Italy’s Recession Deepens

Italian fourth-quarter gross domestic product declined at the fastest quarterly rate in nearly 30 years, sending Europe’s fourth-largest economy off into an even deeper recession. According to ISTAT preliminary estimates, Italian GDP fell 1.8% between Q3 and Q4 in seasonally and working day adjusted terms. If confirmed, this quarterly decline would be the sharpest recorded since 1980. GDP fell in the previous quarter by 0.6%. Year on year, overall output in the Italian economy dropped by 2.6% in Q4, down from both the 1.7% contraction expected and Q3’s annualized fall of 1.1%.

Across 2008 as a whole, the Italian economy fell 0.9%, ISTAT said, the most pronounced decline recorded since 1993.The Italian economy officially fell into recession in the third quarter of 2008. And one more interesting detail, Italian GDP is now back at the same level it was in Q4 2005, and falling. This is pretty worrying, and even more so given there are quite a lot more people in Italy then there were in 2005.

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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".

12 thoughts on “Italy’s Recession Deepens

  1. Other reasons for the GDP shrinkage could be:

    – people retiring or working less hours as population ages – they’ll create less value added

    – hidden emigration: salaries in Italy for young people are quite low (same levels as Portugal/Greece, even though cost of living is higher).

    I’m sure there’s lots on young Italians scattered around Europe that are still recorded as being in Italy – because I can’t see that it’s very easy these days for European countries to know if one of its nationals is working elsewhere

  2. What you’re not considering here (which, I know, it is nothing to be proud of) is that 15% of the Italian Economy is black and therefore doesn’t appear on official statistics. If you look at the “OFFICIAL” statistics of some southern Italian regions you would think that they’re poorer than Poland. Yet, many people there (more than you can imagine) who appear as unemployed and with a low income are actually pretty wealthy. Every time you read Italy’s rate of unemployment you should subtract at least 1.5% in order to consider those working illegally as well. We’re a pretty f*****d up country I know.

  3. Hi Horace,

    “What you’re not considering here (which, I know, it is nothing to be proud of) is that 15% of the Italian Economy is black and therefore doesn’t appear on official statistics.”

    I get your point, but I think this has nothing to do with it from a macro economic point of view, since obviously illegal activity fluctuates too.

    I mean these numbers suggest that Italy is a bit richer than it seems, but that this was always the case. Or are you suggesting that all the informal economic activity has been increasing since the early 1990s.

    Even if you did say that, I would say fine, but we should see it in the electricity data. That is there may be loads and loads of new factories secretly opening up, but unless there is also an informal electric net, they need to get their power from somewhere official. Another measure would be oil and gas imports. So if all these are falling, then economic activity is falling, and this is the only thing that macro economists really try to measure.

    The other part is interesting insofar as it tells you about relative living standards etc, although do remember that in Spain, Poland, greece, Ireland etc etc there are also informal economies, so this problem is perhaps more extended than you would imagine.

    Indeed I would be more inclined to believe that there was a fully working powerr station that no one officially new about in the East of Europe or China than anywhere else.

    On the other hand I did recently see the fim Gomorra, and do recognise that some things are uniquely Italian. The blocks of flats reminded me of the Liverpool I grew up in, but all those guns, Liverpool gangs never had guns like that as far as I could see.

  4. I wasn’t really objecting your macroeconomic analysis which is certainly better than what you can find on “Il sole 24 ore”, Italy’s equivalent of the Financial Times. Italian newspapers tend to omit certain “details” which, more often than not, are more than just “details”. The state of the media system is certainly one of the primary causes of Italy’s predicament. I’m 100% sure that if we had a free media system, we certainly wouldn’t be ruled by the current political class (and I’m referring to both right-wing and left-wing parties).

    What I was questioning (maybe I should have specified myself better) was the point made in the previous comment:

    “hidden emigration: salaries in Italy for young people are quite low (same levels as Portugal/Greece, even though cost of living is higher). I’m sure there’s lots on young Italians scattered around Europe that are still recorded as being in Italy”

    There are certainly young Italian people working elsewhere in the EU but I really don’t think that phenomenon is as big as that comment infers. In contrast, illegal economic activity is certainly a much bigger issue. However, I agree with you when you say that this has always been the case.

    As for Gomorra, I’m from Northern Italy and I’ve been to the South only a couple of times. What I can tell you is that, for me, it wasn’t that different from going to another country. The level of illegality that you can perceive when you look around is somewhat frightening.

