The economic problem that is Italy

Today is ECB ( European Central Bank) day and the struggles and problems of the Italian economy will be on the mind of its President Mario Draghi each time he thinks of his homeland. Actually as both the ECB and OPEC decamp to Vienna in Austria there can only be one musical accompaniment which is from Ultravox.

The feeling has gone only you and I
It means nothing to me
This means nothing to me
Oh, Vienna

The song itself also became famous for reaching number 2 in the UK charts and being kept off the top spot by Shaddap Your Face as we note that life is often not fair.

Economic Growth

The update from earlier this week told us this.

In the first quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2015 and by 1.0 per cent in comparison with the first quarter of 2015.

The good news is that this is a much improved performance on the -2.7% of the same quarter in 2013 as we note that annual economic growth did not become positive until the first quarter of 2015 and barely (0.1%) at that. So any growth at all is welcome. However in spite of the chorus of claims from official sources and the media about an Italian economic renaissance I note that annual growth is only 1% and that it has just edged lower from 1.1%.

Whilst Italy has a solid trade position the changes in it will not be welcome as after all its economic growth rate is lower than its main trading partners.

imports (increased) by 1.2 per cent, while exports decreased by 0.4 per cent.

The problem of perspective

If we look back we can again briefly have some good cheer. Back on the 12th of February I pointed out this from Nick Kounis of ABN Amro.

The ‘good’ news is that this is above ‘s trend growth rate of zero.

However the cheer is bittersweet as we mull numbers like this.

between 2001 and 2013 GDP shrank by 0.2%. (The Economist)

That is hardly an advertisement for Euro area membership! In fact whilst the situation has improved slightly since I posted this back in February there is still a shock effect from this.

Here we get a direct link to the current situation as you see in the better times Italy has raised itself from its economic topor to a growth rate of around 1%. Well right now is a better time for the Euro area and Italy has managed only 1% again. This is in spite of all the promises of changes and reform. It seems to be trapped in its own version of groundhog day.

It is also helpful to consider the individual position because it is significantly worse than the aggregate one. If you look back to the 0.2% decline in 12 years above well the population did this.

That statistic gets even worse when you allow for the fact that the Italian population was expanding over that period by around 7% so per person the situation was even worse.

I have taken a look at the annual numbers and in the year it adopted the Euro (1999) Italy had a GDP per capita of 26,353 Euro’s and in 2015 it was 25,479 Euro’s or 3.3% lower (2010 prices).

Interesting even the Governor of the Bank of Italy referred to it this week.

that Italy has the potential to recoup the growth gap it has accumulated in the last twenty years.

Looking Forwards

We know that official denials are troubling to say the least so this from the economy minister Padoan yesterday poses its own question.


Italy was apparently “turning a corner” which would be great news as it seems to have been at that same corner since 1999. Perhaps he has already forgotten that he told us of “extraordinary circumstances” as the Wall Street Journal reported this back on April 8th.

Prime Minister Matteo Renzi’s government sees the Italian economy growing by 1.2% this year and 1.4% in 2017, down from the previous forecasts of 1.6% for both years.

Even manufacturing sentiment appears to be fading according to the Markit Purchasing Manager’s Index.

Italy’s manufacturing sector remained in growth territory mid-way through the second quarter, although the latest respective increases in output and new orders were the slowest in three months…….However, the index sank to its second-lowest level in the past 15 months, as the rates of expansion in output, new orders and employment eased.


This is an ongoing problem as Tuesday’s numbers reminded us.

In April 2016….Unemployed were 2,986 million, +1.7% over the previous month…. unemployment rate was 11.7%, +0.2 percentage points over the previous month……Youth unemployment rate (aged 15-24) was 36.9%, +0.2 percentage points in a month,

This is not the “turning the corner” that economy minister Padoan presumably meant. There was a little solace to be found in the fact that employment rose but unemployment and in particular youth unemployment do not seem to be responding much. Actually the past was worse too as the March unemployment rate was revised up from 11.4% to 11.5%.

