Italy in crisis again but average incomes higher than Ireland’s
Italy is in crisis again, following an election that gave populist parties of the right and left about half the votes cast while the centre-left Democratic Party (PD) plunged to 19% of the vote. However, after two decades of near-stagnation, average incomes in 2016 were higher than Ireland’s as reflected in Eurostat data on consumption of public and private goods/ services, adjusted for price differences and the OECD’s latest data on net adjusted disposable income.
Research by Germany’s Institute for Applied Economic Research (IAW) at the University of Tübingen published in 2017 shows an estimate of 20% for Italy’s black/ shadow economy.
The inclusion of some illegal activities in national accounts resulted in a 1% growth addition for Italy in 2010 according to an OECD briefing in 2015.
In its first 50 years 1861-1921, the Kingdom of Italy had 37 governments and the outgoing government of prime minister Paolo Gentiloni is the 65th government since January 1946.
This week the new German government became the 25th since 1949.
Until 1993 in Italy, 52 governments lasted an average of 10.8 months while the average since then has risen to over 21 months.
The public finances have also set records: In its 157 years as a unified country, Italy has had a debt-to-GDP (gross domestic product) ratio below 60% in less than 30 of those years while its ratio has been above 90% in 82 years.
Since reunification in 1861, Italy has managed to balance its annual budget in about ten years and it has had an annual deficit every year since the last surplus during Fascist rule in 1925/26.
Hyperinflation during the 1940s wiped out most of the public debt, which is currently at 131% of GDP (net public debt is at 121%).
The Italian household sector has a history of prudence with savings and debt.
Italy’s Golden Age and aftermath
Globalization came to a shattering halt in 1914 and its second phase began in the 1950s, with Italy and Greece among Europe's star economic performers for almost a quarter of a century, with average real (inflation-adjusted) per capita economic growth of 5.0% and 6.2% respectively in 1950-1973 compared with 5% in West Germany, 4% in France, 3.1% in Ireland and 2.4% in the United States, according to calculations by Angus Maddison, the late renowned economic historian.
In 1970, the Italian jobless rate was at 3.2%, 7% in 1990, 10% in 2000 and 11% in January 2018.
In 1970, the German rate was at 0.5%, 5% in 1990, 8% in 2000 and 3.6% in January 2018.
The number of employed rose by 1.1 million since May 2014, but 58% were temporary jobs.
The annual Italian budget deficit was typically in low single digits — 3.74% in 1951; 1.38% in 1961 and 4.32% in 1966.
When Ireland joined the EEC in 1973 along with the United Kingdom and Denmark, it was the poorest country in Western Europe and the first enlargement began a pattern where poor countries were admitted to the Community (named the European Union from January 1993) along with wealthy ones such as Sweden and Austria.
Organisation of Economic Cooperation and Development (OECD) data for 1973 using constant 2010 dollars, adjusted for price differences (PPS), show that Denmark’s GDP per capita at $24,800 was on top in the EEC compared with Ireland’s $12,200.
West Germany and France were at $20,600 and $20,300, while Italy had a level of $19,200 and the UK was at $18,800.
Greece’s GDP per capita was $17,600 — compared with Japan’s $17,000.
As growth slowed and inflation surged following two oil price hikes in the 1970s, public spending rose and the rise was mainly paid for by borrowings — public spending as a ratio of GDP jumped from 38% in France in 1965 to 52% 20 years later; in Italy the rate rose from 34% to 51% and in the UK from 36% to 48%.
Economists at the Banca D'Italia in a 2002 paper said: "For about 25 years, from the mid-sixties to the early nineties, Italy ran unsustainable fiscal policies. High deficits, stemming from persistent primary imbalances, fuelled public debt accumulation. In 1994 the debt reached 124% of GDP. Over the same period, future pension liabilities gradually increased to about 400% of GDP. Fiscal policy and rapid population ageing set public finances on an unsustainable path, with large generational imbalances and perspective deficits."
In Italy, in 1991 the primary balance (excluding debt servicing) returned to surplus for the first time since the mid-sixties and in the second half of 1992, reform was accelerated by the European exchange rate crisis which forced the lira to leave the exchange rate mechanism.
Annual debt servicing was at a huge 12.5% of GDP. The interest cost fell to 5% of GDP in 1998-2007.
Blame the EU and Euro!
