On Their Knees

It should be noted that Germany is not the only EU member state where controversy is growing about economic stagnation and what to do about it. Luca Cordero di Montezemolo, the chairman of Confindustria, Italy’s employers’ group, has made his preferences clear: ?I don’t want an Italy like Disneyworld”.

More to the point, he also said the following:

?If we look at the economic statistics of our country, unfortunately we see that we are down on our knees,? he told a conference in Trieste in north-eastern Italy. ?If we look at productivity, the balance of payments, public and private investments, the way industry is going, the tax burden on our companies and even the speed of our civil justice system, we see that we are in bottom place in Europe.?

The cryptic comment about Disneyworld is an allusion to Italy’s necessary and painful transition from an industrial to a services economy. Increasing tourism is simply one part of this.

A balanced assessment of where this process is at can be found in this piece from Morgan Stanley’s Vincenzo Guzmann yesterday.

Italy?s industrial sector is ill. Manufacturing value added to GDP was down 1.8% in Q4/04 from a year earlier, the third phase of outright contraction in three years. In fact, we might well say that the sector entered a protracted recession in early 2001 and has never come out of it since, except for negligible periods. The trade balance, measured as a 12-month rolling sum, dipped into the red in October 2004, and the gap widened steadily thereafter. While we could blame the strong Euro for the loss of some market shares, Italy visibly lost ground also against the other Euro partners throughout the past eight years. The country?s growth model based on traditional cheap low-tech production is falling under the axe of global competition. In our view, the implications are twofold: First, industry will have to rethink its own role; second, the secular shift from industry into services will intensify. Growth will likely become more dependent on services and domestic demand, leading to more pressure for deregulation in sectors so far shielded from competition.

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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".

4 thoughts on “On Their Knees

  1. Growth will likely become more dependent on services and domestic demand,

    I doubt the Morgan Stanley people look at it this way, but is there some point when “domestic demand” ceases being Italian domestic and instead becomes eurozone domestic?

    Maybe I only think this way because I see the enormous columns of cars headed down the autobahn to Italy almost every weekend…

  2. I think we are re-running the same (euro-related) issues here Doug. I don’t think its helpful to look at the aggregates in this way.

    Domestic demand is weak in both countries. Trade between them helps both of them, and this is certainly fine. OTOH while Germany still manages a trade surplus, Italy is slipping into deficit, and for these purposes it doesn’t matter whether the deficit is with other EU countries or with China.

    Obviously German consumers can see some advantages in buying in Italy, and Italians obviously buy some things from Germany.

    In terms of exports, Italian companies seem to be *less* competitive than German ones. Hence their problem is, in principle, bigger.

  3. Has anybody ever studied the relationship between the industrial and the services sector? Is it possible to have a thriving economy with only a service sector? If so under which conditions?
    Or is industry still a necessary bedrock?

  4. “Has anybody ever studied”

    I haven’t seen any explicit studies, but in principle there is no particular problem.

    There was a time when people imagined that there was a difference, based on the distiction between the respective tangible and intangible products.

    There were all sorts of obscure debates about ‘productive’ and ‘unproductive’ labour, or about ‘necessary’ and ‘luxury’ consumption, but I think these are now pretty much dated.

    One produces a physical product, the other doesn’t. The only difference is the time scale over which you consume really, and even this may not hold as you may lease a service over a protracted time scale, and buy an industrial product – like a firework – which you consume instantaneously.

    As the debate about BPO shows, you can also import and export services just as you can the products of industrial output.

    Obviously, for all sorts of reasons, economies continue to have agricultural and industrial components, but normally these days with pretty residual value shares.

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