Will the role of the new government in Italy be one of managing economic decline?

29th April 2013 by The Harried House Hunter

The weekend just passed has seen a new government under Enrico Letta form in Italy as it tries to find some political stability in an economic crisis. As ever I will leave the politics alone except to point out that the new government looks to be a child of Italy’s  political establishment when many electors cast their votes for anti-establishment candidates such as Beppe Grillo. So as seems so often familiar in these times we find ourselves mulling the concept of democracy and what it means in the twenty-first century.

What about Italy’s economy?

We know that the economic situation is weak with economic output in 2012 being some 2.4% lower than that in 2011 and some 6.9% below that of the near-term peak for the series in 2007. Putting this another way we see that Italy has retraced twelve years and returned to a similar economic output to the one she had in 2001. So we see that after growing slowly in what were relatively good years Italy has reversed sharply in the bad years of the credit crunch.

What is the outlook?

On Friday the ratings agency Moody’s offered this view on the outlook for Italy.

Moody’s has now lowered its forecast for Italy’s 2013 GDP growth to -1.8% from its previous forecast of -1.0%, and predicts growth of only 0.2% for 2014.

Displaying their usual skill at timing Moody’s used the “political paralysis” (which ended virtually immediately) as a partial reason for their maintenance of a negative watch on Italy and growth downgrade! However there were other factors including one which I discussed in relation to Spain only on Friday, the problem that smaller businesses are having finding funding from what look like ever more broken banking systems. From Moody’s.

Moreover, credit remains constrained and expensive, particularly for SMEs ( Small and Medium-sized Enterprises) which are Italy’s engine of growth. Indeed, close to one third of Italian firms cannot meet their operational expenses as they are short of liquidity, according to Confindustria, the Italian business federation.

That one-third figure is worrying enough on its own is it not? Let me add to that the view of the European Central Bank.

By contrast, SMEs in Greece, Spain, Italy and Portugal reported, in net terms, the largest decrease in turnover……..The reported decline in profits was most prevalent for SMEs in Greece (a net 77% of respondents), Spain (60%), Italy (58%) and Portugal (64%).

So we can see that this “engine of growth” as Moody’s puts it is struggling and misfiring. This means that as we see the leverage numbers below they look ever less likely to get bank finance.

By contrast, SMEs in Greece and especially Italy reported a net increase in their leverage (12% and 22% respectively)

Which no doubt led to a need for this.

 SMEs in Italy contributed most to the net increase in the need for bank loans and bank overdrafts,

What about Italy’s banks?

This does not feature in the mainstream media much but here is Moodys view.

The second factor that supports the negative outlook is the country’s weak banking system.

Rather ironically there is a vicious circle at play here where past loans to businesses are increasing having issues with non-performance which make banks weaker and less likely to issue new corporate loans. Moody’s puts it thus.

Weakness in the banking system is additionally compounding to the weak economic outlook as the banking sector’s high cost of funds and capital is being passed on to its borrowers, particularly SMEs, in the form of higher lending rates.

If we look at a speech given by the Deputy Director General of the Bank of Italy in March we are reminded again today of the situation in Spain.

Tensions are now concentrated on loan quality: bad loans account for 6.9 per cent of total lending, while all deteriorated credit amounts to 12.8 per cent (3.3 per cent and 8.4 per cent, respectively, net of value adjustments).

So a reminder that troubled loans are not only a problem for Spanish banks although as her housing market is relatively untroubled Italy will have travelled to here by a different route. The same speech puts if thus.

Bank loans made up over two thirds of Italian firms’ financial debt, compared with about a third in France, Britain and the United States and half in Germany. Italy is the only major country in which this share has increased since the onset of the crisis.

So there you have it. Italian banks appear to have behaved as UK politicians would like UK banks to behave except it has created its own set of problems. Ouch! As we are reminded one more time to be careful what you wish for because what we in the UK wish for is described  thus in Italy.

  especially disadvantageous in the present cyclical phase.

