The Euro was supposed to lift all boats. Italy was left behind, and will stay there for two more decades according to the IMF.
Please consider Italy ‘Facing 20 Years of Economic Woe’
The IMF has warned that Italy faces two decades of stagnant economic growth.
Its latest report on the country puts growth this year at under 1%, down from its previous 1.1% estimate, and forecasts growth in 2017 of about 1% – down from a 1.25% estimate.
The IMF says Italy will not reach pre-crisis levels until 2025, by which time its neighbours will have economies 20-25% above 2008 levels.
Italy is the third largest eurozone country.
It has 11% unemployment and a banking sector in crisis, with government debt second only to that of Greece.
Italy GDP 1961 to Present
Italy GDP Since Joining Eurozone
Charts from World Bank.
Italy has been in decline for a long time. The eurozone was supposed to help. It didn’t.
Decline and Fall of Italy
Italy vs. Eurozone
The Economist discusses The Italian Job.
Italy’s experience within the euro zone has been miserable. It has been in recession for five of the past eight years. Real (ie, adjusted for inflation) GDP per person is lower than in 1999. Sovereign debt has risen above 130% of GDP. Worse, Italy’s economy is woefully uncompetitive. Since 1998 productivity has fallen steadily. Labour costs, however, have not. Since Italy joined the euro, exports have ceased to be a driver of growth, which has consequently slowed. A slowdown is not something a country with such daunting debts can afford.
There is no shortage of explanations for Italy’s slump in productivity. Thanks to punitive regulation of labour and product markets, it is one of the most expensive places in the rich world to start a new business. Taxes and red tape strongly discourage productive firms from growing very large. Nearly 70% of Italian workers labour in firms with fewer than 50 employees, compared with about a third in America. The government taxes income from labour far more heavily than consumption, discouraging work (and encouraging evasion). Perhaps most worrying, the share of young Italian workers with a university degree is among the lowest in the rich world. At just under 10%, the share of highly educated Italians living abroad is also among the highest in the rich world.
The slowdown in productivity occurred just as Italy joined the single currency. Some economists see this as coincidental. The euro was born just as the global economy was undergoing a rapid bout of globalisation. Italy’s small firms did not scale up to capitalise on emerging-market demand, as Germany’s did. By the same token, its under-skilled population could not take advantage of the rising return to trade in professional services, as firms in America and Britain did.
Rather than waiting for productivity to rise, a quicker route to faster growth is to drive down wages. Indeed, Mr Renzi’s advisers suggest that the government may seek to impose a decentralised wage-setting process if negotiations between trade unions and industry do not yield one.
Yet even the benefits of wage restraint could be disappointing. Germany’s competitiveness drive occurred during an era of relatively strong global growth and relatively buoyant inflation, which made the suppression of real wages both less painful and less noticeable. Italy will enjoy no such help. Any growth scheme that rests on falling wages is unlikely to endear Italians to Mr Renzi. For his reforms to work, he will need time that voters are unlikely to grant him. Keeping Italy happy enough to stay in the euro zone will, in the short term, take much faster growth across the euro area as a whole, fostered by continued dovishness from the ECB and less finickiness from the European Commission.
If the euro area is to keep Italy on board, it will need to become a bit less austere and a bit more Italian.
Italy Roundup
- July 4: Merkel-Renzi Showdown: Italy Threatens to Defy Merkel, Brussels Over bank Bailouts
- July 4: ECB Triggers Another Bank Shares Selloff, Tells Monte dei Paschi to Shed More Assets
- July 6: “Italian Gov’t Collapse More Than Just a Possibility”
- July 10: Deutsche Bank Chief Economist: “Europe is Seriously Ill”, Banks Need €150 Billion Bailout
Mike “Mish” Shedlock
https://m.youtube.com/watch?v=HZCaSyid4m0
Itexit!
It’s Italeave.
oh, i don’t think Italy will have the 20 years of woe by itself, as the EU will be a thing of the past wayyy sooner than most think, setting off the world sovereign debt collapse.
People have the government they want. Italy has lived like this long enough to assume they prefer this situation to any other they would have to expend effort for. I used to wring my hands about situations such as theirs. Now I just look at them in wonder as to why they like it that way. Just as a good crisis should never go to waste, the Italian situation is an opportunity for someone avaricious to mine. The proposed bank bailouts come to mind. Bring on the debt. It won’t be paid anyway, at least by the people who borrowed the cash..
Let me invent a new term here.
Crisis Mining: The creative exploitation of a government crisis that allows wealth to flow from government to a small number of crisis miners.
Please feel free to improve the definition as needed. I can see a hole or two but it’s close.
I think this is less to do with the Euro (although that hasn’t helped) and more to do with Italy’s terrible government and leaders.
This situation was thoroughly predicted by a guy named Wynne Godley long ago at the time of the creation of the EU.