National Debt

The address by Bank of Italy Governor Visco at its Annual Report on Tuesday pointed out this.

The increase of the ratio of debt to GDP, from just under 100 per cent in 2007 to almost 133 per cent last year, is largely a consequence of the crisis..

He also explained why this has happened.

If during that period real GDP growth had been in line with that of the previous decade and the deflator had evolved in keeping with the inflation target for the euro area, the debt burden would have risen by only 3 percentage points,

You may note in their why he is so keen on inflation! Of course workers and consumers in Italy would have the opposite view. Also he was unsure about the plans for debt reduction this year.

The way in which the macroeconomic context will evolve could hinder the achievement of this goal in 2016.

This is a familiar theme for the national debt for Italy which follows part of the Mad Hatters Tea Party.

“The rule is, jam to-morrow and jam yesterday—but never jam to-day.”
“It must come sometimes to ‘jam to-day,’” Alice objected.
“No, it ca’n’t,” said the Queen. “It’s jam every other day: to-day isn’t any otherday, you know”

With Mario Draghi and the ECB such enthusiastic buyers of Italian debt (117.8 billion Euro s so far)  the interest cost of this is remarkably low but this hides two problems. Firstly the fact that the capital burden gets ever higher and secondly that politicians will move to fill the “spending gap” created which means that the ECB is as Coldplay put it.

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,

How could it stop QE now?

The banks

Apparently they are doing really well and supporting the economy.

Banks are actively seeking to use the abundant liquidity at their disposal, above all by lending to firms in a stronger financial position ( Governor Visco)

You may note that “actively seeking” is different to doing and wonder how strong a firm’s financial position has to be to get bank lending?! Anyway we have a claimed triumph if we switch to economy minister Padoan.

Italy banking system avoided crisis due to Atlante

Ah the bank rescue fund! How is that going? Credit & Macro PM helps us out.


On the 11th of May I looked at the problems use of Atlante caused for the other Italian banks but a practical example of this can be seen by the share price moves in response to the Veneto Banca news. The Google Translation of Ilsole24ore is clumsy but the gist of it is clear.

Milan Stock Exchange, with the increase of Veneto Banca at great risk, collapsing the Popular Banco Popular which closes at -7.3%, -5.1% and BPM Bper to -5.47%; Unicredit leaves on the ground 4% with Equita who judges the inevitable increase in capital (follow the industry trends).


This tale is a sorry one for a beautiful country with much to commend it. I understand why it wanted to join the Euro as in essence it seems quite happy to bypass its own establishment in the hope of finding more luck in a Europe wide one. Sadly in economic terms that has created its own “lost decade” concept which has lasted all of this century. You are in a bad place when a longer-term perspective puts you in a worse position than Greece as we return to the “girlfriend in a coma” theme.

Perhaps some solace can be found in the size of the shadow economy. A research paper by Friederich Schneider estimated it at 20.8% of GDP in 2014 which was a little higher than the European average of 18.3% and well below Bulgaria at 31%! In January Business Standard reported this.

Italy’s black is worth at least 540 billion euros ($752 billion), or around a third of its gross domestic product (GDP), research agency estimated in a report.

The Italian accounted for around 270 billion euros in dodged taxes, Eurispes highlighted…..In addition, more than 200 billion euros were generated by the criminal economy, according to Eurispes.

I note the wide variation and cannot avoid the thought that some of what we used to count as the shadow economy ( Prostitution and illegal drugs) are counted these days.

Just after I posted this came this news from @creditmacro.


Me on Tip TV




22 thoughts on “The economic problem that is Italy

  1. Very interesting (and depressing analysis). The thing that I cannot understand is how the Euro is not more discredited in financial circles. I would ask what more evidence do you need of its malign effect on the southern European states than:
    1. Negative growth over more than a decade, with ever-increasing debt;
    2. Youth unemployment above 35%;
    3. The same or worse applying to Portugal/Greece/Spain.
    I am just amazed that there is not more political trouble, given these figures and the stark contrast with the German statistics. It looks more and more like a club suited to one country.

