Download Italy`s Economic Recovery

November 15, 2015 3:39 pm
Italy’s economic recovery is not what it seems
If country fails to bounce back from recession, it is hard to see how it can stay in the eurozone
©Reuters
Italian prime minister Matteo Renzi
Yoram Gutgeld last week made one of the most astonishing economic statements I have heard in
a long time. The adviser to Prime Minister Matteo Renzi said in an interview that Italy’s
economy was immune to global developments for the next 12 to 24 months because of the tax
cuts and reforms of the present administration.
The idea that a G7 club of rich nations is immune to the global economy is ludicrous. This is the
21st century. Granted, Mr Gutgeld may have spoken as the prime minister’s spin-doctor. That is
part of his job. But what worries me is that the Italian government is not ready for when the
impact of the slowdown in China and emerging markets hits Europe. Friday’s preliminary
figures for eurozone gross domestic product show that the slowdown has started. Italy’s quarteron-quarter growth rates have been falling: from 0.4 per cent in the first quarter to 0.3 per cent in
the second to 0.2 per cent in the third.Italy’s ability to sustain a healthy rate of growth is critical
— for the country’s political stability, for its young people with no hope of finding work, for
debt sustainability and in particular for its future in the eurozone. The euro has brought Italy
nothing but stagnation. Real GDP is now at the same level as at the start of 2000, a year after the
euro was launched. GDP today is 9 per cent below the pre-crisis level in early 2008.
If Italy fails to bounce back strongly from this recession, it is hard to see how it can stay in the
eurozone. At some point it might well be in the country’s undisputed economic self-interest to
leave and devalue. So when we ask whether the economic recovery is sustainable, we are not
having a technical dialogue about economics. We are talking about Italy’s future in Europe.
There are three reasons why I am sceptical. The first is evident in last Friday’s GDP data. Italy is
not exceptional.
The second reason is the lack of restructuring of Italian banks. The stock of non-performing
loans as a percentage of all loans is about 10 per cent, which is close to the peak level in the
current cycle. Many of the small and medium-sized banks are in effect insolvent. The clean-up of
the banking system — following the 2008 crisis and the two subsequent recessions — has yet to
happen. If it does, it will take place in a much tougher regulatory environment. From next year
EU “bail-in” rules take effect. Then the Italian government will no longer simply be able to bail
out banks but will have to make bondholders and depositors pay up first. Can we be sure the
rotten banks will continue to sustain the recovery in this environment?
My third concern is Mr Renzi’s fiscal policy choices. His priority has been to ensure that these
create more winners than losers. This is exactly what Silvio Berlusconi did when prime minister.
And it should come as no surprise that Mr Renzi ends up with similar policies. Instead of
reforming the public administration or the judiciary, he has opted for a cut in the housing tax.
This will win votes but will not deliver the change to the economy. We have been here before.
The danger of this strategy is that it could go horribly wrong if the economic shock is big enough
and the banking sector weak enough. On current projections, Italy’s 2016 budget deficit will be
2.2-2.4 per cent, depending on how you account for the cost of addressing the refugee crisis. This
includes flexibility clauses that Rome has negotiated with the European Commission to take
account of that cost. The original deficit goal would have been 1.4 per cent for 2016, but the EU
has allowed more leeway because of economic reforms.
I have no objections to any measure to loosen the grip of austerity. But if the downturn comes
along with a banking crisis, the 2.4 per cent could easily turn into 3.4 per cent or 4.4 per cent. At
that point all flexibility will come to an abrupt halt. Italy will once again have to tighten policy as
the economy slows.
Another non-elected “technical” government might take over. Italy might never choose to leave
the eurozone for political reasons. But, if Mr Renzi’s calculations prove wrong, Italy will be at
the point where it would be rational to leave for economic reasons.