Yesterday saw one of the themes of this website raised by a rather unusual source. The European Commission released this document yesterday.
Today’s 27 Country Reports (for all Member States except Greece, which is under a dedicated stability support programme) provide the annual analysis of Commission staff of the situation in the Member States’ economies, including where relevant an assessment of macroeconomic imbalances.
Greece is omitted presumably because it is all to painful and embarrassing although of course one of those presenting this report Commissioner Pierre Moscovici keeps telling us it is a triumph. Reality tells us a different story as this from Macropolis illustrates.
The employment balance stayed negative in January 2017, with net departures climbing to 29,817 from 9,954 a year ago, data from the Labour Ministry’s Ergani information system revealed on Tuesday.
But as we note that 13 countries in the European Union were investigated for imbalances or just under half with 12 found to have them ( oddly the troubled Finland was excluded) the Commission found itself in an awkward spot with regards to Italy. Here is the label it gave it.
excessive economic imbalances.
Which led to this.
a report analysing the debt situation in Italy
So let us investigate.
Italy’s National Debt
Firstly we get a confession of something regularly pointed out on here.
in particular low inflation, which made the respect of the debt rule particularly demanding;
No wonder the ECB is pressing on with its QE (Quantitative Easing) program and as I pointed out only yesterday seems set to push consumer inflation above target which will help the debtors. Also in that section was something awkward as you see it is a statement of Italy’s whole period of Euro membership.
the unfavourable economic conditions,
We have an old friend returning although of course pretty much everyone has ignored it even Germany.
namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3%; and (b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless it is sufficiently diminishing and approaching the reference value at a satisfactory pace.
Yep the Stability and Growth Pact is back although these days in the same way as the leaky Windscale became the leak-free Sellafield it is mostly referred to as the Fiscal Compact. The real issue here for Italy though is the debt numbers are from a universe far,far away.
Italy’s general government deficit declined to 2.6 % of GDP in 2015 (from 3% in 2014), while the debt continued to rise to 132.3% of GDP (from 131.9 % in 2014), i.e. above the 60% of GDP reference value. For 2016, Italy’s 2017 Draft Budgetary Plan7 projects the debt-to-GDP ratio to peak at 132.8%, up by 0.5 percentage points from the 2015 level. In 2017, the Draft Budgetary Plan projects a small decline (of 0.2 percentage points) in the debt-to-GDP ratio to 132.6%.
We get pages of detail which skirt many of the salient points. So let me remind them. firstly a debt-to-GDP target of 120% was established back in 2010 for Greece to avoid embarrassing Italy (and Portugal). Since then both have cruised through it which poses a question to say the least for this.
Italy conducted a sizeable fiscal adjustment between 2010 and 2013, which allowed the country to exit the excessive deficit procedure in 2013
So as soon as it could Italy returned to what we might call normal although whilst it runs fiscal deficits they are lower than the UK for example. Whilst the EU peers at them they are not really the causal vehicle here. Regular readers of my work will not be surprised to see my eyes alight on this bit.
the expected slow recovery in real GDP growth
This is the driving factor here as we note that even in better times the Italian economy only grows by around 1% a year ( 1.1% last year for example) yet in the bad times it does shrink faster than that as the -3.2% annual growth rate of the middle of 2012 illustrates. The Commission describes it like this.
Italy’s GDP has not grown compared to 15 years ago, as against average annual growth of 1.2% in the rest of the euro area.
Putting it another way the economy seems set to get back to where it was at the opening of 2012 maybe this spring but more likely this summer. In such an environment any level of borrowing will raise not only the debt level but also its ratio to GDP. Thus the pages and pages of detail on expenditure would be much better spent on looking at and then implementing economic reform.
A fiscal boost
This has come form the policies of Mario Draghi and the ECB.
taking advantage of the fiscal space created by lower interest expenditure, which declined steadily from the peak of 5.2% of GDP in 2012 to 3.9% in 2016.
Of course debt costs have lowered across the world but the ECB has contributed a fair bit to this gain of over 1% per annum in economic output. I doubt Italy’s politicians admit this as they rush to spend it and bathe themselves in the good will.
Monte dei Paschi
Another old friend so to speak but it does illustrate issues building for Italy as the Commission admits. Firstly to the debt numbers explicitly.
For instance, in 2017, both the deficit and debt figures could be revised upwards following the EUR 20 billion (or 1.2 % of GDP) banking support package earmarked by the
government in December 2016.
But also implicitly as we mull current and future economic performance.
At the current juncture, following the protracted crisis, banks are burdened by a large stock of non-performing loans and may not be able to fully support the
We left MPS itself on the 30th of December as it was socialised and in state ownership. You might reasonably think it would have been solved over the New Year break. Er no as this from the Financial Times today highlights.
Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.
There was always going to be trouble over whether this turned out to be a bailout, a bailin or a hybrid of the two. Has any progress at all been made?
The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses that creditors will suffer and the depth of restructuring needed to make the bank viable.
The creditor issue is one that resonates because ordinary Italian depositors were persuaded to buy the banks bonds in a about as clear a case of miss selling as there has been. The trouble is that the guilty party the bank’s management cannot pay on the scale required and nor can the bank inspite of it being in “optimal condition” according to Finance Minister Padoan.
Indeed some may be having nightmares about the return of a phrase that described so much economic destruction in Greece.
An Italian official said talks were on track.
This is a situation which continues to go round in circles. Europe concentrates on fiscal deficits and now apparently the national debt but ignores the main cause which is the long-term lack of economic growth. There is a particular irony that at every ECB policy press conference the Italian Mario Draghi reads out a paragraph asking for more economic reform and the place where it happens so little is his home country.
The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area.
Yet when the European authorities get involved we see as in the MPS saga that they “dilly and dally” as Claudio Ranieri might say. Exactly the reverse of what they expect from the Italian government and people. The next issue for the banking sector is that for all its faults the UK for example began dealing with them in 2008 whereas Italy has looked the other way and let it drag on. That poor battered can is having to be picked up.
My suggestion would be an investigation into what is now called the unregulated economy to see how much has escaped the net. Maybe people do not want to do so because they fear that it has increased but what is there to be afraid of in the truth?
Tip TV Finance