paid-in capital of €80 billion and committed callable capital of €620 billion.

If we feel extremely generous and allow that the weaker nations have capital to pay in which in some cases they do not ,how will they have “callable capital”? The only route for some will be to borrow it if they have to make the commitment described below.

against an appropriate amount of the authorised unpaid capital, which shall be called in accordance with Article 9(3).

The problem is that they will find themselves borrowing the money from the supposedly stronger nations which may tip them over the abyss too.

One of the nations in this situation is my subject of today which is Italy. Her capital share of the ESM is some 17.91% which as you can see is quite a potential exposure before were even allow for the fact that she may have to lend to others so that they can pay their share. On her own account this leads to a potential exposure of just over 125 billion Euros.

This matters for Italy because as she stands she is one of the most indebted Euro area nations if we look at her national debt to Gross Domestic Product (GDP) ratio.The latest numbers from Eurostat showed this ratio to be 126.1% and that it had risen by 4.4% over the previous year. So high and rising. However as well as her own problems Italy is finding that the “rescue” effort is adding to her public-sector debt just as she needs that least. Her share so far of the effort has been 1.9% of her GDP and we know that this will rise as we see today debate about yet another Greek bailout for example and one day the Euro area funds for Spanish banks will have to be paid.

How is the Italian economy doing?

Last week the Italian statistics office told us this.

In the third quarter of 2012 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.2 per cent with respect to the second quarter of 2012 and by 2.4 per cent in comparison with the third quarter of 2011.

This was perceived as good in the circumstances as it was an improvement on the second quarter. However it was a negative number and showed her economy to be firmly in decline compared to a year earlier. One of the reasons that her public-sector debt burden is rising is that what it is compared to -her economy- is shrinking.

Less well reported was this about her construction sector.

In September 2012 the seasonally adjusted index decreased by 8.0% compared with the previous month

So we can see that at the end of the third quarter it was still in decline and furthermore with an underlying seasonally adjusted index at 74.7 (2005=100) it is declining from a very weak starting point.

 Italy’s industrial performance

This morning has give us an update on the state of play here and it is not a happy one.

In September 2012 the seasonally adjusted (industrial output) turnover index decreased by 4.2% with respect to the previous month (-3.7% in domestic market and -5.3% in non-domestic market).

If we look at this numbers one matter leaps out of the page at me and that is that the export performance is worse than the domestic one. As so many nations are claiming improved export numbers we see a potentially disturbing issue here. There is potential for the fact that this September had 20 working days as opposed to last years 22 to be an issue but if we check we see this.

With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by 5.4 %

If we look at the underlying calendar adjusted index we see a reading of 111.4 where 2005=100 however this will mislead the unwary. This is because turnover indices include price changes or inflation. In September for example Italian Consumer Price Inflation using Europe’s standardised measure was running at an annual rate of 3.4% so as a rough guide we need to subtract that from the September 2012 annual comparison if we are looking to look at an estimate of volume trends. When you do that we see that the numbers are genuinely poor.

What about future trends?

There is a gauge for this as we have industrial new orders numbers too.

In September 2012 the seasonally adjusted industrial new orders index decreased by 4.0% with respect to August 2012 (-1.4% in domestic market and -7.4% in non-domestic market).

Again we see a weak number that is compounded by the fact that overseas markets are leading the decline. We can also compare the situation with last year for some more perspective.

In September 2012 the unadjusted industrial new orders index decreased by 12.8% with respect to the same month of the previous year.

As you can see the future does not look too bright when considered in that context. Interestingly for those looking for a calendar adjustment the Italian statistics office does not consider it to be relevant or useful. However it does produce an underlying index for the series which is at 97 where 2005=100. As we mull Italy being back to pre 2005 levels overall we see that external orders (-8.1%) are now falling rapidly and that for 2012 as a whole they are some 4.1% below the levels of the same period in 2011.


Today’s economic figures for Italy show the weakness that was evident at the end of the last quarter and if we look at industrial new orders we see that matters look likely to deteriorate as we move towards the end of 2012. If we move to unofficial measures such as purchasing managers indices we see that her services sector was at 46 in October (here below 50 indicates contraction) and her manufacturing sector was at 45.5. So we see that official and unofficial measures are pointing in the same direction which is downwards.

If we bring this message to Italy’s public-sector debt problem we see the scale of the challenge which faces her. In fact the danger is for something of a “blowout” as further economic weakness leads to higher fiscal deficits which are divided by a lower GDP. This will be compounded as the latest austerity package of 30 billion Euros bites ever more. So far we have a clear map of where that leads from the countries that have tried it and ominously the one area where they have shown a gain which is trade is not working at the moment for Italy.