    Now, you will certainly know that Northern Italy has assisted Southern Italy for decades. Many people argue that we (the northerners) should do that out of some misplaced solidarity principle enshrined in Italy’s 1948’s Constitution. They say “After all, that’s what the Western Germans have been doing with the Eastern Germans”. Well, that’s not exactly the case. Eastern Germany took advantage of the funds it received from the west and used them to gradually rebuild its economy. That should be the purpose of assistance. Redistributing money among different territories SHOULD NOT be the same as redistributing it between social classes. The latter should be perpetual, the former should be temporary.

    Nevertheless, in Italy we have a situation of perpetual assistance to a territory which has showed us more than once its incapability of using public money properly. Just one piece of information: Sicily (5 million people, Italy’s poorest region) spends twice what Lombardy (nearly 10 million, Italy’s richest and more economically dynamic region) spends for public health care and 30% more than the whole of Finland. Campania (Naples’ region, 5 million, Empire of the Camorra) has twice the number of public employees Veneto (5 million, other engine of Italy’s economy) has.

    This shows only one thing: North-to-South assistance’s only consequences were:

    1) Eliminating Southern Italy’s incentive to develop a competitive economy of its own
    2) Making Southern Italian criminal organizations incredibly more powerful than they were before (The Mafia first source of income is public money diverted from public purposes by bribing and corrupting local public officials)

    I’m not a Northern League supporter but I AM a staunch supporter of Fiscal Federalism. That’s the only way you can allow the North to unleash completely its economic potential and at last give the Southerners an incentive to do better instead of being assisted for eternity.

    Sorry for some grammar mistakes.

  5. Horace: One thing you are failing to grasp in your view of southern Italy is the fact that without the people from southern Italy, the industrial north would not have become anywhere near as industrialised as it has become.

    Not only because of the people that have filled the northern factories, working for as little as the wealthy northerners could get away with paying – but also through acting as the rubbish container for all of the toxic filth that the northern factories have been producing for all of these years.

    Of course, it could be argued that it is the people of the south that benefited from acting as the toxic dump of Italy. That would, I fear, indicate a great misunderstanding of the situation in the south. The only substantial benefit that southern terroni have received from the northern polentoni is seeing their land vanish through a combination of toxic waste dumping and uncontrolled building. Hardly a befit that we would normally recognise as such.

    It is only through the active support and encouragement of the northern business empires that the various mafiosi clans and groups have achieved the strength and power that they enjoy these days.

    It would be interesting to observe how well the north would do without the support of the south. Sadly, the Lega will never be able to achieve more with its rhetoric than garner votes from people that wish only to look better and enjoy greater wealth than their next-door neighbours.

  6. @ Horace,

    “There are certainly young Italian people working elsewhere in the EU but I really don’t think that phenomenon is as big as that comment infers.”

    Well I’m not so sure. According to the AIRE database, there are currently an estimated 3.5 million Italians living and working outside Italy, and many of these are young and qualified.

    The website Lavoce said this at one point:

    La fuga dei laureati italiani all’estero è un fenomeno di cui spesso si discute senza l’appoggio di dati significativi. Analizzando i flussi di laureati italiani che vanno all’estero il fenomeno appare drammatico e in crescita. Mentre all’inizio degli anni ’90 meno dell’1% dei nuovi laureati emigrava all’estero, alla fine degli anni ’90 circa il 4% dei nuovi laureati lascia l’italia.

    My young economist friend Paola, who gave up teaching in the University of Milan and now lives and works in Toronto wrote me this in a mail:

    It is difficult to differentiate between people who are first, second and third generation Italian. However, in terms of first generation Italians leaving the country: I found that since 1990 every year 4% of people who hold a bachelor’s degree move out of the country to find job elsewhere; to this number you need to add some people who went to work elsewhere after high school, and MANY young people who did not register to AIRE (Association of Italians residing elsewhere) -therefore the government has no idea they are working somewhere else … Could we estimate an average of 6% of the average yearly birth for people between the ave of 20 and 45 years old are leaving the country?

