Between A Rock And A Hard Place

US Economist Arnold Harberger once asked what Thailand, the Dominican Republic, Zimbabwe, Greece, and Bolivia had in common that merited their being placed in the same growth regression analysis. I can’t help having the same feeling about Germany, France, Italy and Spain. As I indicated in a post on A Few Euros More yesterday, its sometimes hard to see the common thread.

Be that as it may, this post is only about one of the ‘big four’: Italy. As I say in the Afem post, Italy is bucking the trend. Unfortunately it is bucking it in the wrong direction.

Growth in Italy in the third quarter actually decined from a 2.8% annualised rate to a 1.2% one. This suggests the Italian economy is losing steam not gaining it. Add to this two additional pieces of data.

Firstly inflation: Italy’s EU-harmonised consumer price inflation was 2.6 percent year-on-year in October, actually increasing from September’s 2.2 percent rate. This put Italy again in sharp contrast with the picture in the two biggest Eurozone economies, Germany and France (Spanish inflation continued apace). German annual inflation was 2.4 percent in October (down 0.2 percent from September), while French inflation slowed to 2.0 percent (down 0.4 percent from September). This increase in inflation in an Italian economy which is slowing down is distinctly worrying, bevasue it seems to suggest that productivity may well still be in negative territory, and that the Italian economy is resisting the restructuring pressures in a way in which the German one, for example, didn’t.

Secondly, Italy’s balance of payments situation continued to deteriorate, and this despite the declining euro. Italy’s trade deficit increased to 2.15 billion euros. That was up from a revised 0.39 billion euros in August and suggests the depreciation of the euro this year has done little to boost export competitiveness. The widening of the trade balance in Septemberalso came despite a rise in the value of Italy’s exports to just under 26 billion euros (up from 19.43 billion in August), and thus logically it is the result of a sharp increase in imports, from just under 20 billion euros in August to over 28 billion in September. These results are probably way to early top see what the full impact of the euro devaluation will be, but stil they are hardly encouraging.

I emphasise all this, since we had some debate last week about how real the threat of a sovereign debt downgrade for Italy was in practice. Well, all I can say is that if these numbers continue like this, it is hard to see the Italian government risking deteriorating the situation even further by really implementing meaningful fiscal tightening, and if they don’t introduce meaningful fiscal tightening it’s hard to see how they can avoid further downgrades. As I said: between a rock and a hard place.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

9 thoughts on “Between A Rock And A Hard Place

  1. How much is this Energy related. IIRC Italy imports not only oil & gas but also a lot of electricity

  2. Obviously energy is part of the story, but only one part. The trade impact of the oil hike is already there, but in general we can assume that the last round of energy increases have yet to show up in the consumption numbers (across Europe generally). ie consumption should weaken to some extent.

    And on inflation, everyone else is paying the same prices for energy.

    Otoh, while oil prices are now off their peaks, we may have to live with ‘high’ energy costs for some time to come. So Italy has to learn to live with this. As I said, one more issue for being sceptical over the they’re just about to turn the corner story.

  3. Italy does not only import oil but electricty as well. I assume that the price of it has also risen but that the contracts are somewhat more long term than the oil contracts so the price of it will only now start to rise.

  4. And on inflation, everyone else is paying the same prices for energy.

    But that is not true with respect to the balance of trade. Eg. the UK is hit a lot less hard.

  5. Electricity imports in Italy are probably from France, and so produced in nuclear centrals, so the price of this electricity should be more stable than other sources. If so, Italian problems are mostly an internal matter.


  6. EdF is not a charity. If they can raise, they will. Plus, Italy makes a lot of electrical energy from natural gas, which means that it is hit harder than France or Germany.

  7. “EdF is not a charity. If they can raise, they will.”

    Do you actually have proof of this statement?
    The world is full of energy companies that (for whatever mysterious reasons) do NOT raise prices when they could, and which extend seemingly infinite credit — eg Russia into Ukraine and Belarus (don’t know if Ukraine is now out of favor) or South Africa to Zimbabwe.

    My understanding is that EdF is, practically speaking, still part of the French government. Who knows what behind-the-scenes deals France has or may want to have with Italy?

  8. “Do you actually have proof of this statement? …..My understanding is that EdF is, practically speaking, still part of the French government.”

    Actually Maynard, although this is way off the main topic I was trying to get at, Edf is in the process of privatisation:

    “French citizens shrugged off an anti-market reputation in their rush to buy shares in EDF, with some 4.5m private investors applying for stakes in the state-owned electricity group.”

    “The government is expected to announce this morning the final price for the sale of 15 per cent of EDF, which is being described as the world’s largest share offer in almost five years.”

    France and Italy do have one thing in common: both are trying to sell off state assets to try and stabilise the deficits.

  9. We are talking about energy that is sold to a foreign country. In that case you don’t have charity

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