Added to this will be the fact that at best there will be a drip,drip,drip of funds from Italy to some of her Euro area colleagues. Almost everyday the numbers change (aka rise) for Greece and it will not be too long before Portugal needs another bailout too. This is before we get to the more systemically important Spain. If the unstable lifeboat I have described above starts to founder then the drips will become a flood and may be too much for Italy.

The main hope is that she can mobilise her black economy but that has been an apparently insoluble problem for many, many years.

I found it interesting that President Monti confirmed my views over the weekend. The hyperbole and what I call anti-truth reached new heights.

Perhaps today, without the austerity measures brought in by the government, the euro zone would be no more

And yes it was backed up by a claim that Italy will not need a bailout. We know what usually happens next after that!


17 thoughts on “Italy’s economic weakness contrasts sharply with Prime Minister Monti’s hyperbole

  1. Hi Shaun
    Like the new look!
    Northern Italy is more like Germany/Switzerland than its southern half.( are there seperate economic stats available?). Historically its a very young country. I wonder if the EU ‘dream’ of federalisation’ is realised how many ‘countries’ as we now know them will continue to exist. Greater Germany could stretch from the Baltic to Florence and incorporate much of eastern France ( south of Strasburg) over to the Czech republic and western Poland. The rest would be vassal states. Much like right now in fact.

    • i think that there was a plan drawn up in the 1930s to achieve these goals, but the implementation phase went wrong and resorted to violence.
      I am sure that the urge to split back to ethnic areas will become ever stronger. My list would include
      1. Already happened : Yugoslavia, Czechoslovakia
      2. In progress: Scotland, the Basque area of Spain, Belgium
      3. Possibles: Wales, catalan districts, Italy.

      i expect that there are many more…

      • Freedom for Kernow! 😉

        Seriously, how would Cornwall build a successful independent economy? She seems like a mini Portugal in waiting. Fishing/agriculture/tourism but no real industry allied to massive social costs leading to Brussels bailout.

    • The Sud Tyrol province is a culturally Germanic area having been included in Austria before world war one. They are making some separatist political noise too.

      With all these border areas it is often impossible to draw a line. The border province becomes a patchwork mix of the cultures.

      It is highly unlikely that Roman politicians would allow the industrious north to leave because doing so would heavily reduce their tax income.

    • Hi JW

      Thank you, I had an experiment over the weekend and settled on this one.

      As to your question there are updates on this front from the Bank of Italy. From the 9th of November.

      “The autumn update of Economic Developments in the Italian Regions is divided into two parts, an account of the latest cyclical development; followed by a collection of monographic essays.

      The cyclical analysis shows that during the first 9 months of 2012 economic activity has decreased in all parts of Italy; in the regions of the South it is now at its lowest since the spring 2009. In the rest of the country, output was partly sustained by the expansion of exports. Even so, export growth slowed in the first half of 2012 in all parts of Italy, including the regions of the Centre, where foreign sales stagnated after nine quarters of buoyancy. Italian manufacturing and service firms’ total sales and profitability diminished.

      In the first half of 2012 the unemployment rate rose by 2 percentage points in the Centre and North and 4 points in the South, due in part to a significant growth of the labour force. Employment decreased slightly in all parts of the country except the North East, where it remained stable. The number of hours of wage supplementation paid turned back upward, most markedly in the Centre and in the South. “

  2. Thanks Shaun – theses Eurozone studies are very enlightening.

    So I have to ask – should Italy exit the Euro, default and devalue ?

    • Hi DaveS

      That is one route out of the current problems. However Italy does have strengths and a private sector with savings so for her there is an alternative route. But the problem is that it would involve mobilising her black economy and some of the private-sector savings. It would represent a complete change in the way that Italy is run and governed.

      Muddling on just leads to an ever more indebted public sector.

  3. Hi Shaun,

    I like the new layout and it also looks much better.

    I see Mindful Money is now under new management, but I presume with this update, you are staying in your “Back to the Future” home?

    What is happening in Europe is from what I can see a repeat of the 1930’s mistake of staying in the Gold Standard during a depression at the wrong exchange rate. With austerity measures we now know from the OECD that each 0.5% of austerity causes 0.9 to 1.7% drop in GDP. Most of the Eurozone seem to currently be on a race to the bottom! Most of the austerity is also being carried out by their respective governments in the most economically damaging way of front loading tax rises and back loading public sector cuts.

    Italy with its austerity and falling GDP and its rapidly rising debt to GDP is heading into Greek territory. Okay, they have a much bigger manufacturing base, but also much more to lose if their manufacturing base keeps contracting.