The euro was launched in 1999 and in the period 1999-2016, growth in annual per capita Italian economic output was at 0%.
In Germany, the annual rate was at 1.2%; 0.84% in France and 1.08% in Spain.
According to Bruegel, the Brussels economic think-tank, in cumulative terms the Lira lost around half (53%) of its value vis-à-vis the Deutsche Mark in the 20-year period 1979-1999. “However, there were not equivalent gains in real terms, since employment levels at the end of this period were very similar to what they were at the start.”
The Banca d'Italia owns 18% of the total Italian government debt on its balance sheet, on behalf of the European Central Bank (ECB).
According to Deutsche Bank, in 1990 about 70% of the Italian government debt was financed by private investors, today it is less than 10%. The Italian central bank held on average only 5% of all government bonds since 1990, until the decision was taken after 2012 to buy bonds on the secondary market.
Political instability and an unstable currency are not a reliable harbinger of growth.
In the 1990s, globalization via the entry of China and former communist countries in Eastern Europe, to traditional markets was not welcome news for Italian small family-run firms.
Italy has global fashion brands but it lacked big multinational firms that enabled Germany and France to meet the product demands of emerging markets.
Italy at 47% has one of the lowest rates of employment of women in the EU and compares with Germany’s 69% according to Eurostat.
Women who keep working after childbirth typically see earnings drop more than 35%, according to INPS, Italy’s social security institute, as childcare facilities are scarce.
Bruegel says that not only is Italy a net contributor of scientists, it also trades high-quality researchers for lower quality ones.
Italy's Mezzogiorno region covering the southern half of the Italian peninsula combined with the islands of Sardinia and Sicily, is the Achilles heel of the Euro Area and it has some of the worst economic metrics in the European Union, including the lowest birth rate since 1862 when Italy had a total population of 22m (this number comes from Istat, the national statistics office. 26m is also cited elsewhere) compared with 60m today.
Mezzogiorno is the Italian term for “midday” or “noon,” and southern Italy got its name because of the intensity of sunshine there at midday during summer. The area broadly coincides with the footprint of the Kingdom of Naples.
According to InStoria magazine, a publication of Sapienza University of Rome, "In 1954, 49% of the adult population of the Mezzogiorno was illiterate and 85% of all southern Italian families were classified as poverty-stricken. "
Italy ranks poorly for inward investment and the Mezzogiorno, with its reputation for corruption and organised crime, attracts little.
The employment rate of 43% is the lowest regional employment rate in the EU while in 2016 GDP per capita in Mezzogiorno was €18,600 compared with €36,600 in Lombardia.
Mezzogiorno is responsible for about 11% of Italy’s exports.
In recent years one bright spot for Italy has been the trade surplus and overall exports account for 29% of GDP which is similar to ratios in France and the UK.
Only 13% of tourists who come to Italy go to the Mezzogiorno, according to The New York Times in 2014.
The Five Star Movement (MS5) and the League (Lega) took advantage of anti-migrant and anti-EU sentiment with the MS5 getting 32% of the vote with strong support from the Mezzogiorno while the Lega represents the rich north of Italy.
Italy needs a consensus to get itself out of a hole and the inexperienced leaders of the populist parties in government would not achieve much as the problems that need solution require long-term horizons.
These are issues identified by Bruegel:
“Poor Education and related work skills,
Specialisation in low growth, traditional sectors,
Small firms size,
Poor firm governance,
Low level of trust,
High level of corruption,
Poor public administration, including the judiciary,
A welfare system based on the protection of jobs rather than workers,
Geographic dualism between North and South.
In terms of exogenous global changes, the emphasis is usually put on three interacting factors:
Changes in international specialisation and comparative advantage,
Globalisation, with large emerging economies, in particular, China, entering the world market and producing traditional goods at much lower cost
The ICT revolution.”
Pic above: NASA.gov: "This oblique, night time panorama of much of Europe was photographed by one of the Expedition 32 crew members aboard the International Space Station flying approximately 240 miles above the Mediterranean Sea on Aug. 18, 2012. The country of Italy is visible running diagonally southward from the horizon across the centre of the frame, with the night lights of Rome and Naples being visible on the coast near the centre. Sardinia and Corsica are just above left centre of the photo, and Sicily is at lower left. The Adriatic Sea is on the other side of Italy, and beyond it to the east and north can be seen parts of several other European nations."