Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the tag “Italy”

Is the EU being dragged apart?


After a sense of calm had finally emerged in the eurozone since last summer, panic has erupted once again. Cyprus’s long awaited bailout was carried out with little thought of the consequences, both short term and long. The initial decision to place a one off tax on all depositors in Cypriot banks, both over and under €100,000, was always going to lead to public uproar and a bank run. The second bailout decision was slightly better, only affecting those with over €100,000 in their banks accounts and winding down one of Cyprus’s biggest banks, the Laiki bank, while switching accounts to the Bank of Cyprus. But the damage had already been done; the government now has to enforce capital controls to keep money in the country, while the public won’t forget how close it came to them losing chunks of their bank balance. It has almost certainly ruined one of Cyprus’s biggest sources of income as an offshore financial haven, with the conditions of the bailout most likely requiring reforms of the country’s economy. Then there is the tourism sector (another big market) which will be hit, as foreigners won’t want to risk getting caught in the middle of another financial crisis. Worst of all, this will not be the end of it; the economy is set to retract by 5% in the more positive estimates and another bailout will need to be negotiated.

Cyprus’s  Debt-to-GDP ratio could overtake Greece in the future by some estimates. Found at http://trueeconomics.blogspot.co.uk/2013/03/2432013-are-cypriot-debt-dynamics-worse.html

Yet this is not the biggest worry for the European Union. Cyprus accounts for a tiny 0.2% of Eurozone GDP, its bailout at €10 billion is minuscule compared to the €246 billion needed to bailout Greece. If the economy crashed and defaulted on its debt, it would hardly tear the European Union apart. The bigger repercussions of this debacle are that the EU looks as divided as ever. The capital controls being placed on the Cypriot economy are not supposed to be possible in the EU – they are the first case of it since its creation. They are supposed to be short term, but then the same was said about Iceland 4 years ago.

 Cyprus’s Bailout is tiny compared to the other EU Bailouts. Found at http://www.economist.com/blogs/graphicdetail/2013/03/daily-chart-18

Even more worrying is that the much heralded banking union that the EU nations announced last year now seems less likely. The European Central Bank was set to bail out troubled banks directly, thereby cutting off the self-defeating link between weak banks and weak governments. But to some member countries that seemed too much like gifting money without conditions that have so far been ever present within bailouts e.g. reforms to the economy. Cyprus was the big test, to see if the ECB would directly fund the failing banks of the island, but disappointingly this was not to be the case. A banking union would have showed a more unified EU, with member countries prepared to provide assistance to troubled states. It could have possibly paved the way for joint government bonds, stopping the inconsistent borrowing costs that have spread throughout the eurozone. In reality the EU members have been diverging for awhile, amplifying the problems of the union.

Looking across the region, this isn’t the only sign of a gap emerging between EU states. Tensions are rising within the union, with the periphery nations growing resentful over the austerity policies being enforced onto their economies, while the central nations are becoming frustrated at having to rescue the weaker nations from their own mistakes. This is showing in the form of protest votes. Greece had a near miss in their latest election, where a party campaigning on leaving the euro ran the victors close. Italy went a step further, with the 5 Star Movement (a protest party lead by an ex-comedian) caused a political gridlock in the March elections which has yet to be resolved. This was helped by the far right being led by Silvio Berlusconi, a controversial billionaire who campaigned on ending the EU austerity in Italy. In Germany, Angela Merkel will soon face her own elections, where her popularity will be tested by opponents who will campaign against the continued funding of the EU by the German tax payers.

Beppe Grillo has captured votes for his 5 star movement party by campaigning for a referendum on EU membership. 

Then there is France, a country somehow caught in the middle. The nation is central to the EU, its partnership with Germany gives the union its clout and its leadership with Angela Merkel helped lead Europe through the financial crisis in 2008/2009. But Francois Hollande won his presidency by promising policies like the 75% tax on millionaires and the lowering of the retirement age, while he has backed the periphery economies in talks against austerity (to the annoyance of Angela Merkel). The French economy is in desperate need of reform and cuts however. The budget deficit is set to go over the set target of 3% of GDP, public spending is the highest in the EU at 57% of GDP and while Germany’s economy has become more competitive over the last decade, France’s has been left unproductive in the global economy. President Hollande is now set to implement the austerity measures he never mentioned during his campaign and has since seen his popularity plunge to the lowest since the firth republic began.

Showing the high public expenditure of France compared with similar sized countries. 

The contradictory aims of the different members are leaving the big decisions unmade. The lessons of the past bailouts are not being learnt; there is still no definite lender of the last resort, no banking union, no talks of the possibility of sharing out some of the debt across the union to help member states recover. Austerity is needed, but so are some pro-growth policies and just demanding more and more cuts from the bailed out countries is not going to get the right results. The EU budget could be restructured to help improve spending on much needed areas like infrastructure and reduce spending on subsidies like French Farming and the rebates that go to countries like Britain.