Here is a quote of his courtesy of Steve Keen
Some writers (such as Samuel Brittan and Sir Douglas Hague) have seriously suggested that EMU, by abolishing the balance of payments problem in its present form, would indeed abolish the problem, where it exists, of persistent failure to compete successfully in world markets. But as Professor Martin Feldstein pointed out in a major article in the Economist (13 June), this argument is very dangerously mistaken. If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.
Civilizations really do suffer and fall because they are bad at macroeconomics which is a variation of being bad at math.
Politely disagree. The Eurozone exists because the right people at the right time exploited an opportunity to convince people that they could all gain if they joined together and created the ability to print money and issue debt that somebody else would be responsible for. They convinced people they would get something for nothing. Now they’re just trying to hold it together because the fallacies that were ignored at the onset can’t be ignored any longer.
The US has permanent structural wealth transfer mechanisms. For example wealth chronically flows out of California and into states like Arizona because California pays more tax than it receives. Arizona less. This is necessary because California runs a chronic trade surplus relative to Arizona and so a tax imbalance is used to rebalance this deficit for Arizona. This is the fiscal corrective Godley is referencing. No such mechanism exists in the EU. Oops.
It’s because of this flaw in the EU design that debts build up which can never be repaid. Not deadbeat culture causing the problem but institutional design failure. Build a stupid system; pay the price in human suffering.
Pete,
agree 1000% about the big flaw in Eurozone design. It’s immediately obvious to someone with one course self taught in int’l econ (me) so it should have been obvious to genius macro planners. Hence, genius macro planners were not consulted or were ignored in the design and creation of the EU. It’s just a hustle. The motivations (free stuff, control, utopia, 4th Reich, and so on) are the only debatable subject. The ECB was/is the long game they all used to pay for it. Draghi will go down in history as a buffoon and a case history in big scams of the day. (Fraud is another big hobby along with economics. The EU is a wonderland to me.)
Obvious to genius macro planners except the ones who were crazy Germans. Sorry if I offend some by saying this but it’s high time. What passes for intellectual discourse about macro economic theory in Germany is pure cocky doo doo.
The fact that a shit storm is breaking over Germany because of this is long overdue IMO. Europe needs to acknowledge their crazy German macroeconomic aunt in the attic. There. I said it. Take this as racism if you like. If the shoe fits…
Maybe the Germans have on German TV the 2 minute appeals for 1 euro a day you can feed a Syrian refugee in a euro-camp and keep him from becoming a thief or a rapist. For 5 euros they will send you a picture and give him your address and a train ticket. The picture of a pitiful poor soul accompanies. Send your donations to a sinkhole somewhere. Gotta love German liberalism, especially when they shove it down the entire EU’s throat.
Why should Italians care if they aren’t as productive as their neighbors or their businesses aren’t growing as fast as other countries? I tend to think that reports like this assume other nationalities want to live the way Americans live. I’ve traveled a lot and it is my impression that most actually don’t.
I traveled a little between Rome, Pompeii and Amalfi this time last year. Met lots of English-speaking Italians. I did not get the idea they gave a whit about growth, getting rich, or cared it their banks collapsed. They seemed more interested in cultural issues and making sure work was a pleasant experience.
If you ever go to Italy, one piece of advise, never eat at restaurants in big touristy areas. Ask locals where the good places are.
Some Italians, meaning those in power (and the Mafia, to the extent the two differ), do care about getting rich and powerful. As do regular Italians, if wealth can be had without too much work. So, when, say, an Italian sells his house or old family firm (since Italians are running a close second to the Japanese in the childlessness game), the ones who can afford to offer the most, are those from wealthier and more productive areas.
Over time, this process leads to more and more of the country’s non-human capital coming under control of those obsessed with productivity. Either directly as owners, or indirectly as creditors. So less and less nice places to live will be available to Italians who just want to live well, as all the nice places are taken up as third homes by City banksters, and only ghettos under freeways are left available top the locals. While the salaries the banksters pay to have their beds changed, their toenails clipped and their dicks sucked, render the price level such that traditional “live well” jobs in “culture” no longer pay well enough to make ends meet.
Then, as the locals starts looking and acting ever more indigent, the banksters starts getting worried that the sight of them may “lower their poppeti vajues”, so they toss some money to hire the local politicians’ daughters as chief blowjobesses, in return for some tighter zoning, driving the locals ever further under the freeways, until they are all pushed all the way underground.
“There is no shortage of explanations for Italy’s slump in productivity. Thanks to punitive regulation of labour and product markets, it is one of the most expensive places in the rich world to start a new business.”
Is Italy trying to emulate France?
I remember the story Mish posted, about the Italian businessman who sent his workers on holiday, then moved his business to Poland.
More neo-keynesian failure…
The G7 countries are slowly dying. Investors should look elsewhere
Italy may indeed have a moribund economy, but it might be a stretch to blame it all on being a member of the Eurozone. Italy could still be struggling with corruption, over-regulation and profligate government spending even if it had it’s own currency.