    • Hi James

      i think that many if not all southern European populations hoped that a more central rule would benefit them. They all had and have their problems with corruption etc and hoped for better. For a while it seemed to work but that changed and it is taking a while for that to get through because the same establishment’s ironically became the biggest beneficiaries. Look at the increased number of jobs for the political class alone.

  2. Ha! Joe Dolce gets a mention via his awful number 1 hit – which is still the best selling Australian-produced single of all time.. You’re right Shaun, it’s not fair.

  3. Just wondering if Mario “Joe” Draghi sits in his bath each morning singing:

    What’s-a matter you? Hey! Gotta no growth.
    What-a you t’ink you do? Hey! Why you look-a so sad?
    It’s-a not so bad, bond yields a-keepin’ pace.
    Ah, shaddap-a you face!

    • Hi Andy Z

      It is a shame he did not sing that at the ECB presser this afternoon. It would have livened up a particularly dull session where at one point he even read out some of the Introductory Statement again. Mind you many people want to forget that song!

  4. Great TV interview, Shaun. You express your ideas just as clearly in interviews as you do in print.
    Zak Mir wondered if computers were in the UK CPI. I checked and both PCs and tablet computers were priced items in 2015. I don’t know when the tablet computers were introduced but the PCs have been around a long time; they were already priced in 2003, and probably earlier. As far as I know, there has never been an attempt to estimate new goods bias in the UK CPI in general, i.e. the upward bias in the measured inflation rate due to failing to incorporate pricing of new goods in the index in a timely way. There is Mr. Mir wasn’t making the argument that the new good bias how when they were introduced. Bank of England economist Alastair Cunningham made what he rightly called a guesstimate that the new goods bias for the RPI at that time was in the range of 0.0 to 0.15 percentage points, so one could assume a point estimate of 0.075 percentage points. I expect that the omission of housing prices from the CPI inflation rate is a lot more serious problem.

    • I have never understood how technology improvements are accounted for. For example, in 1990, almost no-one had air-conditioning in a car, but now it is common. Do they:
      1. Just say a car is a car (and how does this work when models change?)? or
      2. Do they go back and add in air-conditioning as an extra to the old car and compare?
      3. Do something else altogether?
      While many commodities do not change over time, many do. Again, when I was young, you could not get, say, strawberries in the winter, but you can now. How do you compare things now when they were simply not there years ago? I know that the basket of goods changes, but then how can anyone pretend that we are comparing like with like over any length of time?

      • “how can anyone pretend that we are comparing like with like over any length of time?”

        as things are imputed as well this makes the metric even more bogus than before .

        the types of pot you can get now are much more in variety and strenghts , yet alone how do you measure its improvement to life considering its illegal!

        as for negotiable affection , the £20.00 quick one in Newquay compared to Battersea Russian dolly ?

        Specific requirements are upgrades and how counted? whips, leather boots and k-y?

        Well atleast popcorn isnt imputed …. yet


      • James, I can tell you how such problems have been handled in the Canadian CPI. Shaun would probably know if the ONS does something different in UK consumer price indices. Statistics Canada got quite detailed information from the major vehicle manufacturers on new models. If air conditioning were added to a model, the production cost of making the change would be the basis for the quality adjustment. Also, sometimes an option price would be available for air conditioning or some other feature from the previous year. If the option price was the basis for the adjustment, usually only a fraction of that price would be used to make the adjustment since it would obviously be cheaper to add it to every car. Cost-of-living-index purists don’t like this approach because it doesn’t reflect consumer valuation of an improvement, but in most cases it probably isn’t far off. A manufacturer is unlikely to spend £100 adding a feature unless he thinks it is worth at least that much to the customer. I haven’t worked at StatCan since 2012Q1 so they may do quality adjustment there differently but I doubt it. I know they were having increasing difficulty getting good co-operation from the manufacturers the last years I worked there, which is probably common in national statistical institutes. For a while air conditioning was a standard feature in US cars, but not block heaters, and the reverse was true in Canada, but I don’t think that’s true any longer. The last two cars I bought both had air conditioning but not block heaters. Maybe it’s due to global warming, sorry, I meant to say climate change.