Britain is another obstacle awaiting the EU in the future. The government is set to hold a referendum after 2015 (if it wins) on its EU membership and if the union is still facing the problems it is today, it is not inconceivable that the nation could leave the club. The public are already frustrated at the European laws they have to abide by and the levels of immigration that arrive to their shores. Losing Britain would be a deep blow to the union, both as the third largest economy and as a good balance to Germany’s motives. But the growing popularity of the UKIP party, again campaigning on an exit from the EU, shows the split that is appearing between member states.

Together the EU is the biggest economic zone in the world, one which can rival the economies of the USA and China. Divided it is a bunch of quarrelling nations that can’t agree on the best policies to move forward. Right now the latter is a more poignant picture of the EU, with GDP retracting by 0.3% in 2012  and unemployment reaching a new high of 12%. Europe needs to integrate further both politically and economically if it’s reverse this slump. A move towards a banking union would be a good start, while sharing the debt burden of its weakest members would go a long way to restoring stability to an economic zone that has struggled with such a concept.

A divided Europe is a weaker Europe, let’s just hope it doesn’t take its members too long to remember this.

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An Old Italian Joke


Italy is set to hold an election that could prove pivotal to the rest of Europe. The current Prime Minister Mario Monti, while a very respectable figure, was always an unelected official, which never sat right in a democratic country. His painful reforming of the country over the last year, while very much needed, has eaten into his popularity, leaving him lagging in the polls. It is almost certain a new leader will be elected (though many hope Mario Monti could keep some sort of position in the next parliament, depending on who wins), so it will be a split race between the right, the left and the radical Five Star movement lead by a comedian.

Well I say a new leader, but somehow Mr Berlusconi has managed to veer his big ego into this election. That is despite Italy showing nearly no growth during his long terms in power, his controversial resignation in 2011 when facing criminal allegations (of which he will stand trial for after these elections) and the more recent press release stating he wouldn’t stand in this election (a decision he almost instantly reversed). He is campaigning on tax cuts and against the much maligned austerity, despite Italy holding one of the largest public debt to GDP ratio’s in Europe at nearly 130%. He is also using his considerable resources and dominance over private TV channels to grab votes from an undecided public. Even with this however, he retains only an outside chances of winning this election, with the Italians luckily holding a long memory. But even if he doesn’t win, his presence will certainly upset the balance and could stop a stable government from winning a majority.

Only Greece can boast a high Debt to GDP ratio than Italy in Europe. 

The favourite in the polls is Mr Bersani, leader of the left leaning Democratic Party. He has suggested he will keep to the same economic policies as Mr Monti, though pressures from the trade unions that support his party could lead to more frustrating postponements of reforms. His parties lead in the polls is also less than their percentage of the vote in the last election in which they lost, showing both the precarious position he holds and the split in the vote to smaller parties.

Mr Bersani looks likely to win. 

One party that has taken advantage of this is the Five Star Movement. Their anti-establishment message has a hit a cord with the voters and has seen them rise to third in the polls, with many seeing them as a dark horse. Their lack of experience holds them back however, with many doubting whether they will have the heads to handle one of the biggest economic crises’s to hit Europe in recent memory.

Beppe Grillo (a comedian) is winning support for his Five Star Movement party. 

The likely outcome is that Mr Bersani will gain enough votes to win the lower house, but could however be left lacking in the upper house (the senate), which he needs to properly govern the country. In theory, he then could form a coalition with Mr Monti’s party, the Civic Choice, which would help him gain control of the upper house and have the esteemed figure Mr Monti as part of his government, maybe as the finance minister or as “The Economist” has suggested a super-minister overseeing the economy. This would be a favourable solution to Mr Berlusconi getting back into power, who instead of providing the reforms needed during his time in office, actually changed the laws to benefit himself e.g. de-criminalising false accounting.

Whoever wins however faces a lot of tough decisions. Mr Monti did a lot of good work while in office, but has arguably ran out of time in making the biggest changes. Reforms that his government had been working on will probably not be completed, for example a much heralded constitutional requirement to balance the government budget.

The country is in recession and suffering from high unemployment of over 11%. The public sector is over bloated, with Italian MP’s some of the highest paid in the world and the parliament one of the biggest in the world. The private sector on the other hand faces stifling restrictions, with the firing of workers famously difficult due to the red tape, making it hard for new workers to break into the job market.