Also care is needed with too rough and ready comparisons as Italy has a relatively small banking sector.

The Italian banking system is comparatively small with respect to the real economy. Its total assets amount to 2.7 times GDP, significantly less than in the other major countries except for the United States

However as the debacle which has enveloped the world’s oldest bank Monte dei Paschi di Siena has shown there are certainly plenty of problems to deal with in Italy’s banking sector. One of them is the way that official bodies like to emulate the supposed behaviour of an Ostrich when faced with a crisis as we review that words of the Governor of the Bank of Italy from January.


Right here,Right now

With apologies to FatBoy Slim we can look at the latest data from this morning to see how these themes are playing out in practice.

In April 2013 the composite business confidence climate index , decreased to 74.6 from 78.5 in March.

As the 74.6 compares to a benchmark of 100 in 2005 we are left wondering how many years Italy has retreated in time on this measure. Even the strongest sector in this numbers which is production looks to be weakening.

Assessments on order books and production expectations worsened (from -43 to -46 and from -3 to -5, respectively); inventories decreased.

This reinforces the message that the purchasing managers surveys have been providing which has been reinforced by this today.

Sharpest decrease in retail sales in 2013 so far

The actual reading of 37.2 is the sort of number mostly only associated with Greece and is a long,long way from the benchmark represented by the number 50. Also we see that this is now a long-standing series of declines.

This marked the twenty-sixth straight monthly decrease in sales, and the rate of decline was faster than the average over that sequence.

With a little help from my friends?

There is little sign of an improvement coming any time soon from the Euro area as this mornings collection of surveys from the European Commission informs us.

In April 2013, the Business Climate Indicator (BCI) for the euro area decreased by 0.18 points to 0.93.

In April the Economic Sentiment Indicator (ESI) decreased by 1.5 points in the euro area (to 88.6) and by 1.8 points in the EU (to 89.7)

Financial Markets are optimistic though

We are reminded one more time of the apparent divorce settlement between many equity markets and their underlying real economies by the way that the FTSEMIB has risen by 18% over the past year as the economy has turned decisively downwards. It is welcoming the new government with a rise of 1% so far today.

Also the Italian government bond market has strengthened too as market participants become more optimistic about the extent of Euro area support for Italy and the global thirst for yield quenches itself when and where it can. Italy has issued ten-year bonds at below 4% today (3.94%) and five-year bonds at below 3% (2.84%).

Whilst there is a genuine gain for Italy here in terms of debt finance which with her high level of public debt is a significant factor I have to confess that the yield seems to ignore the risks ahead.


Back on February 27th I pointed out that Italy faced a deepening problem with her level of public-sector debt.

This has left it with a high level of public-sector debt (127.3% of economic output) which means that it is vulnerable on this score in any future economic slowdown which is of course what it is now experiencing.

We now know that the slow down did continue and yet again seems certain to continue. Challenges abound including the fact that as she is relatively a high tax nation (42.5% of GDP in 2012) there is no easy route forwards particularly if we remember the Laffer curve.

However on the other side of the coin Italy does have private-sector wealth even if as I discussed on April 2nd the German Bundesbank seems keen to keep emphasising this factor. Also just like Spain she has a substantial black economy which just like Spain is as slippery as an eel when you try to quantify it.

But sadly I find myself coming to the conclusion that the new government will find itself dealing with economic weakness for some time. It can in the very short-term wait to see what the European Central Bank comes up with on Thursday but frankly it is hard to see what real difference a 0.25% rate cut would make. Will the new government’s  role in essence involve the management of a decline?



21 thoughts on “Will the role of the new government in Italy be one of managing economic decline?”

