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o live with deflation and find ways of managing the impact on the financial sector as the ft s david pilling so cogently put it recently in the japanese context monetary policy can t print babies and one day or another as our workforces accelerate their decline it may be hard to sustain positive growth maybe there are some realities looming out there that we are just not ready or able to accept yet but going back to renzi the initiation of sovereign bond purchasing type qe will surely mark the beginning of a japanese turn in ecb policy it may start with just 400 billion but it could then grow and grow especially if the structural weakness in domestic demand continues to exert a downward pressure on prices even despite the money printing so just who might benefit from this well you don t have to be excessively astute to see that italy would be prime candidate the country currently has a gross government debt to gdp ratio of around 135 small when compared to japan s level of nearly 245 but still it is large and rising especially if italy continues to push on its fiscal deficit limits and they will need to do this since there are no signs that the country s economy like its japanese equivalent can grow any faster than it did before the global crisis without ongoing fiscal stimulus pushing the debt upward much beyond the current level without being forced into some kind of debt restructuring would seem to be be virtually impossible unless unless the ecb start to buy the bonds so could matteo renzi who doesn t seem especially worried by the size of italy s public debt levels be just the man for the job the key to the new win win strategy would lie in the renzi s aim getting agreement to increase the country s fiscal deficit rather than as previously lowering the bond spread in exchange for structural reforms basically any ecb italian bond purchasing would ease pressure on renzi in the short term mario would have renzi s back provided he complied with the reforms and if he didn t well then more than likely he would simply go the way of enrico letta and to those would argue that all of this goes beyond what the german public have come to expect from euro area policy i would suggest that all of what is about to happen was already evident when mario draghi used the famous whatever it takes phrase he meant what he said as i argued in october 2012 in a post entitled taking a man at his word the heart of the issue is that mario draghi has vowed to do enough and enough seems to have no limits so what could the ecb do if we really put our imagination to work on the issue well like ray dalio argues they could print money lots of it even to the point of doing it helicopter style those people who think the ecb is already printing money which they aren t necessarily doing when they increase their balance sheet ain t seen nothing yet that s what the it will be enough promise means none of this is in the mandate yet naturally it isn t but it could be and it would be much easier to put more in the mandate than it would be to keep going to the german parliament to ask for more money so it could and most probably will happen when you re crossing that rope bridge and it starts to creak and sway then you just have no alternative but to continue moving towards the other side we have all seen far too many movies about what happens to the people who try to turn back posted by edward hugh at 8 38 am no comments friday august 10 2012 is the italian elephant about to break loose again market nervousness about italy has been growing in recent weeks with the moody s credit downgrade of the country being only one of the reasons a bailout is clearly in the offing with the only real questions being how and when while the situation inside his country appears to be deteriorating mario monti has been doing the rounds of european capitals in an attempt to drum up support while in helsinki he raised an eyebrow or two when he warned that without a serious plan to bring down interest rates disaffection with the euro in his country could easily grow to dangerous proportions crying wolf or a piece of insider information probably a bit of both italy is in a deepening recession which has now lasted for over a year monti himself has ruled out the possibility that he could continue in office after next spring s general elections while at the same time silvio berlusconi is constantly hinting that he would not be averse to accepting prime ministerial office again should his country need him all of which makes me ask myself just over a year after my is italy not spain the real elephant in the euro room post whether in fact the currently chained beast is not about to break its tethers and go for a crockery breaking rumble round the euro living room what follows is a summary of a revised version of a presentation i gave in cortona last autumn i have put the presentation online here low growth and high debt a highly combustible cocktail just as i highlighted in the case of portugal in my recent post italy s problem is long term growth this is not a passing phenomenon but one which has been getting steadily worse over decades italy has lost growth at a pace of about one percent a year over the last four decades if the pattern continues italy gdp will drop over this decade and continue to do so for as far ahead as the eye can see to give us an idea of what this means italian gdp at the end of june was at the same level it first reached in the second quarter of 2003 if the current recession continues as forecast by the italian government during this year by december we will be below the gdp level of december 2000 which is another way of saying that it will be below the level first attained some 12 years earlier if the recession is slightly deeper that the current government forecast and continues throughout 2013 certainly not an excluded scenario we might even arrive at levels first seen in the late 1990s in the meantime the country s population will have risen from 57 million to 61 million hence gdp per capita will have fallen substantially this is not a situation either to be taken lightly or one which it will be easy to turn around there are a variety of reasons for this sharp drop in growth momentum some of the reasons are undoubtedly as i will argue demographic others are associated with the loss of international competitiveness experienced by the italian economy since entering the european monetary union once clear indication of the extent to which the deteriorating growth outlook is associated with cometitiveness loss is to be seen in the correlation between worsening growth performance and the deteriorating current account balance double dip recession italy first fell into recession at the end of 2007 some months before the other euro area countries and didn t come out of it again till the start of 2010 so the economy contracted for two full years gdp fell by 1 2 in 2008 and by 5 5 in 2009 after an 18 month recovery the economy again fell into a second double dip recession around the middle of 2011 after a surge in borrowing costs forced the government to apply stringent austerity cuts in an attempt to recover investor confidence in the three months up to june gdp contracted for a fourth straight quarter falling by 0 7 percent over the previous quarter we don t have the detailed breakdown from the statistics office yet but it seems clear the contraction was again led by sharp falls in consumption and investment