Saturday, August 06, 2011

Italy’s Real Deficit

For the last month, Italy has been buffetted more than most by the financial storm hitting Europe and the US. In the last week, the storm became a hurricane and there is no guarantee that it won’t continue or even worsen next week.
Far from being the most relaxed time of year with everyone by the seaside or about to go, politicians are looking forward to a hard, fraught and working August.
The longterm reasons are clear enough; the national debt has been growing since the Eighties while the economy has stagnated. The country became less and less competitive with globalisation and since joining the euro, devaluation has no longer been an option to reduce debt and make Italian goods and services more attractive. Servicing that debt is becoming more and more expensive as the perception of the country’s reliability declines. Italian 10 year treasury bonds are close to 4% higher than German one, the so-called spread has moved between 350 and 400 points over the last week, only just below Spain’s and occasionally above it.
Italy’s debt is today around 120% of its GDP (and was higher than the 60% Maastricht criteria maximum when Italy joined the euro – like Greece’s debt and creative accounting, this is another and much bigger original sin of the euro). The increase since the 2008 crisis has been more due to slow or negative growth rather than greatly increased spending. It’s hardly a happy state, but it’s not catastrophic either and it very definitely did not appear out of the blue in the last few months.
The budget deficit has also been creeping up and is well over the ECB limit but a good part goes to pay interest on the debt and without that, the budget is close but within the limit. Again, a grey outlook but not disastrous. Certainly nothing like Greece.
Italy’s banks and savings are pretty sound as well – there are no bubbles in housing or anything else as in Ireland or Spain.
By most accounts then, Italy should be bumping along the bottom without a major crisis. But it isn’t and the reason is blindingly obvious. The crisis is caused by real flaws in the system and the numbers behind them, but above all, it is the result of lack of leadership.
This is the country’s most crucial deficit.
Since Lehman Brothers blew up, the Prime Minister has been telling Italy that there is nothing to worry about. The crisis, according to Berlusconi, was an international one and Italy was in a much stronger position to weather it. This was actually partially true, but only if something was done to address the much older structural problems.
For most of the last year, the prime minister and the economics minister, Giulio Tremonti, sniped at each other with the first saying that everything was fine and the second calling for spending cuts. When it came to passing a serious austerity budget, Tremonti was told first that “no one is indispensable” and then that the budget was “a collective responsibility of the cabinet”. As it turned out to be – last month’s bill was a mess that pleased no one, least of all the markets. It promised to balance the budget by 2014, after the next elections with most of the cuts delayed. It was obvious then that it was not enough so after disappearing from the scene for more than a fortnight, and after a run on the Milan stock exchange, Berlusconi spoke on Wednesday to reassure the country and the markets. Amazingly, once again, it was the markets that were wrong, not the government.
It was a dreary, lacklustre speech obviously written by a not very harmonious committee (and political philologists had a field day guessing who was behind it). The only time Berlusconi woke up from his stupor was when he was heckled about the stock market. He replied “I have three companies quoted on the Milan exchange – I’m a businessman on the front line of this battle of the markets”. Funny… I thought he was prime minister of Italy. Once again, there seems to be no translation of “conflict of interest” – or at least not one that Berlusconi understands. He promised that funds already allocated would actually be spent and promised the usual run of committees to see where savings in politicians’ perks and privileges could be made – as if the world had long since learnt that a committee is just a semi-polite way of stalling.
The following day, Thursday, he met with what Italians call le parti sociali, employers’ groups, trades unions, trade and business organisations. They gave him and his ministers a six point plan some of which to be executed now, in August; a balanced budget by 2014, reduction of costs of politics and administation, including the abolition of the provinces (Italy has four tiers of government compared to most countries’ three. That could be done immediately and the number of comuni or municipal governments greatly reduced. Politicians’ privileges could be cut tomorrow), liberalisation and privatisation (on one index of “economic freedom”, Italy was 64th in 2008 and 76th in 2009 ), freeing up of investments, simplification of the public administration and the labour market. The unions did not agree to privatisation but accepted the rest. It was a measure of the urgency that parties who are normally antagonists, got together in order to pressure the government.
The best result was a press conference in which Berlusconi said that “if I had any money, I would buy shares in my companies because they’re sound” and then added: “If you want to invest you should buy them too”. Old salesmen never lose their patter, apparently. He also contradicted Tremonti in front of all the cameras once again underlining their disagreements.
It was not till yesterday, after the European markets had closed that he again called a press conference to say that some of the budget measures would be brought forward and that government and parliament would be open over August to work something out.
This was after the markets had battered Italy very seriously for a week, after the parti sociali had begged him to do something quickly, after ECB president, Jean-Claude Trichet had asked Italy to act , after the EU Economic and Monetary Commissioner Olli Rehn had done the same . The European institutions cannot bail out Italy and we all know that – if Italy fails, the whole euro is in trouble. Now the US ratings have been downgraded which will produce more pain. Next week will give us more surprises.
The man who sold himself as a man of action, a Milanese businessman who deals with facts, not hot air, has once again shown himself to have feet of clay. There are no easy solutions for Italy and if Berlusconi stepped down, there would be no rosy dawn – but it would a start in reducing at least one on Italy’s deficits.