    And Sascha Becker, Andrea Ichino and Giovanni Peri, in a piece of research you can probably find by Googling online (How Large is the “Brain Drain” from Italy?) found the following:

    Using a comprehensive and newly organized dataset the present article shows that the human capital content of emigrants from Italy significantly increased during the 1990’s . This is even more dramatically the case if we consider emigrating college graduates, whose share relative to total emigrants quadrupled between 1990 and 1998. As a result, since the mid-1990’s the share of college graduates among emigrants from Italy has become larger than that share among residents of Italy. In the late nineties, between 3% and 5% of the new college graduates from Italy was dispersed abroad each year. Some preliminary international comparisons show that the nineties have only worsened a problem of ”brain drain”, that is unique to Italy, while other large economies in the European Union seem to experience a ”brain exchange”. While we do not search for an explanation of this phenomenon, we characterize such an increase in emigration of college graduates as pervasive across age groups and areas of emigration (the North and the South of the country). We also find a tendency during the 1990’s towards increasing emigration of young people (below 45) and of people from Northern regions.

    I was very impressed by Alessandro D’Alatri’s film La Febbre when I saw it, and especially by the moment when the young Italian “would be” businessman hands his passport over to the President. At the time I wrote this:

    Well, almost an everyday story in an Italian context I would say, but what interests me here is the situation of Mario as a young person who wants to succeed, and all the trials and problems which are thrown in his path by a system which doesn’t understand him, and which seems happier to see him fail than to see him succeed. THIS is one of the big problems facing Italy today. And it is reflected in the large numbers of young qualified people who leave Italy every year. There is one very memorable moment in the film, the one where Mario gets to meet the Italian president. The scene takes place in Mario’s bar, which he finally manages to get the permit to open thanks to the fact that the local mayor needs his help in the context of the president’s visit. Mario offers the president a drink, una birra is the reply, una birra Italiana, è bella la birra Italiana. So Mario serves the drink, and then tells the president there is something else he would like to give him, and out of his pocket he whips his Italian passport: “here, this is for you, I don’t need it or want it” (or words to that effect).

    “I’m 100% sure that if we had a free media system, we certainly wouldn’t be ruled by the current political class (and I’m referring to both right-wing and left-wing parties).”

    Well I wish I could be as hopeful about Spain, we certainly don’t have a free and objective media system (most people haven’t heard of half the economic facts about the current crisis I explain to them, facts that can be easily found in the English language press (eg), but I don’t have great confidence that things would change with a change in the media. My feeling is that people get the (mediocre) politicians they want, and here in Spain both main parties are totally opposed to any kind of meaningful reform simply becuase they know the electorate will punish them for it (so one side advocates tax cuts and the other increased spending in the face of the biggest structural crisis that I personally have ever seen, in any modern economy). You may, or may not, like Sarkozy, or Strauss Kahn, or Merkel, or Gordon Brown, but the sad truth is that there is virtually no-one here in Spain even on this level, or with this kind of ability to put country before party to some extent.

  7. @ Horace and Nardini

    Basically you take different sides in what is a very important debate, and both of you make some points I would agree with.

    Let me put my cards on the table, I am british born and Catalan by adoption. This means that I can understand the point of view of Northern Italy to some extent (although not the extremism of people like La Liga, we, fortunately, don’t have this kind of extremism here, apart from a few, largely irrelevant, nutcases). What we do have is national prode and sentiment, in due, and reasonable proportion, and here I mean pride in being Catalan.

    So,

    “the fact that without the people from southern Italy, the industrial north would not have become anywhere near as industrialised as it has become.”

    This is obviously the case, and it is the case here in Northern Spain to, with the people who came from Andalusia. So I think we here have some responsibility to support the grandparents who gave birth to the children, and whom they left behind when they left. I mean Catalonia had entrepreneurial skills, and it had money, what it lacked were children, and these were supplied by the south (as they are now supplied by Senegal and Ecuador). So yes, there are advantages to migration flows, and there is also responsibility.

    But…..

    Horace raises this point:

    “but I AM a staunch supporter of Fiscal Federalism. That’s the only way you can allow the North to unleash completely its economic potential and at last give the Southerners an incentive to do better instead of being assisted for eternity.”

    Me too. You see something seriously hasn’t been working with the way we have been doing things, and the models we have used. How can Southern Spain have maintained unemployment at over 10% in an epoch of record growth when 5 million migrants had to enter the country to feed the needs of the labour market?

    This now means mass unemployment is about to become a very severe problem, since Spain started from such a high base even before the crisis.

    So we need to be solidaristic with the South, but we need a new model to do it with. We need to be given control over our own resources, and allowed to develop economic growth (infrastructure spending here in Catalonia has been ridiculous), and then to help support the poorer regions out of the extra wealth we create (after the crisis is over, evidently).