TOPIC RANKINGS DB 2013 Rank DB 2012 Rank Change in Rank
Starting a Business 84 76 up -8
Dealing with Construction Permits 103 100 up -3
Getting Electricity 107 109 up 2
Registering Property 39 47 up 8
Getting Credit 104 97 up -7
Protecting Investors 49 46 up -3
Paying Taxes 131 133 up 2
Trading Across Borders 55 59 up 4
Enforcing Contracts 160 160 No change
Resolving Insolvency 31 32 up 1

Italy’s ranking in “Doing Business”, found on http://www.doingbusiness.org/data/exploreeconomies/italy/

Unit labour costs (the combination of productivity and labour wage costs) have continually risen in the last decade, even while its neighbours have managed to lowers theirs since the financial crisis. This can be described as the real effective exchange rate and has seen Italian exports become extremely uncompetitive in the global market, decreasing Italy’s ability to create growth in their economy. Corruption is rife, with tax evasion one of the biggest issues in a country where public debt is soaring, but personal wealth is one of the highest in Europe. All in all this helps make Italy an unattractive country to invest in, with the FDI to GDP ratio nearly a third of the EU average from the period 2005-2010, vastly trailing the other European powerhouses.

 http://www.heritage.org/index/visualize?countries=italy|unitedkingdom&src=heatmap (this table shows the difference in corruption between Italy and the UK/USA)

There are still more twists and turns in this election to come I’m sure, but that aptly reflects the economy right now in Italy; unstable.

Does money buy success? « Back Page Football


Does money buy success? « Back Page Football.

 

Article I wrote on whether money has bought success in the 5 big European leagues this past season. Have a read, its very interesting 🙂

The Unelected Super Mario


In November 2011, Mario Monti was invited by the Italian President to form a government after the resignation of Silvio Berlusconi; he swiftly set up a new cabinet, appointed himself the finance minister and refused any salary. Mario Monti is an incredibly intelligent individual and has performed wonders in such dire times for Italy, especially after the farce of Berlusconi’s time in power. Silvio Berlusconi was known for his scandalous private life and questionable business decisions, while his cabinet held a former calendar girl, a minister linked with the mafia and only one female with heavy responsibilities. Mario Monti was a professor of economics, a European commissioner for 10 years and before his announcement as Prime Minister he was chosen as a Senator for Life (of which there are only seven in Italy). His cabinet also holds much more respected officials including: the chairman of NATO’s military committee, the boss of Italy’s biggest retail bank, six other professors and three women in high up positions namely the Interior Minister, Justice Minister and the head of employment and welfare.

The contrasting Time covers of both Italian Prime ministers.

Mr Monti needed a high class cabinet however to face Italy’s over whelming problems, namely that it is Europe’s biggest debtor, with Italy the only country along with Greece to have a debt to GDP ratio over 100%. Many in Europe fear that a Greek default could topple Europe, but it remains a small country, the real worry is Italy. If Italy were to crash it would all but end the euro, the current EU set up does not have the funds to bail it out and Italy’s combination of size and debt would be too much to handle for a fractured Europe. There are signs that Italy will have to be careful not to fall into this trap, with bond yields (borrowing costs) high in January at around the levels that saw countries like Portugal and Ireland needing a bailout (at 7%) and currently are at 6% and rising again. Yet Italy is actually running a very good budget, with the biggest primary budget surplus in Europe (budget excluding the interest payments on old debt), a low budget deficit when compared to European neighbours (targeting 2.7% this year) and a budget plan that hopes to wipe out the deficit by next year. It is rather growth that is Italy’s weakness, they are forecast to shrink this year by around 1% and have hardly grown in the last 10 years. This is mainly down to poor competitiveness by the county in comparison to countries like Germany as they have allowed wages to race upwards making Italy unpopular for industries.

The rise of Italian debt over the last few decades. 

In such a short space of time, Mario Monti is attempting to make more changes to the Italian system than Berlusconi made during his whole time in power. He has managed to push heavy reforms through parliament while keeping acceptable approval rates with the public, who have realised that changes must occur for Italy to survive. One big step he is taking is to make Italy more competitive within its economy, this is important as monopolies have existed in markets such as the gas industry for far too long. He hopes to complement this with extensive labour reforms that could change the level of difficulty for firms to sack their employees. This sounds wrong to begin with in such harsh times, but it could actually motivate employers to hire more Italians as they would have increased flexibility in staff turnover. There are also other unforeseen problems with the current labour rules; as it restricts young workers from entering the job market with the older generation so enshrined in their jobs, and encourages firms to offer short term contacts which offer less stability to employees and less tax for the government. This first point is backed by current unemployment statistics; Italy’s total unemployment stands at just under 10% (not great but better than most others in Europe) but the country fairs less favourably with Youth unemployment (under 25 years old) where 30% of young Italians are unemployed (only Spain, Portugal, Slovakia and Greece have higher percentages). Mr Monti is also applying strict austerity on his country to try and tackle the huge debt that is weighing them down. This means making unpopular cuts in public spending to try and decrease the budget deficit while also trying to balance it out with growth policies to stop Italy from sliding into a severe recession. This has only been accepted by the Italians as they have seen what could happen if they leave their debt unattended, with Greece not too dissimilar to Italy in some statistics. Mario Monti has also made important reforms to the pension schemes in the country and has campaigned fiercely against tax evasion (rife in Italy).