        • Hi Guys

          The UK situation is similar but the Technical Manual (2014 version) is imprecise.

          “Direct comparison
          If there is another product which is directly comparable (that is, it is so similar to the old one that it
          can be assumed to have the same base price), for example a garment identical except that it is a
          different colour, then the new one directly replaces the old one and its base price remains the same.
          This is described as “obtaining a replacement which may be treated as essentially identical”, and is
          equivalent to saying that any difference in price level between the new and the old product is entirely
          due to price change and not quality differences.
          b. Direct quality adjustment
          This is the preferred method of dealing with the situation where a replacement product is of a
          different quality or specification. An attempt is made to place a value on the quality, or specification,
          difference and the base price is adjusted accordingly. This section discusses quantity adjustment
          and hedonic regression. Another method of direct quality adjustment, option costing, can be used
          when a product changes in specification and it is possible to value separately the components that
          have changed. “

  5. so how do you make a political union from such diverse and , frankly , corrupt economies ?

    So long as they serve the Franko-German empire I think , no one in Brussels will care ( too much pot and leather )


  6. Shaun, this is my third attempt to post! Server keeps blocking me.

    Italy’s woeful situation should not be happening if the so called Junker plan is working. I raise this issue because i have just read that it is being extended by the EU without any public consultation or proof that it is working. Britain has contributed £6.0 billion to the European Fund for Strategic Investment and will be on the hook for further contributions now that the plan is to carry on for another two years (and may become permanent). Are these sums included in the figures politicians are quoting as what we contribute to the EU? I suspect these amounts may be over and above regular payments!

    If the Junker plan was working then I suspect they would be shouting it from the rooftops hence I wonder where the money has gone? Looking at Portugal, Greece and Italy I suspect the plan has failed to deliver.

    Anyone know if these sums are extra to what we pay to the EU?

    • Hi Pavlaki

      Sorry you have been having trouble posting. I have taken a look and cannot see any reason for it at this end but please let me know if it happens again.

      As to the EFSI I think I can help out via some research I did on the European Investment Bank. Ironically it was Italy which made me look as they published the sum they put towards it. So where was the UK’s? When I asked I was told that the EIB money is only accounted for should it be written off! So it is fine until it isn’t or a binary type of accounting…..

  7. “more than 200 billion euros were generated by the criminal economy, ”

    illegal and un accounted for

    does not generate tax either

    anyway since when has a thief been a customer ?

    Poor Italy , so beutiful and at the same time cursed……. perhaps we’re needed in the EU to pay for their criminal class (!) ( as if our needs the competition )


    • Hi Forbin

      Here is the other side of the coin from the Guardian earlier this week.

      “The financial services industry based in the City of London facilitates a system that makes the UK the most corrupt nation in the world, the anti-mafia journalist Roberto Saviano said at the Hay festival.

      Saviano, who has been living under armed police guard for more than 10 years after writing an expose of the Neapolitan Camorra, said London’s banking institutions were key components of “criminal capitalism”, which laundered drug money through the offshore networks.

      He said: “If I asked what is the most corrupt place on Earth, you might say it’s Afghanistan, maybe Greece, Nigeria, the south of Italy. I would say it is the UK. It’s not UK bureaucracy, police, or politics, but what is corrupt is the financial capital. Ninety per cent of the owners of capital in London have their headquarters offshore.”

  8. No-one quite seems to mention the fundamental problem with southern Europeans – that they are idle and inefficient.

    Many in northern Italy probably regret leaving the Habsburg Empire and joining Naples in a swell of nationalism. Take heed.

    • Maybe, but you might compare how hard subsistenance farmers work in Romania & Bulgaria compared to the British underclass who have never worked and never intend to contribute ….

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