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ch is obviously needed but is not perhaps as pressing as the growth and debt problem leaving the suspicion that he is more interested in getting re elected than anything else indeed the fact that he needs the support of the discredited former prime minister silvio berlusconi to get the reform through with any kind of urgency see italy slips back into recession as new pm seeks berlusconi s help has lead critics of the two institutional parties to suggest the reform may be more about getting rid of newcomers like beppe grillo s five star movement than anything else see renzi slammed for coup over senate changes to date renzi s government which is almost operating outside real historical time in terms of economic issues has made little progress on the sort of reforms which might help the country recover some kind of growth like those to the judicial system and the labor market the only measure that could be considered vaguely pro growth that his government has enacted was the 80 euro bonus delivered to low wage workers hasn t boosted the economy as its proponents claimed the measure seems more cosmetic comparable with josé luis zapatero s ridiculous plan e in spain and only reinforces the impression of politicians fiddling while rome burns the business lobby confcommercio which was highly critical of the measure calculated that consumption was boosted by just 0 1 in june the first month in which the tax relief was operative in their press release they said italian families were holding back from shopping because their uncertainty about the future was stronger than the actual increase in funds in their pockets despite this prime minister renzi continues to insist that his government s economic strategy is sound and will lift the country out of crisis in a lengthy interview broadcast on la7 television following the announcement of the gdp results renzi said that his government was determined to get the economy back on track but in due course we will work better and harder but i promised to change direction not to change the universe in three months time renzi said adding that only a comic book superhero could turn around the economy in a matter of months calmly serenely we are taking this country by the hand and pulling it out of the crisis renzi told listeners the problem outside observers are having is not in seeing the complete turnaround renzi is right here this involves a long painful road but in identifying the first baby steps that are being taken and fears about mr renzi s grasp on italy s finances were fanned again last week when spending review commissioner carlo cottarelli highlighted the tensions which existed in the government over the prime minister s spending plans in a post on his blog mr cottarelli who was appointed by letta and was previously director of the fiscal affairs department at the imf said that earlier savings were already being used by parliament for other expenditure meaning that in the longer term they could not be used to reduce taxes on employment which is what they were intended for renzi normally responds to critics that all points of view are valid but 11 million italians think differently in a clear reference to what he perceives to be his electoral support but even this will eventually wane if progress is not seen to be made on the economy the ft quotes wolfango piccoli analyst at rome based think tank teneo to the following effect as prime minister matteo renzi struggles to make progress on political reform it is becoming increasingly clear that his government lacks an original and coherent plan for the economy to add insult to injury more bureaucratic delays mean that the treasury will not hit its target to raise 12bn from privatizations this year there are also concerns about the outcome of the european central bank s stress tests and asset quality review of the country s leading banks bankers point out that if an italian bank needs a bail out the state s coffers will not easily be able to support it of course here we have a mighty instrument which draghi can use to twist renzi s arm another issue is labour market reform the controversial article 18 of italy s workers statute is just a symbol and debating it is a pointless exercise renzi told state broadcaster rai 3 last week the comments came after interior minister angelino alfano who comes from the new center right ncd party called for its abolition article 18 of the 1970 workers statue is a law that forbids companies with over 15 employees from firing people without just cause the italian prime ministers reluctance to tackle the labour market issue is understandable any attempt to really change italian labour law would be deeply unpopular on the left and even among many in his own party and a direct clash with italy s unions would surely cost him votes if his plan is to hold elections after passing a new electoral law more fiddling while rome burns so which way for the ecb evidently members of the eu commission ecb governing council members and senior political leaders in berlin amsterdam or paris are neither theoreticians nor intellectuals the secular stagnation hypothesis is at this point more akin to a theoretical research strategy than a workable template for policy making and policymakers are understandably reluctant to take decisions on the basis of what is still largely a hypothesis as the editors of a recent book on the topic put it in their introduction secular stagnation proved illusory after the great depression it may well prove to be so after the great recession it is still too early to tell uncertainty however is no excuse for inactivity most actions are no regret policies anyway as they suggest the risks here are far from evenly balanced if countries like japan italy and portugal are suffering from some local variant of one common pathology then normal solutions are unlikely to work and matters can deteriorate fast naturally the ecb can go down the abenomics path and institute large scale sovereign bond purchases even while the commission turns an increasingly blind eye to higher deficit spending at the country level but it is far from clear that abenomics works see here and if it doesn t what happens to all the accumulated debt on the other hand time always has a cost letting things drift further means letting debt levels rise and risking testing market patience and this becomes especially important in the cases of italy and portugal the longer time passes the more difficult it is going to be for anyone to convince themselves that the debt of these countries is sustainable so there may come a point after which the germans simply will not allow draghi to buy italian bonds without a prior haircut ok they ve said they won t do more psi but they ve said a lot of things and the cost of irritating investors is limited when you have a regional current account surplus and a central bank buying bonds maybe the costs of the euro widowmaker trade will be borne by all those eager bond purchasers who thought nothing could possibly go wrong i am sure german politicians would decide a loss of credibility on psi would be less costly to them than getting german taxpayers on the hook for current italian debt levels especially in a country where they are now proudly announcing they have reduced government debt for the first time in more than 50 years so in this case maybe the turkeys just did vote for xmas the thing is despite the meeting between draghi and renzi who