While Italy’s total unemployment is relatively low, their youth unemployment is disturbingly high. 

Mr Monti has finally given Italy credibility in Europe again as well (sorely missed under Berlusconi) with his sensible policies and likeable nature. He seems to get on with most other political leaders and has recently been offering advice on how to solve the Euro’s problems, notably backing the idea of “Eurobonds”. This is refreshing to see as it challenges the status quo that Germany is the only nation allowed to organise the policies of the euro. It is an idea that seems to be catching on as the recently elected French President Francois Hollande has also challenged the authority of Angela Merkel in deciding the EU’s future. He is also keen to get Britain back involved in the EU after David Cameron refused to sign the Fiscal Compact which seemed to set them apart from its fellow EU members.  He now needs help from his neighbours, to help Italy face its problems. He has called on Germany to push through reforms on their service industry to help boost European demand and he has called on the EU to help lower the interest rates Italy have to pay on their debt as a reward for the punishing reforms currently being pushed through by his government.

Prime Minister David Cameron (L) greets Italian Prime Minister Mario Monti outside Number 10 Downing Street on January 18, 2012 in London, England. In addition to meeting Mr Cameron on his visit to the UK, Mr Monti will also conduct meetings with financiers to find solutions to tackle Italy's large government debt.

Mario Monti hopes to enjoy a good relationship with David Cameron, to try and get Britain back involved in Europe. 

There have been problems for the Italian Prime Minister however, as disagreements over his reforms, political squabbles and the impact of a weak eurozone have damaged his recovery of the Italian economy. His labour reforms have been fiercely criticised by the Trade Unions of Italy, as they argue it will just the give the big employers more power to sack Italians. Mario Monti should have reason to fear as the past two individuals who attempted labour reforms were both assassinated for their efforts. His reforms now seem to have been watered down to appease the trade unions, but there are worries they will become useless and that more weakening of Monti’s resolution to change Italy’s labour market could occur. Originally in the reforms companies would be able to fire employees for economic reasons, Mr Monti has had to back down slightly by allowing courts to reverse these situations, though he hopes to speed up the whole process. The point of the reforms are to free up the labour market and give more freedom both to employers and employees, if this watered down reform doesn’t have the same effect, then Italy would have wasted a great opportunity. Another worry with his labour reforms are that they are long term in nature, so many Italians might not have the patience to keep supporting such changes while future governments could be inclined to scrap the ideas altogether if public cries become loud enough. Public turmoil over politics is also damaging the Mario Monti’s government, as local elections showed a decline in turnout and a rise in protest parties like 5-star movement, a party headed by a comedian who rejects the current Italian set up. This doesn’t bode well for Mr Monti as faith in the government wears thin, while his backing has also taken a hit after a controversial tax on property was released by the government (disliked in a country with 70% homeownership). Then there is the ever raging Euro Crisis, as problems in Greece and Spain reverberate around Europe and cause panic in the markets, effecting Italy’s economy. If the EU was in fine order, then Italy would currently be doing a lot better, with increased demand for its exports and more money available for external investment in Italy, instead the opposite is happening as Italy’s exports are struggling and FDI in Italy is almost nonexistent. This leaves Mario Monti facing an uphill struggle to lead Italy into a recovery, with outside and inside forces both working against him.

Beppe Grillo’s 5-star movement party gained seats in the recent local elections, showing Italian distrust of the current political set up. 

The real question is what will happen when Mario Monti has to step down next Easter; the Italian political scene is a disaster with no parties able to boast a clear backing from the public. Many want him to continue as despite the harsh austerity measures he has implemented, he still has the majority of the public’s backing and no-one else can boast that right now. But Mario Monti has always stated he will not continue after next year, plus it would mean him heading a political party, which would negate the neutrality he brings to the current parliament. If he were to be kept in power in any other way it would be democratically questionable as he would remain unelected by the Italian people, a quality that too closely resembles that of a dictatorship. Yet Mr Monti has arguably been Italy’s best leader in years, and has gone about the task of fixing Italy’s problems with integrity and commitment.

Next year will probably bring back the shady Italian politics of old with underhand deals, bribes and deceit. We should value the steady and articulate leadership of Italy while we still can, it’s just a shame that it has come about from an unelected professor being handed the job.

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