Sunday, April 05, 2020

Italy's coronavirus battle amidst 50-years long economic crisis

Italy has a history of high debt but it had an economic miracle in the period 1950-1970 with an average annual growth rate level with West Germany's. It ended with a national labour strike and in 1971 the Organisation for Economic Cooperation and Development (OECD) noted that "The index of production showed no increase whatsoever in the course of 1970." The succeeding 50 years have been characterised by double-digit inflation and interest rates, persistent budget deficits and low growth both before and after the launch of the Euro.

"Perhaps it is historically true that no order of society ever perishes save by its own hand," John Maynard Keynes, the renowned British economist, wrote in 'The Economic Consequences of the Peace' (1919) — his misjudged polemic against the Treaty of Versailles.

The data on April 5th on the coronavirus from Johns Hopkins Coronavirus Center show 1.2m known infections worldwide and 64,700 deaths. Covid-19 statistics are also available from Our World in Data. The data only show part of the iceberg for every country whether it is China, Italy or poor Myanmar (Burma) with a population of 52m but officially only 21 cases and 1 death.

Nate Silver, the American statistician and writer who analyzes baseball and elections, noted this weekend in an article

"According to two recent epidemiological studies, which tried to infer the true number of infected people from the reported number of deaths, there is roughly a 20-fold difference in case detection rates between the countries that are doing the best job of it, such as Norway and the worst job, such as the United Kingdom. (The United States is probably somewhere in the middle of the pack by this standard.) That means, for example, that in one country that reports 1,000 Covid-19 cases, there could actually be 5,000 infected people, and in another country that reports 1,000 cases, there might be 100,000!"

United States: infections are at 311,357 and 8,452 deaths; Spain: 126,168, 11,947; Italy: 119,827, 15,362; and Germany: 96,092, 1,444.

Nicholas Kristof of The New York Times on April 4, 2020:

"South Korea and the United States had their first coronavirus cases on the same day, but Seoul did a far better job managing the response. The upshot: It has suffered only 174 coronavirus deaths, equivalent to 1,100 for a population the size of America’s.

That suggests that we may lose 90,000 Americans in this wave of infections because the United States did not manage the crisis as well as South Korea did."

Italy is fighting the virus against a backdrop of an economic crisis that began a half-century ago.

The Euro was launched on Jan 1, 1999: for the first three years it was an ‘invisible’ currency, only used for accounting purposes and electronic payments. Coins and banknotes were launched on Jan 1, 2002 in 12 EU countries — now the Euro System has 19 member countries with a population of 341m the biggest cash changeover in history took place.

The European Central Bank (ECB) has said that "Growth has been rather heterogeneous among the five largest Euro Area countries. Since the creation of the euro Spain grew most strongly (2.3% average annual growth), followed by the Netherlands (1.9%), and France and Germany (both 1.6%). In contrast, Italy has been growing by only 0.5% on average per year."

Chart 2 shows that some countries have even diverged further since 1999. This is particularly the case for Italy.

In 1999 Italy's GDP (gross domestic product) per capita was above the 100 level but in 2018 was below 90.

For those who would blame the Euro for Italy's recent near-stagnation, Bruegel, the Brusells-based economics think-tank noted in 2017, "In cumulative terms, the Lira lost around half (53%) of its value vis-à-vis the DM (Deutsche Mark) by the end of this 20-year period (1979-1999). However, there were not equivalent gains in real terms, since employment levels at the end of this period were very similar to what they were at the start."

There are some positives in household savings and trade while Italy was ahead of Ireland in 2017 in respect of Household net adjusted disposable income, per capita USD at 2017 PPPs (adjusted for price differences) data (see methodology etc.) from the Organisation for Economic Cooperation and Development (OECD) — the average for 32 mainly rich OECD countries was $28,000 and Ireland was at $26,913 and Italy at $27,797.

Italy has a shadow/ black economy of an estimated 23% of GDP while an estimate of the legal portion is included in the national accounts.

Note: The latest available year is 2015 for New Zealand. The OECD average excludes Chile, Colombia, Iceland, Israel and Turkey, as data are not available.