    Something that is currently very topical and shows how out of touch the Euro gravy train and elite are, is the deadlock over the EU 2014-2020 budgets. They are preaching cuts and austerity to many Eurozone countries and at the same time demanding a 6.3% real term rise to their budget. They complain about Greece fiddling the figures to join the Euro express and their bailout economic progress, while due to widespread fraud, the EU auditors refuse to sign off the EU accounts year after year! They preach austerity, living within your means to countries and political leaders while needing an emergency top up this year to EU funds. They replace prime ministers, with unelected officials to to carry out their austerity agendas, so lets have the reverse, get rid of Van Rumpuy and Barroso and replace them Farage and Hannan, who I’m sure will be able to balance this years books and won’t need a 6.3% budget rise, in fact with them in charge I think the EU costs might drop considerably!

    I see over the weekend that the DT have found that the BOE QE program is potentially sitting on £48bn of losses that the £35bn and future interest was mean’t to cover. Still stealing off of Peter to pay Paul, must be right as Japan and the US do it. Another can kicking exercise, which our children and grandchildren, will be paying for, while those who committed the crime, will be enjoying their gold plated, index linked pensions, their generous fees for writing their memoirs, the after dinner speech circuit, not to mention the odd city directorship or two. While the population at large, sweats away to earn and pay the taxes to cover this and many other follies.

    • I see that you are just like me – you start calm and then, when the monumental theft is spelt out, you get more and more angry.
      Don’t forget the complete lack of democratic accountability in Europe, the MPs’ expenses here, the ridiculous tax evasion practised by anyone rich, non-dom or indeed major companies, the bankers… just trying to raise your blood pressure!

      • Talking about rising blood pressure. How many Romanians/Bulgarians etc have used the Dublin-Belfast-Cairnryan route to mainland UK without any need for passports or photo ID, just a train ticket bought on-line?

    • Hi,
      I believe Shaun referred to potential losses on QE in his excellent post back on the 12/11/12 regarding monetizing debt by the BoE way before the DT.

      • Hi Hoppingpot

        Thank you. For those who are unaware of what has happened here let me explain.

        The UK Gilt market has been in a strong bull market which has led prices to rise. So that bonds issued at 100 have risen to 110,120,130.140 and even 150 in one case.. But if you buy at 125 for example and then hold the Gilt to its maturity you only get 100 or what is called par. So on the capital element you have made a loss.

        This needs to be considered against interest or coupon gains and assumes you hold all the Gilts to maturity for simplicity although I believe that we will not always do that.

  4. “In September 2012 the seasonally adjusted index decreased by 8.0% compared with the previous month”

    Is the market in property protecting itself Europe over by some involuntary feedback loop? Simply secure the investment by stopping building and limiting the supply.

    Are they building in Germany and Austria? Or does construction so rely on public money it has been hit for six by austerity measures?

    As someone who depends on the construction sector via a long convoluted service sector tether I would really like to know! I would say there are some signs of activity in the UK sector, at least in the preparation and planning stages.


    • Hi Redbanner and welcome to my blog.

      I am not an expert on the property situation in Italy did I do recall a discussion a while back on here about house price falls. I do know that austerity has invariably involved cutbacks in capital spending which invariably hits construction.

      As to the UK sector there was for once some better news discussed today.

      “One bit of #UKconstruction good news Architectural & eng. services annual turnover up 10.6% y/y (down to o/s work?)

  5. I’m Mr Angry too!! Seriously, I expect the present economic conditions to bring forward the usual political upheaval that always accompanies depression eras. I think people just assume that the governments of these countries will have the actual say, but there are quite a few elections pending in 2013, among which is Italy I understand. Isn’t Beppe Grillo making a strong showing in the polls there? He sounds a joke candidate but he is an anti-euro and even anti-eu politician. He and others like him might be more seriously listened to before very long. Even here, the wind seems to be blowing a bit stronger re the anti-eu case, even though such rumblings have been heard before – this time around I think they may be more significant, particularly if events in the eurozone unfold as we all rather feel they might.

  6. Hi Shaun, After the IMF u-turned a few weeks ago on the austerity/multiplier debate I was expecting a change in direction yet I am shocked to read Montis comments above! And its amazing to see some mainstream press still giving these people support. Heres the Wallstreet journal praising Rajoy:

    It does seem that despite all the empirical evidence firmly stacked up against austerity, and with the technocrats still pressing on with the austerity program regardless that there must be another agenda here? Could it be that the big Northern European banks want to buy up the peripherys state assets at knockdown prices? Or is Germany really serious about political union? Political union is a fantasy right?!

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