Italy’s Supply Constraint

The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
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Why reform has become a dirty word.

This anniversary guest post was written by the indispensable Jérôme Guillet, who normally writes for The European Tribune.

Laurence Parisot, the head of MEDEF, the French business
organisation, recently complained that:

There is one word who meaning for the public has changed in the past 25 years: “reform”. It used to be synonymous with progress, and now it means social regression.

One wonders why. Or not. As I’ve written incessantly over the past year at European Tribune (for instance here), “reform” has come to mean only one thing: less regulation of corporations, lower wages, fewer rights for workers, and weaker unions, i.e. the elimination of anything that can impede corporations’ freedom to make profits in the short term.
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Why France MUST Reform – MUST, I Tell You!

Since the withdrawal of the CPE and the resulting collateral damage to Dominique de Villepin, not to mention Nicolas Sarkozy’s unexpected appearance as a unity figure at the height of the crisis, it’s rapidly being promulgated as conventional wisdom that France “is ungovernable”/refuses to “reform”/cannot be “reformed”. There is only one problem with this discourse, very popular in anglophone leader columns and the like, which is that it’s nonsense.

It’s quite often been raised here on AFOE that the French economy isn’t actually in trouble. Growth, although not great, is ticking along, inflation is controlled, unemployment is higher than the UK but lower than Italy or Germany, and the demographics (as Edward Hugh will no doubt point out) look a lot better than many other countries. Certainly, there’s more youth unemployment than one might like, but almost all the figures for this are wildly misleading. The percentage rate of unemployment in the 15-24 years age group looks scary high, but is actually a very small percentage of that group–because most of them are in education or vocational training of some form and hence not part of the labour force. Unemployment as a percentage of the age group is rather lower than the national rate and not much different from that elsewhere in Europe. (Le Monde ran a useful little chart of this in a supplement yesterday that doesn’t seem to be on the web.) Much – indeed most – of the difference in employment growth between France and the UK in recent years has been accounted for by the UK government going on a hiring binge.

So why the crisis atmosphere? More, as ever, below the fold..
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French protests : it’s the politics, stupid!

There are some offers you can’t refuse. An invitation to join the permanent roster of Afoe is one of them. Let me first say, then, that I was initially happy and thrilled and grateful to be part of this wonderful blog. All the more so since it means that I’ll be ineligible for the Afoe Awards next year, and thus spared the humiliation of a third crushing defeat in a row. (For those of you who are scratching their head and wondering “who the hell is this guy?”, check this post)

If is say “initially”, it’s because, as the French guy of the team, I now have the daunting task of trying to explain clearly our current social row over the Contrat première embauche (First job contract) to a mainly non-native readership. As it happens, the BBC has already done a quite decent Q&A on the topic. So go read it to get the basics. And then come back here if you want my long and -I hope- not too muddled thoughts on what it all means.
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Robin Hood Or The Sheriff of Nottingham?

José Barroso, European Commission president, yesterday advised Tony Blair not to act like the Sheriff of Nottingham, taking from the poor to give to the rich. I don’t know whether Tony’s been taking his advice, but this decision seems significant, and seems to reflect a willingness to try and get a deal. I don’t know what will eventually happen to the badly needed reform of the CAP though.

UK prime minister Tony Blair has signalled London will agree to cut its rebate from the EU budget, without a link to common agricultural policy (CAP) reform but through excluding new member states from contributions to the “British cheque.”…

London had, until now, insisted that a complex reform of EU spending, mainly on farm subsidies, is needed if the UK is to give up the rebate, which was negotiated in 1984 by Margaret Thatcher.

However, with France unlikely to agree on any farm cuts at the December summit, UK officials have revealed they will offer to freeze the UK’s €5.6 billion annual rebate at something close to the current level.

The solution is similar to one which London rejected in June, but the proposed British rebate cuts are less severe.

The End of the Dolce Vita?

Are the good times and the good life still going to continue to roll in the Italy of the twenty first century? This is the core question the Economist’s Europe editor John Peet asks in the latest Economist Survey: Italy, Addio, Dolce Vita. As Peet says:

Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today’s Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.
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Italian Pension Reform

The Italian government finally agreed the details of the new penison reform yesterday. Curiously, it does not need to go to parliament for approval. Getting government agreement had not been without difficulty, and again interestingly enough it won’t come into effect for two years, giving next year’s incoming government plenty of time to change its mind.

The reform aims to launch a second pillar of private and occupational schemes to flank state pensions, using money which companies currently hold on behalf of their workers in a fund which employees receive when they leave their job. It will come into force at the same time as a reform of the state pension system which raises the retirement age to 60 from 57. Both measures could be changed or scrapped between now and 2008 by whoever wins the 2006 general election.

Rational Markets?

The general impact of the French riots is, I feel, being ably covered by others here, what I am curious about is how financial markets reach their opinions. According to headlines in many newspapers, the euro is falling aginst the dollar as a result of what is happening in France (or see here). This may or may not be a good reading of why the euro is dropping, but if it was the explanation, I would say it was a far from rational response.
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Buried lead?

Saturday over at European Tribune says:

In the past few days, everyone talked about Franz Müntefering’s resignation as SPD chairman. I did, too. That is why I nearly missed one of the most important news in German politics for months (or maybe even years):

SPD and CDU/CSU have agreed on the most contentious points of federal reform. Federal reform will be the first big reform project of the coming grand coalition.

Slowed or stalled?

Taking a break from the German elections, I ran across this recent article over at Radio Free Europe. Short version: EU accession for the Western Balkans (Croatia, Bosnia, Serbia, Macedonia and Albania) is stalling.

All of these five states would like to be part of the EU, but — with the partial exception of Croatia — none of them are particularly welcome. The EU appears to be going through a period of “accession fatigue” in general. The “No” votes in France and the Netherlands, though not directed specifically at these countries, have definitely created an atmosphere of doubt and uncertainty.

Furthermore, many of the countries of the Western Balkans are — there’s no way to be polite about this — unpopular. A recent Eurobarometer poll shows that more people oppose membership for Bosnia (43%) than support it. Only 40% of Europeans support EU membership for Serbia, while 44% oppose it. And for Albania, those numbers are a depressing 36% for, 50% against.

Obviously this could change over time. Again with the exception of Croatia, all of these countries are at least a decade away from membership. So opinions might shift. Still, the poll numbers suggest that there’s not much popular support within the EU for even starting the process.

Looking at the potential members one by one, below the flip.
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