A history of mostly high public debt

Italy's gross public debt is 136% of GDP and since 1861 when Italy was partly reunited, the debt ratio has exceeded 100% in 72 years or 45% of the time while it has been above 60% for 120 years or 75% of the period since reunification (Risorgimento).

Italy has only reported one annual budget surplus since 1909/1910.

Hyperinflation in 1947 cut the debt burden to an all-time record low of 25% and the average rate to 1973 was 31%.

Nevertheless, Italy has run a primary surplus since 1992 apart from the first two years of the financial crisis a decade ago.

Interest payments on the national debt fell from 12% of GDP in the early 1990s to less than 4% today.

About 45% of Italian public debt is held abroad including by the ECB via the Bank of Italy.

A Golden Age for 20 years in a century

In 'Postwar: A History of Europe Since 1945' Tony Judt (1948-2010), the English-born historian, wrote that, "In 1951 Italian factories made just 18,500 fridges; two decades later Italy was producing 5,247,000 a year almost as many as the USA, and more than the rest of Europe put together."

Italy had become Europe's largest manufacturer of refrigerators and other 'white goods.'

However, in 1984 Electrolux acquired Zanussi, Italy's top brand, and today the Swedish giant considers the following companies as its major competitors in Western Europe: Miele (Germany); B/S/H (Bosch, Germany); Whirlpool (USA); Samsung (Korea); LG Electronics (Korea) and Arcelik (Turkey).

Poland has become Europe's top manufacturing location for domestic household appliances.

A hundred years after Marx and Engels warned in the 1848 Communist Manifesto that "A spectre is haunting Europe — the spectre of communism," the devastation of European capital stock was much greater than in the First World War. The European Recovery Program, which was proposed by George Marshall, a five-star general and then US secretary of state, would distribute roughly $13.3bn ($143bn in 2017 dollars) of assistance to 16 countries in the period 1948-1951.

Vanquished Germany would produce a goods trade surplus in 1953 and post a surplus every year since.

The period 1950-1973 is known as a Golden Age in Europe. Unemployment would by 1970 fall to low single digits in several Western European countries. Italy's rate was at 3.2% in 1970.

Greece had the best economic performance as measured by average annual economic growth of 6.3%, across the continent of Europe in the period 1950-1973. Italy and West Germany grew at 5% annually.

Italy industrialised and became second to West Germany among Western European steel producers.

The number of workers in the car industry tripled. Metallurgical exports rose 25 times but later the steel industry declined and it was privatized in 1992–97 as part of efforts to reduce public debt in advance of entering the Euro System.

In late 1969 about 75% of the Italian workforce went on strike.

In 1970 the average GDP per capita in Italy was $19,200 (2015 US$) according to the OECD compared with Germany at $20,800; France 19,500; Denmark $24,800; Sweden $23,000 and Japan $16,000.

The Italian government agreed with trade unions to hike wages and social spending and with inflation rising 130% in the period 1970-1977, real wages grew by 53%.

By 1974 with the quadrupling of the oil price Italy had to request bailouts from the International Monetary Fund (IMF); European Economic Community (EEC) and the German Bundesbank. About $5.9bn in loans were provided. The Bank Of Italy also funded part of the growing deficits through money printing — US Federal Reserve paper (1978).

In 1979, the EEC created the European Monetary System (EMS) to keep member country currencies within a fixed range of each other, to reduce volatility.

The Bank of Italy was given independence from the Italian treasury and to cool high inflation in 1981 it raised its discount interest rate to a peak of 19% and it was still above 10% until 1993. Yields on 10-year government bonds peaked at over 20% in 1982 and averaged 14% between 1980 and 1993 when annual inflation dropped from 21% in 1980, 9% in 1985 and to 6.5% in 1990.

The high real interest rates were a serious blow to both business and residential mortgage holders.

In the period 1980-1990, the public debt to GDP ratio rose 38% to 92%.

Despite a 60% debt ceiling for entering the Euro System, financial engineering such as privatisations, and falling bond yields helped Italy to improve its finaces but it entered the System with a debt ratio of 113%.

