Italy’s Economic Problems Under The Spotlight

As Manuel points out in the accompanying post, Romano Prodi’s resignation as Italy’s Prime Minister is a rather sudden and dramatic, but scarcely unexpected, development. The immediate political crisis may be resolved as rapidly as it appeared, but again as Manuel indicates it may only serve as a prelude for further things to come, and the fragility of any government coalition which may be put together only underlines the difficulties Italy will almost certainly have in addressing what are important ongoing economic problems. The present post will simply attempt to outline some of the main economic problems Italy faces, in order to contextualize the political problem a little.
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Italy 2007 Budget Storm

Italian Finance Minister Tommaso Padoa-Schioppa is going to be a man of his word (and not follow in the path of that other European political leader who was lying about his budget in the morning, in the afternoon, and at night). He assures us of this:

Mr Padoa-Schioppa was adamant any adjustments to the budget, which MPs must approve, would not affect its goal of cutting Italy’s budget deficit to 2.8 per cent.

This is an important re-affirmation, since this time yesterday this little detail wasn’t clear at all, as there was a small matter of 5 billion euro of cuts which were in the budget but which effectively didn’t exist. (All of this is explained in a post on the Italian Economy Watch blog, and the follow up here, as well as by Claus Vistesen on his blog).

As the Economist said:

This is not the sort of thing you expect of a former board member of the European Central Bank. But it shows how far Mr Padoa-Schioppa has had to bend to placate demands by left-wing parties within the government.

The uproar produced within the small business community – who would have seen this mony simply transferred from their coffers to those of the state – has meant that Prodi has now had to publicly vow that the budget will be changed, always of course sticking to the three principles which underlie the budget policy of the current Italian government, namely:

“It’s clear that we will make technical corrections and adjustments, but we absolutely won’t renounce the three objectives of fairness, restoring the health of the public finances and development,”

So, Tommaso Padoa-Schioppa, even though this isn’t exactly the sort of thing that you expect from an ex-director of the ECB, we will assume that this time you are serious, and that you will try to comply with the spirit of what your government has agreed with the European Commission, even if, realistically, it may be a very difficult objective to achieve in the global economic environment we may all face in 2007.

A new hope?

Many thanks to David for offering me a chance to raise my profile just before the second edition of the Satin Pajama Awards with a two-weeks guest-blogging stint here at AFOE.

For the 99% of you who don’t already know me, I usually display my limited knowledge of economics and politics at my own blog Ceteris Paribus and also, though not that often since a certain fateful 29th of May, at the group blog Publius. Oh, and I’m also French, which explains my awful English style and may or may not be a good reason to disregard my analysis about European matters.

Anyway, enough about me, since the quite unexpected European budget deal of last night offers plenty of things to write about.
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Waiting With Baited Breath?

Will there or won’t there be an eleventh hour agreement on the new EU budget. Tony Blair is clearly burning the midnight oil, but the foreign ministers did not seem to be unduly impressed:

EU foreign ministers’ talks on the 2007-2013 budget ended after less than a minute on Monday (12 December), with the UK set to issue new proposals on Wednesday ahead of Thursday’s summit.

Britain is set today to publish revised proposals designed to broker a deal on a seven-year EU budget, with the new offer still expected to include heavy cuts to funding for eastern Europe. According to the FT:

Tony Blair, British prime minister, is expected to soften his proposals at the EU summit starting in Brussels on Thursday, including giving up more of the UK budget rebate and restoring some of the planned cuts in the new member states.

In pushing for a tighter EU budget for 2007-2013, the UK’s inital offer proposed cuts of almost 10 per cent in funding for eastern Europe in a total budget of €847bn ($1,000bn, £571bn).

Tony has also found a new argument, the cuts in Eastern Europe aren’t as bad as they seem, since these countries don’t know how to spend the money even when they get it (hmmmmm).

Britain claims there is little harm in reducing payments to poorer new members because they are already finding it difficult to spend the much smaller amounts they are being allocated in 2004-2006. But central Europeans say the British analysis is flawed because it looks at figures for this year, which give no indication of how well the billions of euros in structural funds will be spent.

Meantime, in a decision which is getting decidedly less coverage, French foreign minister Philippe Douste-Blazy may have pulled the plug on the enlargement process itself by refusing to approve official EU candidate member status for Macedonia. I’m not sure what this implies. Any comments from our experts out there?

The Political Fallout of Italy’s Growth Problem

Yesterday the news from Italy was the sudden drop in industrial output, today it is the fact that this makes Berlusconi’s re-election much more uphill work. In particular his coalition just lost a vote in Messina, Sicily, that they normally should have won.

