The Italian crisis continues to deepen

Sometimes financial life comes at your quickly and at others it feels like it takes an age. The current Italian crisis has managed in typically Italian style to have covered nearly all bases as we note the main driver simply being lack of economic growth meaning on a per head basis economic output is lower than when the Euro began, But if we move to the current there was a development yesterday, and context can be provided by statements from the new government that economic growth of 3% per annum is possible. From Italian statistics.

In 2018, GDP is expected to increase by 1.1 percent in real terms.The domestic demand will provide a contribution of 1.3 percentage points while foreign demand will account for a negative 0.2 percentage point and inventories will provide a null contribution. In 2019, GDP is estimated to increase by 1.3 percent in real terms driven by the contribution of domestic demand (1.3 percentage points)
associated to a null contribution of the foreign demand and inventories.

The initial response was surprise that Istat had held the previous forecast at 1.4% for so long. After all the Italian economy had been slowing for a while in quarterly terms from the peak of 0.5% and as it had been following a Noah’s Ark two-by-two style policy might have been expected to be 0.2% this time around, Except of course it was 0% reducing the annual rate to 0.8% which is below the current forecast.

If we look at the detail we see that such as it is there seems to be a reliance on consumption.

In 2018, exports will increase by 1.6 percent and imports will grow by 2.6 percent, both are expected
to accelerate in 2019 (3.2% and 3.5% respectively). Residential households consumption expenditure
is expected to grow by 0.9 percent in 2018 accelerating in 2019 (1.2%). The stabilisation in employment and the wages increase will support households purchasing power. Investment are expected to progressively decelerate both in 2018 (+3.9) and in 2019 (+3.2%).

In itself the trade decline is not a big deal as Italy has a strong trade position but it does subtract from GDP. It also poses a question for the Euro area “internal devaluation” model. Also it is hard not to question where that investment is going? After all in collective terms the economy is not growing. So we are left with domestic consumption relying on this.

Labour market conditions will improve over the forecasting period. Employment growth is expected to stabilise at 0,9 percent in 2018 and in 2019. At the same time, the rate of unemployment will decrease at 10.5 percent in the current year and at 10.2 percent in 2019.

Will the labour market continue to improve with economic growth slowing and maybe stopping completely? Frankly the only reason to forecast a better 2019 is the planned fiscal stimulus which of course is where the whole issue comes in.

Along the way we can get a new perspective from the fact that if we put 2010 at 100 the Italian economy peaked above 102 in early 2008 and has now recovered to just above 97.

Excessive Deficit Procedure

In essence the Euro area is stalling on the application of the EDP as it is hoping there might be a change of tack. Also I would imagine that it does not want to prod the Italian crisis with Brexit also up in the air. But there is something quite revealing in yesterday’s documentation from the European Commission.

Italy made a sizeable fiscal effort between 2010 and 2013, raising the primary surplus to over 2% of GDP and exiting the excessive deficit procedure in 2013 by keeping its headline deficit at a level not above 3% of GDP as of 2012 (down from more than 5% in 2009).

The reality if we look at the pattern of GDP was that returning to 2010 as our benchmark Italian GDP which was recovering from the initial credit crunch shock and rallying from ~94 to ~97 turned south from early 2011 and fell to below 93. Back then the EC and its acolytes were claiming that this was an expansionary fiscal contraction whereas if we allow for the lags it hit the Italian economy hard. There have been various mea culpas ( IMF mostly) and redactions of history since. But not only did Italy struggle to recover as even now we are only back to the 97 level where in GDP terms it started from of course it was then benefiting from both fiscal and monetary policy. Or as Mario Draghi likes to put it.

an ongoing broad-based economic expansion

If we look back to my article from the 26th of October Italy is now being told that fiscal policy cannot help and may make things worse too. So Italians may reasonably be annoyed and sing along with All Time Low.

‘Cause I’m damned if I do ya, damned if I don’t

Things that will not improve their humour is that it is the same Olivier Blanchard pushing this who was in the van of arguing that a fiscal contraction would boost the economy. Also that Euro area rhetoric is making the situation of their bond market worse.