  1. Anonymous says:

    I think managing a decline is a very good description of exactly what most governments in the Euro periphery will have to do if they are ever to return to any economic competitiveness. The living standards of Greece, Portugal, Spain, Ireland and Italy are still well above what is commensurate with their economic performance. I think that this argument also applies to the UK, to a lesser degree, as we attempt to rebalance our economy and to compete with the rest of the world. We can devalue of course to achieve this rather faster than the Euro periphery. In Pre Euro days economic competitiveness was achieved by a steady devaluation of the Drachma, Lira, etc and all appeared to be well and everyone was happy with the status quo. The straight jacket of the Euro is proving to be a very uncomfortable fit for the PIIGS!

    1. Drf says:

      Yes, but why is their economic performance depressed? All problems are about cause and effect. Any problem is created due to a cause. If you take most of the wealth generated from work and business in one form or another as overt and many incidents of covert taxation (including debasement), then the motivation to perform and grow becomes extremely stultified. John Calperthwaite in Hong Kong demonstrated that if you want to stimulate above average economic growth then government interference and taxation must be minimized; then everyone prospers; (see http://en.wikipedia.org/wiki/John_James_Cowperthwaite). And he was a Civil Servant, yet he could see and understand it.

      1. JL says:

        Lots of jibber jabber on this comment.
        There is no evidence that government interference is bad or good for economics. There are a lot of countries in both sides of the equation that perform well. It is about the people that runs the government and its quality. Also, taxation minimization is about the same thing. There aren’t any papers, reports, countries et al, that show that more or less taxes give an economy back its mojo.
        What we know is that lesser taxes on a depressed economy rise the black hole revenues and enhances unbalanced between the rich and the poor. Go on, look for the papers and articles at Scirus. There’s a lot of good ones there and none has a spreadsheet error.

      2. forbin says:

        and we have the examples of Sweden and Somalia,

        one is an epitome of minimal government the other a nanny state

        which do you choose to live in ?

        OK maybe that’s a little unfair , maybe, but the point is too little government kills the economy as well as too much


        Note1 : And as to which country I’d like to live in ? Canada or Australia – both still have resources – unless they daft and sell them all to the Chinese , but at least they have the resources – Europe is resource poor ( ex Norway and a few others )

        Note 2 : all SME require customers with money – you dont get a good deal out of large corps ( yet alone paid ontime ) but from a wealthy middle class – and guess who is being snuffed out ?

        1. Drf says:

          Hi Forbin,

          So you like excessive taxation and excessive government control; I don’t. I certainly would not want to live in Sweden. So you can stay here or go to Sweden and I am making plans to get out of the EU for good. That way we should both be happy! Somehow I suspect I might end up happier than you though, even as you continue to munch your popcorn.

          1. DaveS says:

            Sorry Drf, I just can’t see how it can be that black and white.

            Forbin could have used Germany as an example – high tax, big state but surely you agree one of the most competitive economies in the world.

            What about the heavily controlled “planned” economy of Singapore or the state controlled economy of China.

            On the other hand the Thatcher privatisation revolutions seems to have spawned a number of disasters in the UK. We have the housing benefit fiasco (privatised social housing), PFI scandals, Railtrack etc. Worst of all the unfolding disaster of nuclear as our privatised utilities chased short term profits and failed to invest – its going to cripple this country,

            It seems to me the last few years have taught us that deregulated, free market capitalism is positively dangerous.

            I don’t want to live in Sweden either, I have lived in Denmark and a very nice place it is too – but a bit too nice,

          2. Anonymous says:

            It’s good government & good regulation that makes the difference.German letting regulation prevents the buy to let brigade from overcharging, except the law dodging slumlords who prey on poor

            The UK housing benefit is a cash cow for some BTL
            slumlords. Worse it keeps the rent excessively high for workers struggling to make ends meet in London. A most unfair way of redistributing taxpayers money to the wealthy. Thatcher has been out of power over 20 years, Blair & Brown had 13 years to fix this and just what did they do ?

            I found the BT privatization good, no more waiting 6 months for a phone.

            The energy privatization looks to be failing. I suggest the way forward is a nuclear power referendum – let the voters decide if they want to subsidize EDF’s overpriced reactors. Also we could look at how the USA manages private energy utilities and try to copy their best practice.