Italy has had 67 governments in the 75 years since 1945, which indicates a weak political system and institutions.

Bill Emmott, who was editor-in-chief of The Economist in 1993-2006, and is the author of 13 books, on Japan, Asia, Italy, lives in Dublin. In late May 2018 when the 66th government was formed by the leftist Five Star Movement (M5S) and the far-right League (Lega), Emmott set 10 tests for the improbable coalition, while noting that the 55-page “contract” the two parties had signed "gives us ample scope to assess how they are doing. But a lot of it is abstract waffle, full of contradictions."

Luigi Di Maio, the M5S leader, implemented his citizens' income welfare programme while Matteo Salvini, the Lega leader, concentrated on being the hard man that would halt migration from Africa.

Giuseppe Conte, Italian prime minister, forecast that the welfare scheme would be a major boost to the country's economy, "It will have a positive impact on domestic demand."

There were Nul Points for Bill Emmott's tests when the gialloverde coalition collapsed over a year later.

In August 2019 the 67th government took power and the M5S was back with the left of centre Partito Democratico.

Bill Emmott noted, "What has emerged in the past 15 months about Five Star is neither very inspiring nor particularly concerning, except in so far as it may have wasted precious time...Gialloverde turned out to be mainly noise and little action, at least little of the sort of fiscal action that could have destabilised the economy, so why should giallorosso be any worse?"

Now the focus is on the health emergency and it will have an impact for years to come.

Will the 68th government be the one that makes a difference for a change?

An expected coronavirus recession will be Italy's 4th since 2007.

Fabiano Schivardi, an economist at LUISS University in Rome, said in a comment to the Financial Times last year that a key problem was the structure of Italian industry. “Italy has a production structure that is mainly based on medium-sized businesses, typically family businesses run by entrepreneurs who are excellent at the production stage but perhaps less accustomed to designing new products, innovating or investing in IT,” he said. “This model worked very well in a certain phase of the country’s growth until the 1980s, but with globalisation and technological change, such small businesses started to struggle.”

Italy had no company in a 2019 ranking of the top 100 global food and beverage firms.

Only 1.4% of GDP is spent on research and development compared with 3% or more by Germany, Denmark and Sweden.

Italy has global luxury brands but traditional shoemaking and textiles were hit by competition from Chinese and Eastern European firms in recent decades.

The best graduates tend to emigrate as the many family firms promote their own.

The poor Mezzogiorno region in the south has the lowest employment rate of any region in the EU at about 40%.

The labour participation rate is 59% compared with Germany's 76% and Sweden's 83%.

Corruption and a sclerotic courts system are endemic.

Inward foreign direct investment (FDI) to Italy averaged only around 1% of GDP in the period 2003-2018 according to the United Nations Conference on Trade and Development (UNCTAD), and the poor Mezzogiorno (the South) region is typically a no-go area for FDI because of organised crime.

In April 2009, an earthquake struck near the city of L'Aquila in the Abruzzi region of central Italy and killed 309 people. The magnitude 6.3 tremor struck at 3:32 am local time, seriously damaging the 13th-century city of L'Aquila, located only about 100 km northeast of Rome.

Six scientists and a government official were prosecuted for not accurately pinpointing the expected epicentre of the earthquake. In October 2012 an Italian court found the 7 individuals guilty of multiple manslaughter, and each was sentenced to six years in prison. Those convictions were overturned on appeal in November 2014.

The reconstruction of L’Aquila and its suburbs has an overall budget of about €8bn and of course the Camorra one of the oldest and largest criminal organizations in Italy, dating from the 17th century had to get its cut from these lucrative contracts. The work of reconstruction is still ongoing.

Before the Covid-19 debacle the IMF forecast in 2019 that by 2024, Italy’s output will remain lower than in 2007, marking at least 17 years of stagnation — in effect, almost two lost decades.

The IMF has forecast that in 2024 the Italian GDP per capita at current prices will be $37,600 (end of the broken green line) compared with $37,700 in 2007.


Italy was among the countries that manipulated national accounts data to meet euro entry criteria