    We have one million plus extra people here using the health and eductation system, systems which run on a base budget which has hardly changed proportionately over the last 8 years.

    I cannot be sure from this distance, but I suspect that something like this is also true in the Italian case. The worst outcome here would be to simply leave Italy as it is, watch the economy steadily contract, and one day see the public finances explode since they can withstand the stress no longer.

  8. Pingback: bItaly/b’s Recession Deepens | afoe | A Fistful of Euros | European b…/b | Traveling Blog

  9. Nardini,

    those toxic refuses were dumped in Southern Italy by Mafia-owned waste treatment companies who got their licenses from the Local Government of Campania. Are we to blame because you elected people who are easily bribed by criminals and because you failed to control the way they use public money? It’s not the job of Northern Italian companies to check the procedures with which these licences were handed over. Or are you proposing that we should stop considering offers from companies who received licences from the Governments of Campania, Calabria or Sicily? Yes, that would be an option.

    What YOU ARE FAILING TO GRASP is that my stance is not against the people of these regions. When I read that Sicily spends 30% more of the whole of Finland for public health care although Finland’s got one of the best health care systems in the planet while hospitals in Sicily can barely compete with those of Lybia, of I cause I get angry because our northern money is being spent to allow the perpretration of this crime (because that’s what it is), but first of all angry I’m because the people of Sicily are not benefiting at all from this. You know better than me how many southern patients have to come North to undergo difficult treatments or surgeries because Southern Italian Hospitals are unable to help them properly. You know better than me how many southern students come to Northern universities in Bologna, Turin and Milan. Do you understand that the present system doesn’t bring any benefit to the people of Southern Italy but only to a bunch of Mafia oligarchs? What’s the point in keeping on giving this money to the South forever if this money is not spent properly and, above all, is not spent to incentive entrepreneurial activity and to create new jobs in the South? The fact that immigrants from the South helped build Northern Italy’s industry doesn’t give you any right to recklessly spend the money we keep on giving you. It would be like saying: “since Irish immigrants helped build America, now America must hand over billions of dollars to Ireland forever. It makes no sense whatsoever”. If you had spent all that money properly, you would now be one of the richest region in Europe and the fact that you are definitely not proves that it is useless for us to continue to waste our money this way and that is better for us to spend it here, where at least it will help Northern businesses to thrive and new infrastractures to be built.

    Edward,

    I don’t know the Spanish situation very well. I know that Catalunia is Spain’s richest region and Andalusia’s Spain’s poorest but, I hope I’m not wrong, it seems to me that Spanish regions have more fiscal autonomy than Italian ones, although not as much as German and Austrian “states”. Also I don’t think the pervasivity of criminal organizations in Andalusia is as deep and strong as that we have in Southern Italy. Nevertheless, this doesn’t justify a bad management of public money from Andalusian fiscal authorities anyway.

    I agree with you that Italy must be changed in order to avoid total implosion. I have reasons to believe that bad economic times can strenghten consensus towards Northern Italians separatist movements. Were bankruptcy to happen, it wouldn’t be that unlikely for Italy to break up totally into two nations. Of course, the South will be the only loser of this and, therefore, it would be wise of them to cooperate with us in creating a Federal Italy that could work on a stability pact not that different from that used by the EU. Setting some clear uniformed thresholds in public spending (this means, for example, if Turin has a Public transportation per capita spending of 10, Palermo cannot have a per capita spending of 20) is the only way through which we can, at the same time, incentive southern regions to be more efficent and competitive and prompt them to fight better tax evasion which, in the south is frightening. This should be accompanied by national measures aimed at favouring privatizations and liberalizations. These reforms would make TA go up, G go down, thus eliminating our current government deficit and therefore our public debt.

    This is the only possible way Italy can be saved. Otherwise, as I said before, there’s a very high risk of the peninsula breaking into two independent nations.

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  11. Mezzogiorno, or southern Italy, including Sicily (so almost all the former Kingdom of the Two Sicilies), and Sardinia. This region was chronically poor, especially after Italian unification, when the Savoy emptied the treasury of the southern Kingdom and moved the industries from the Naples region to the northwest of the country.

  12. Before Uniification The Kingdon of the Two Sicilies, was the wealthiest of all Italian states. This is what lead to the blight in Southern Italy.

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