            The state should not regulate nuclear safety and operate nuclear reactors – this brings conflict of interest and inadequately enforced regulation. Look at the consequences of Chernobyl.

            When discussing PFI, the politician who signed the contract should be accountable. The UK has huge PFI liabilities that politicians put off the UK national debt accounts in an Enron style scam. For private investment in the health service, using the Australian model seems best practice to me. It frees Doctors from bureaucracy and lets them run their businesses in the best way possible. It gives patients choice of provider. This means Aussies have clean hospitals and no waiting lists.

            We need accountability and good effective regulation, but government provision is often a bad solution – as life in the centrally planned economies has shown beyond doubt.

    2. Anonymous says:

      Hi pavalaki

      Sometimes one gets support from places that can surprise. This from Paul Krugman today.

      “By joining the euro, Italy in effect turned itself, macroeconomically, into a third-world country with debts in someone else’s currency, and exposed itself to debt crisis;”

      Its nice to agree from time to time although it is a shame he still gives publicity to the De Grauwe paper he quotes which was properly critiqued within a day as I recall….

  2. Justathought says:

    Hi Shaun,

    Decline management should be subject within schooling’s curriculum.
    What would be the better road map between a devastating war and a managed
    decline? In the world of finite resources the managing decline seems the best
    solution. As much as we can be worry and angry about the present situation; it will
    be difficult to come back at the level of the years of plenty, of “innocence”
    and wastage (throwing away culture). This period will have had a profound
    impact in people’ psychological make-up. It would be a complete fallacy to
    believe in “recovery” to the previous economics level’s activities such as

    1. Anonymous says:

      Hi Justathought

      You make a good point about 2006/07 in that unless “something wonderful” as the film 2001 put it (such as cold nuclear fusion) then such economic levels may be like women’s athletics world records from the 1980s….

      So one valid question I think is simply to ask whether we should aim for them right now or lower our sights and cut our cloth accordingly?

  3. James says:

    One factor that seems to be ignored is the inexorable effect of demographic factors, which will exacerbate every point that you make:

    1. In Spain and greece, the army of unemployed youth (over 50% unemployed) is supposed to get a job, save etc for themselves and, by the way, pay for an ever increasing elderly population. I just don’t see how the maths works;

    2. In Italy, I believe that the actual population has been in decline for many years, which equally has an effect.

    the reason that I mention these is that it seems to me that there will be an increasing rift between generations if these economies don’t start growing rapidly. The younger generation surely will at some point wonder why it is paying off the debts of a generation which failed to pay sufficient tax to cover the services which it enjoyed.

    1. forbin says:

      but isn’t there a point when both generations wonder why they are being shafted ?

      the younger one will mostly be unemployed for most of their working lives and then they retire – what on ? a pittance ?

      if 50% are unemployable unemployed now and theres no growth then they can only take over a job when they the old die , then they will be old

      the old don’t die young any more – for example look a prince charles

      he’ll be very old before he’s king and by the looks of it we’ll have his children and his childrens children waiting in line…

      apply that to the “job:” and the results are distressing to say the least.

      and the so called old , well they see that if they retire they’ll end up in poverty – so they work on when they can .

      of course if you’re in the top 1% this does not matter , if your a peon or middle class , then it does- you children nay never work , never afford a house or car and will be called “scroungers ” for the rest of their lives – the 1930’s “useless mouths” of the 21st century !

      The answer is only going to be the creation of more better paid jobs and with the current economic system , distorted to reward the already rewarded , ain’t gonna happen

      Italy will continue the long decline to revolution – because in the end if you have nothing to loose , you don’t mind loosing it just to get them!


      PS: there are answers but the current lot wont stomach it

      1. Mike from Enfield says:

        Depressing stuff, although I’m inclined to agree with you.