Bond Market

Back on the 2nd of October I noted that the benchmark ten-year yield for Italy had risen to 3.4% but that such things took time to have an impact on the real as opposed to financial economy. Well it is 3.47% as I type this and I note that @liukzilla calculated that this phase of higher yields will cost Italy around 6.6 billion Euros in higher debt costs. Care is needed as it is not something to pay now but say over the next ten years as interest is paid. But a rising problem.

The new government suggested that retail investors might surge into the market but they have bought less than one billion Euro’s of this week’s offer which is at best a damp squib. Of course there are the banks…

Italian banks

Did somebody mention the banks? They are of course stuffed full of Italian government bonds and you can see the state of play courtesy of @LiveSquawk.

Italy’s 5 Star Movement Has Proposed Measures To Allow Unlisted Banks And Insurers Not To Mark To Market Gvt Bonds – RTRS Sources.

Yes that bad. But the circus for banks carries on regardless it would appear as we move to Reuters.

Carige said Italian banks had guaranteed they would buy bonds worth 320 million euros, with a further 80 million euros earmarked for private investors, possibly including existing shareholders.

So the tin can gets another kick as we note that this weakens the other banks which participate.


Let me add another dimension provided courtesy of the Financial Times Magazine and let us first set the scene.

Mafia syndicates in Italy have an estimated annual turnover of €150bn, according to a report by the anti-Mafia parliamentary committee in 2017.

They have moved into agriculture as it seems like easy money and the economic crisis gave them an opportunity as whilst conventional business struggled they had cash.

With margins as high as 700 per cent, profits from olive oil, for example, can be higher than those from cocaine — and with far less risk.

Also it gives you clean money to which Michael Corleone would nod approvingly. Here is one route.

A Mafia family could claim about €1m a year in EU subsidies on 1,000 hectares, while leasing it for as little as €37,000. “With profit margins as high as 2,000 per cent, with no risk, why sell drugs or carry out robberies when you can just wait for the cheque to arrive in the post?” he says by telephone from his home.

Here is an even more unpleasant one.

In February last year, 42 members of the Piromalli clan in Calabria were arrested and 40 farms seized in connection with the export of counterfeit oil to the US, sold as extra virgin, which retails for at least €7 a litre. A number of those arrested are now in prison awaiting trial. According to police, about 50 per cent of all extra-virgin olive oil sold in Italy is adulterated with cheap, poor-quality oil. Globally the proportion is even higher.

Makes me wonder about the bottle of olive oil in my kitchen and the “made in Italy” spaghetti. It is all nearly as bad as the video of Patrice Evra and the chicken or perhaps we should say salmonella.





14 thoughts on “The Italian crisis continues to deepen

  1. There are two fundamental problems here: firstly the management of the Italian economy is not within the control of its government and secondly that that external control is institutionally split between the ECB and the Growth and Stability Pact.

    The second of these displays the dysfunctionality of the EZ to full effect. If you have rates at the ZLB ( which you do) the burden of economic stability should taken up by fiscal policy. But fiscal policy is dictated by the GSP in Brussels and seems to pay no attention to this. Monetary policy is of course the province of the ECB. This structure neuters the authority and responsibility of the government concerned (not the sovereign government because that does not exist) whilst simultaneously splitting policy tools, which should be complementary, between different institutions.

    It seems to me this almost guarantees at the very least a severely sub optimal, if not outright bad outcome. It seems almost tailor made to drive divergence between members by driving those needing flexibility further into the depths, in complete contrast to the declared aim of increasing convergence.

    If you wanted to design an economic doomsday machine for a group of countries this would serve very well.

    • Hi Bob J

      In many ways the Italian economy has proven to be outside pretty much everyone’s control. The irony of the ZLB which perhaps should now be called the NLB is that the ECB has turned out to be a fiscal agent via the way its QE has driven bond yields lower. Germany still has negative yields out to the 7 year maturity so is still often being paid to borrow whilst running a fiscal surplus. Should this turn out to be more than an economic dip Germany will face it with interest-rates and yields still negative,

      Perhaps they will decide fiscal policy is a good idea when yields and costs are higher!