This trend in indutrial output is important for what it implies about growth in Italy this year and next, and this is important for the knock-on implications for Italy’s deficit. This Italian government has incorporated an economic growth target of 1.5 per cent in its 2006 budget, and this target now seems improbable. This means the budget shortfall will be greater than agreed with Brussels, and that the deficit will rise more than anticipated. More problems.

The IMF is critical of the approach the Italian government is taking and has already expressed its fears that Italy will not meet its goal of reducing its budget deficit to 3.8 per cent of gross domestic product in 2006 from 4.3 per cent this year. The principal culprit for the IMF: Italy’s slow productivity growth.

“The nation’s economic problems are essentially ‘made in Italy’,” an IMF report said last month. “The fundamental factor accounting for weak competitiveness, and for a decade of disappointing economic performance, is slow productivity growth. Over 1996-2004, growth of output per hour worked was the lowest among all industrial countries and a cumulative 5.5 percentage points below the euro area average.”

The Italian Government Has A New Crisis

Germany isn’t the only EU country where serious ongoing economic problems are leading to political gridlock. Italy’s situation is no better, and arguably worse. This ‘worse’ aspect was pushed into the headlines yesterday by the resignation of Economy Minister Domenico Siniscalco. This is sending shock waves throughout the entire Italian political system. It still isn’t clear at the time of writing whether the Berlusconi government can survive, especially given the gravity of the underlying problem which is the need to make severe budget cuts when Italy is in a prolonged recession and elections loom sometime next spring.

Essentially Siniscalco quit because of continuing government infighting over the 2006 budget and over the administration�s failure to force the resignation of Bank of Italy Governor Antonio Fazio following the scandal produced by accusations that he showed bias against Dutch bank ABN AMRO during a takeover battle for the Italian Banca Antonveneta SpA.
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Hungary Given Euro Warning

Hungary risks missing its 2010 target for adopting the euro unless its government reduces the budget deficit and improves policy co-ordination with the central. This at least is the view of the OECD as expressed in its annual report on Hungary out today. According to the OECD:

the key conclusion is that further reductions in the general government deficit have to come about through spending cuts because of the already high level of taxation. Failure to reach deficit targets have damaged credibility in the recent past and the Chapter discusses ways of providing more realistic budget targets, more transparent fiscal planning, better assessment of progress over the budget year and improved estimation of outcomes.

I can think of two pertinent questions to put to the authors of the report: will the euro still be around by the time we get to 2010 (in its present form, I doubt it), and if it is, are they sure that it’s a good idea (looking at what has happened eg to Portugal, Greece and Italy) for Hungary to join.

Budget Airlines Go East

AP writes from Bratislava about how budget airlines are allowing middle-aged villagers from Central and Eastern Europe to get on an airplane for the first time. Presumably they will also allow British stag parties to enjoy piss-up weekends someplace other than Prague (or Ljubljana or Tallinn) for a change.

“British tourists can now discover Poland and decide for themselves what Gdansk, Bydgoszcz, Szczecin and Rzeszow have to offer…”

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You’d Better Move On

The papers this morning seem to be all full of ‘gloomy’ articles whose principal theme is that Europe has finally been plunged into a grave crisis by this weeks summit.

“People will tell you next that Europe is not in a crisis,” Luxembourg Prime Minister Jean-Claude Juncker, who holds the EU presidency, said after a two-day summit ended in acrimony. “It is in a deep crisis.”

As someone who is ‘crisis prone’ I would have imagined I would share that feeling. Somehow I don’t.

Some reasons why.
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Not Promising

It’s a bit too early to draw any hard and fast conclusions about this weeks summit, but this early snippet of news doesn’t look too promising:

“European leaders plunged into a full-blown crisis at a summit, with a battle raging over long-term EU financing and their lofty plans for an EU constitution nearly in tatters………..French President Jacques Chirac called for an emergency meeting to extricate the bloc from the mess created by deep splits over the bloc’s budget and by a growing popular revolt against the proposed EU treaty….

Leaders had hoped a deal on the 2007-2013 EU budget would let them show a united front after French and Dutch voters delivered stinging rejections of their constitition, meant to lay the ground rules for an enlarged 25-nation alliance.

Instead, the summit was overwhelmed by an embarassing squabble over money, with British Prime Minister Tony Blair refusing demands by the other 24 EU nations, led by France, that he surrender an annual budget rebate.