        The choice is between managed decline – which will never happen because no would-be government would ever offer such a thing to the electorate – and more of the usual not-in-front-of-the-children, “vote for me and everything will be great” rhetoric. It is very hard to see how it won’t all end badly, one way or another.

        I like your Prince Charles analogy.

      2. Drf says:

        In other words Forbin, you cannot leave politics out of it all! It has all happened because of politics.

      3. Anonymous says:

        Hi Forbin,

        Not so long ago, the masses worked on the land. Mechanisation and the industrial revolution freed up workers to go to factories. The robotics revolution has reduced the need for well paid assembly line workers, this has sharply reduced these workers numbers and pay. Globalization has shifted these jobs away from Europe & the USA. The west loses, but the burgeoning middle class in Asia is gaining wealth.

        The USA business culture gives more opportunity to startups which create jobs, where the statist approach in France seems to be fighting a retreat against factory closures.

        The UK needs to create a more startup friendly/business friendly environment – this will help give opportunities to create more jobs.

      4. James says:

        I certainly don’t have any solution. The reason why I feel that the older generation have had a better time of it is that I know so many people who have stopped work on indexed pensions or decent annuities who are now in their late seventies/eighties. They live very very well in comparison to anything that I will have. It just seems strange to me that they have that AND free healthcare etc etc AND own all the houses when it seems very unlikley to me that those aged 30, say, now will have anything like this wealth.

        Perhaps I have missed something, but I feel very uneasy about this (although my suspicion is that Charles, his children and grandchildren etc will probably be OK!!).

        1. Drf says:

          Hi James,

          I agree here, and most middle class professionals now can never achieve the same standard of living which their parents enjoyed. However, I believe we all need to ask objectively why that is, despite it being increasingly clear that some contributors on this blog clearly always look away from the truth to what they want it to be, and convince themselves that the truth is what they wish it were. We shall in that case arrive at different supposed conclusions as to why this has occurred?

        2. Anonymous says:

          I personally think it’s disgusting that pensions for these groups are so high. Let’s face it – there was no way the compounded growth guestimates on which these pensions are based were going to occur. It’s just a bunch of people voting for the unborn to toil for their comfort.

    2. Anonymous says:

      Hi James

      Yes there is a demographic problem which was highlighted here by the Aspen Institute in Milan back in 2010.

      “However, what could make a real difference are measures aimed at increasing the fertility rate (which is stuck at 1.4 births per woman and is lower than that in other countries), at overhauling personal care and health policies, and at encouraging young people aged between 25 and 30 to stay in the country.”

      Also that migration trends may be unfavourable too.

      “Indeed, in respect of the latter, the participants pointed to statistics showing that the number of Italians in that age group moving abroad exceeds the number of young immigrants arriving in Italy.”

      This preceeds the current crisis where one would suspect that such factoes have got worse.

  4. Drf says:

    Hi Shaun,

    “… the problem that smaller businesses are having finding funding from what look like ever more broken banking systems.” I disagree! The problem that smaller business are having is finding profitable business, i.e. producing adequate ROI. The majority of healthy well-managed small businesses are not short of capital or liquidity; they just cannot find any viable business opportunities in the present Depression to invest in which will generate an adequate ROI.

    Those smaller businesses which are in need of funds to borrow are almost all on the brink of insolvency, and that is not due to any lack of funds to borrow at the rates which banks will presently charge them. They are on the brink of insolvency because they are under-capitalized; because continual debasement has eroded their previous capital base; or because their mark-up on current and recent sales is insufficient. Borrowing more money from the banks to survive will not help such smaller businesses in the longer term; it will just ensure that they eventually are wound up with even larger debts!

    1. Anonymous says:

      Hi Drf

      I entirely agree with your point that SMEs in Italy most need more demand. But even viable businesses need overdrafts and access to cash from time to time and in particular at times like this especially if the business is seasonal and right now they seem unlikely to get it.

Leave a Reply

Your email address will not be published. Required fields are marked *