  2. The question I always wonder is exactly how long an experiment, in this case the euro, needs to run before people realise that it is the problem, rather than the solution. Italy has been in the euro for a long time now, but the much vaunted “convergence” promised by euro enthusiasts doesn’t seem to have happened yet. You have a weird, unsustainable system, where the bond markets have been beaten back by the ECB’s QE, so that borrowing is very cheap and then you try to control budgets by centralising budget making in Brussels. Then, you fine the country for breaking the budget rules, thus exacerbating the deficit or, as in the case of France and even Germany, you turn a blind eye to rule-breaking deficits.
    The Greek “bailout” is an extremely painful example of what it is like to be in the euro with an economy and government clearly unsuited to it. The same looks to be the position of Italy
    For those of you with strong stomachs, have a look at the market capitalisations of the top ten Italian banks. It tells you all you need to know about the real state of their balance sheets.
    I don’t see this ending well, with democratically elected politicians actually carrying out the manifesto in the blue corner and the EU in the red corner.

    • And the market capitalisation of the largest bank in Italy is more than double that of the largest bank in Germany while the largest bank in Europe is several times that of the largest bank in Italy and it is British – at least until Brexit – no idea what conclusion to draw.

      • Good points. On the Italian banks I would draw the conclusion that everyone thinks that they are bust because of defaulting loans (except the politicians).
        On the German banks, I would draw a different conclusion which is that German clearing banks shouldn’t dabble
        In derivatives!

  3. Shaun, I always like to prognosticate about Italy. I was on the FT yesterday asking why “retail” would rescue the Bond sale. There is a suggestion that within the current account surplus of the country there are savers. Savers dont exist in blighty anymore so we are unfamiliar with their behaviours. ( we only have child gambiling and unsecured debt growth of 9%, no savers).

    Any way apparently these “savers look at Government debt vehicles as a great repository for their cash. Except as you ably point out they have not galloped to the rescue. Another FT wag suggested retail deposits get stealthily recycled in to Govt bonds. I can imagine Banks buying bonds in quid pro quo, since the government grants them flexible debt terms… is this retail?

    Anyway I think we can agree from our own debt soaked island that the Italians also have rather too much of the stuff.


    • Hi Paul C

      Yes the Italian’s are savers and it is not that the government has been especially profligate to get a national debt of above 130% of GDP, it is more than GDP has struggled to grow. Actually there was a sort of recycling mechanism which went as follows.
      1. Italian saver gets little on his deposits.
      2. Bank tells him/her they can get more on these lovely bonds it is selling ( their own)
      3. Banks have tended to buy BTPs ( Italian government bonds).
      But the banks in some cases have defaulted on their bonds ( the Veneto banks come to mind for example) and Italy in the latest cases have had to break the new Euro area bail in rules to avoid ordinary investors being bailed in.

  4. Time for me to plug Misha Glenny’s excellent “How to Invent a Country” Radio 4 series
    which has 3 good episodes on the how what is now known as Italy came together.

    The fact that regional identity is so strong vs national identity is always going to make it culturally more likely that people will feel it acceptable to avoid paying taxes to the Nation State and claim subsidies from people they don’t like.

    On the olive oil front you should be using Rape Seed oil which is better for you, cooks at higher temperatures, has been used in British cooking since at least medieval times, if not earlier, and helps UK farmers.

    I do try and support Italian products when I can ( e.g. my titanium alloy glasses frames are from Italy and I’m addicted to gnocchi ) but the lack of domestic demand and tax collection isn’t helping them and having that large a shadow ecomonmy is a structural issue.

    A lot of bright gifted Italians are in the UK benefitting our economy and not Italy’s. What are the figures like on bain drain?

    • Hi bootsy

      Cheers for the rape seed oil tip. I switched to Sunflower Oil and then Olive Oil on health grounds but it is hard to keep up with that. I will have a listen to that show as have argued on here before that Italy could easily split.

      As to any “brain drain” it is hard to say as the growth of the population is a major factor in why GDP per head has performed so badly. As to data there was this from La Stampa in January.

      “In the last five years, more than half a million Italians have migrated to other European countries. According to data from destination countries, the number of Italians in European cities doubled from 2011 to 2015, or 64,000 to 136,000. ”

      Here is The Times Educational Supplement from the 4th of this month.

      “Higher salaries ‘needed to stem Italian brain drain’
      Leading Italian academics often leave the country, which struggles to attract highly rated foreign researchers”

      Sorry the detail is behind a paywall.

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