as concerns about the fiscal outlook and the euro area crisis depressed confidence and tightened credit conditions it is quite possible that italy will experience a deeper recession this year and next than most forecasters predict imf current 2012 1 9 reflecting headwinds from the sovereign debt crisis compounded by italy s large planned fiscal adjustment the government will likely miss its deficit targets and even in the absence of any major shocks to yields the country s debt to gdp ratio is surely going to increase significantly over the next few years part of the problem is that italy s fiscal spending has assumed the importance it has in the country s economy due to the loss of international competitiveness reducing the government contribution to gdp in this context only makes the economy fold in on itself more urgent competitiveness raising issues are needed ones which will bring quicker results than the ongoing programme of long term structural reforms so just what do we mean by international competitiveness the issue of international competitiveness is the one which has perhaps caused most theoretical controversy during the current euro area crisis with one side arguing vehemently that some sort of devaluation is essential while the other argues equally vehemently that it isn t in the follwoing slides i propose a slightly new definition of international competitiveness which is to do with having an export sector which is appropriately large given the median population age of the country concerned you can enlarge the slides for easier reading by clicking on them or alternately you can view them via my slideshare version bottom line median population age is an important economic indicator populations with high median ages tend to be export dependent export dependency gives a better more precise measure of international competitiveness an export dependent country is internationally competitive when it has a large enough export sector to drive economic growth italy and the eurozone debt crisis total italian debt is not excessive in comparison with some other countries in the eurozone but public debt is the second highest despite having normally run positive primary balances italy has run general budget deficits since the 1980s the problem here is the weight of the debt the burden of interest payments italy is now poised on a knife edge italian gross government debt to gdp is currently perched just under 123 of gdp the key factors which will influence the future trajectory are gdp growth inflation and interest rates with gdp falling inflation low and interest rates rising the outlook seems quite problematic hence the problem of market pressure and concerns about interest rates italy is currently paying around 6 for 10 year debt issues and the average maturity of italy s debt is 6 7 years the lowest level since 2005 the imf currently predicts that gross government debt to gdp will peak at 124 in 2013 any significant slippage on this and debt restructuring becomes inevitable investors are worried with good reason market responses are not just simple speculation ecb support is critical but so are radical measures to increase the growth rate too big to rescue as stated above italy shrank further into recession in the second quarter with a 2 5 per cent annual decline the 0 7 per cent quarterly fall in gross domestic product only slightly better than the first quarter s 0 8 per cent decline means the economy has now been contracting for over a year and there is at least another year of the same or worse to come as spending cuts steadily bite and the euro debt crisis rocks its way forward the recession will weaken tax revenues and hit jobs and consumer spending a vicious circle which makes it harder for mario monti who is aiming to cut the budget deficit to 0 1 per cent of gdp in 2014 to meet his public finance goals consumer confidence and pmi indicators suggest that the italian government s gdp growth estimates of a contraction of 1 2 for 2012 and an expansion of 0 5 for 2013 are way too optimistic the consumer confidence reading was only just up in july from june s 14 year low and for the first time since the launch of the pmi services survey in january 1998 firms generally expected output to be lower in a year s time than current levels the employers group confindustria now forecast a contraction in gdp of 2 4 in 2012 a further fall of 2 0 is not unlikely in 2013 as the european debt crisis worsens compared to the other forecasters i would be more negative on the outlook for both private consumption and investment activity in addition with a more negative outlook for the euro area economy destination for 43 of italian exports these are unlikely to put in an unexpected stellar performance in 2013 unemployment rising sharply italy s unemployment rate hit a record 10 8 percent in june up from 10 6 percent in may there were 2 79 million people looking for work in june according to seasonally adjusted figures a rise of 37 5 percent compared to a year earlier youth unemployment dropped from 35 3 percent in may to 34 3 percent these are not yet anything like spanish numbers but they are not to be sneezed at either the number of people living in absolute poverty in italy rose to 3 4 million in 2011 or 5 7 percent of the population up from 5 2 percent in 2010 those living in relative poverty for italian standards were roughly stable at 8 2 million or 13 6 percent but among families with no workers and no pensioners the relative poverty rate rose to 51 percent from 40 percent fiscal targets look increasingly out of reach the implementation of austerity measures in italy is likely to have a substantial negative impact on the economy in the coming years given its lack of competitiveness the economy lived off constant demand stimulus from the government without this the growth problem is likely to become worse there have now been five fiscal packages introduced by italian governments since july 2011 with the objective of a cumulative fiscal consolidation of some 5 2 of annual gdp 85 8bn between 2011 and 2014 with the majority of the measures concentrated in 2012 there will inevitably be a large negative impact on the economy throughout this year given the deep recession the country will be in over the next couple of years and poor potential growth prospects over the medium and longer term italy s public sector balance sheet problems are likely to mount although the 2011 fiscal deficit of 3 9 was not particularly high in comparison with many euro area countries the governments projection of a close to balanced budget in 2014 looks hugely optimistic a more realistic expectation would be for the deficit to be under the eu 3 level at that stage but the danger is this could well mean gross debt to gdp will be over 130 above the danger mark the ecb s role in the crisis both helps and doesn t help depending on how you look at it they have been very tardy in acting and normally when they have done so it is been via half measures which have not got to the heart of the problem the ltros are a good example italian banks have borrowed more than 283 billion euros from the ecb via the 3 year ltros and other liquidity operations but this liquidity is by and large used to either purchase government bonds or buy up their own expiring debt buying government bonds is attractive since they pay yields which are far above the ecb lending rates this difference the so called carry helps ba...
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