may also be a turkey by xmas nothing substantial is going to happen in italy the government is under no pressure to ask for help and doesn t even feel it needs it and draghi won t act before things change gridlock with rising debt naturally in the short term the mario draghi ultimately has my back feeling will still prevail but with markets continuing to finance debt levels that any official study will soon have to recognize as unsustainable lack of proactive policies from the ecb will only fuel concerns that the size of the pill may become just too big for the bank to persuade germany comfortably swallow leaving the specter of private sector involvement to once more rear its ugly head how do you tell people who have just sacrificed hard to get their debt under control that they are now about to help pardon 50 of someone else s it simply doesn t make sense these arguments are developed at greater length in my new book is the euro crisis really 0ver will doing whatever it takes be enough on sale in various formats including kindle at amazon posted by edward hugh at 1 10 pm no comments sunday may 18 2014 on the trail of italian debt looking for trends and correlations in that landslide of economic data which arrives day in and day out on our desks is normally something akin to trying to find a needle in a very large and raggedy haystack from time to time however some things are just to obvious not to be noticed like the ever rising levels of debt on the eu periphery and the growing demand from political leaders there for some kind of qe type initiative from the european central bank for example sure there is no obvious causal connecting here the missing middle term linking the two would probably be all that ongoing deflation risk but the inability of governments to contain their debt levels is a consequence of having low growth and low inflation as is the wish being ever more insistently expressed by southern europe s political leaders that the ecb were more like the bank of japan in this context the latest batch of euro area gdp numbers must have come like a bucket of ice cold water thrown across the luke warm recovery hopes of policymakers in frankfurt brussels and berlin only the german economy put in a really impressive performance 0 8 quarter on quarter spain s economy also did well but the 0 4 quarterly growth failed to convince due to the fact that the main influences on the number were a 1 2 fall in imports and a 0 4 negative inflation calculation see my analysis here france s economy stagnated but more worryingly for policymakers core europe countries like finland minus 0 4 q o q and the netherlands minus 1 4 failed to shake off their long running recessionary drag while periphery growth laggards like portugal minus 0 7 and italy minus 0 1 fell back again into negative growth territory clearly the euro area seems to be stuck in some form of secular stagnation a feeling which is only confirmed by the very low inflation levels we are seeing and reinforced by the fact that both portugal and italy have suffered from chronically low growth rates since the start of the century nothing which has happened since the crisis suggests this low trend growth rate is going to to improve radically in fact there are good reasons to think that trend growth might even deteriorate further both countries have higher debt loads public and private combined than when they entered the crisis and in both cases working age populations have now started to decline see an excellent review of the portugal situation by valter martins here and here not only do we have a legacy then of high debt and low growth a new problem has emerged low inflation or even deflation italy s inflation has fallen to very low levels while portugal now has experienced 3 consecutive months of negative annual inflation the combination of low inflation and low growth means that it is the evolution of nominal gdp that really matters now nominal gdp is non inflation corrected gdp or gdp at current rather than constant prices if inflation remains low or even becomes negative then nominal gdp will hardly increase and may even contract as has happened in japan this phenomenon has already started to make itself felt in spain as the following chart from the spanish statistics office makes plain we don t have any detailed data for spain s q1 2014 performance yet beyond the bank of spain initial estimates but if this estimate is confirmed by the national statistics office then it is unlikely than nominal gdp at the end of march was much above the level it was at last june despite the recovery in economic activity which is one of the reasons that spain s debt to gdp level has been rising so rapidly in the last 12 months naturally something similar has been happening to italian debt which rose from 127 of gdp in december 2012 to 132 6 gdp in december 2013 despite the fact the country only had an annual fiscal deficit of only 3 of gdp italy s nominal gdp fell in both 2012 and 2013 largely due to the sharp drop in economic activity nominal gdp may continue to fall in 2014 but this time because the gdp deflator is negative if this happens the debt level will continue to rise confounding hopes for a turnaround in the dynamic italy s situation is to some extent replicated in other countries on the periphery ireland sovereign debt to gdp 124 portugal 129 spain 93 9 and greece 175 since almost all official forecasts anticipate an imminent turnaround in the debt dynamic if secular stagnation and ultra low inflation really set in this turnaround is going to be impossible to achieve and europe s leaders will need to decide what to do about it italy is a good case in point here since if debt were to climb towards 140 of gdp and beyond then someone somewhere would surely have to officially recognize that it was not on a sustainable path cases like greece and portugal are to some extent manageable from an eu perspective since the economies are small enough for eu leaders to engage in some sort of extend and pretend via low coupons and long horizon maturities but italy s debt is simply too big to be manageable in this way so italy s government faces a dilemma complying with its eu deficit and debt obligations may well mean that the deficit comes down but in all probability the debt level will go up given the weak nominal gdp effect not complying with them opens the possibility to slightly more growth and possibly stronger inflation but naturally the debt level will rise it s a sort of damned if i do and damned if i don t situation since either way the debt burden rises from the point of view of the country s political leaders though it is obvious that austerity today has costs and few visible benefits while deficit spending may bring some short term benefit at the price of hypothetical longer term debt issues it shouldn t surprise us then if they go for the latter especially since japan s political leaders have been widely applauded for doing something similar naturally since the difficulties the onset of secular stagnation will produce for heavily indebted countries with ageing and shrinking workforces are not widely understood hints that deficit objective relaxation calls are growing have not been well received everywhere the ft published details recently of a document jointly issued by the german and finnish finance ministries which strongly rebuked brussels for easing austerity demands citing in particular the additional 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