Bill Emmott - International Author & Adviser


Lies about Italy´s economy
La Stampa - April 24th 2011

It is quite normal to expect politicians to say half-truths or even lies: in this, Italy is not unique, even if it is fairly exceptional in the ability of its political leaders to say something one day and deny having said it the next, all in the justified belief that their words will soon be forgotten. But I didn’t expect this in economics too, for it is so easy to check the true facts. Gradually, though, as I have travelled more and more around Italy, I have come to realize that false statements about the country’s economy are made every day not just by politicians but also by bankers, businessmen and even government officials.

            Some of these issues may, it is true, be matters of opinion, not of facts, for economics has subjective aspects, and often the discussion concerns the unknowable future, about which there are no facts at all. Yet I now think there must be more to it than this, as the use of false statements even about the present and past seems to be so pervasive. Hence my new theory: that this is a form of national self-delusion, an attempt to avoid paying attention to the painful reality.

            Let me explain. The first myth that caught my ears was the claim, which I have now heard dozens of times from businessmen, that Italy is in a good position because it has Europe’s second largest “export economy”, after Germany. My latest detection of this claim came on March 3rd, when il Sole 24 Ore held a debate between me and Marco Fortis of the Fondazione Edison about the Italian economy, and in their introduction to the article the il Sole journalists wrote that “Le esportazioni, invece, viaggiano a ritmo sostenuto, seconde soltanto a quelle della Germania”. This was despite the fact that during the debate, Fortis and I discussed this issue and agreed that it isn’t true.

            It is a nice idea, but unfortunately Italy’s annual exports of goods make it fourth in the European Union, not second, for it is also beaten by both France and the Netherlands. If, as one should if one is measuring actual export income, you include services then Italy falls to fifth place, beaten also by the UK. Admittedly, you might discount the Netherlands as some of that country’s exports are really re-exports of materials shipped up the Rhine and processed there, but still Italy is not second.

            This is just a statistical detail, you might say: Italy’s exports are still strong and perhaps the il Sole journalists were referring to their growth rather than their absolute level. Perhaps: none other than the CEO of Italy’s third-largest bank, Antonio Vigni of Monte dei Paschi di Siena, made just that claim in a recent interview (“View from the Top”, April 15th 2011) with the Financial Times. Mr Vigni helpfully repeated three of my favourite delusions about the Italian economy during his short interview.

            During the economic crisis, he said, “the strength of our industrial system in Italy” was proven. We are now seeing “a jump in the level of exports and in the recovery”. Moreover, the situation of Italian families is “positive for the economy”, because of their low levels of debt and their high levels of savings.

            I don’t intend to be too hard on Mr Vigni: he was simply repeating what many people say, though as he is a banker I would hope he might occasionally look up the numbers. To respond to his first assertion, that Italy’s industrial system has shown its strength, let us simply refer to the latest Economic Bulletin produced by the Banca d’Italia, which says that “The growth of the manufacturing sector is less robust than in the other main euro-area countries: compared with its level before the crisis, in February [2011] industrial production was down by about 18% in Italy, against 9% in France and 5% in Germany”. Italy’s “industrial system” thus looks weak, not strong.

            But exports are jumping back, aren’t they? Well, it is true that exports of goods and services from Italy rose by 8.9% during 2010. But meanwhile in France they rose by 10.1%, in Belgium by 10.2% and in Germany by 14.1%. To be fair, Mr Vigni made these remarks in response to a question about whether Italy should be compared with Portugal, Greece, Ireland and Spain, the euro-area economies that most keep investors awake at night. Yet let us look at the growth rates for exports from Portugal (8.7%) and Spain (10.3%) during 2010. Now Italy’s supposed export strength does not look quite so decisive. There is also the fact that despite its exports, Italy has actually run a trade deficit throughout the past decade, for its imports are even stronger.

            Surely, however, Vigni is right that Italian families are a positive factor, with their low debts and high savings, just as he was also correct when he said that Italy’s banking system is stabler than those of many other European countries? Both of these common claims are true, but not very relevant. For they were genuine sources of reassurance during the financial storm of 2008-09, when high household debts, low savings, or internationally adventurous banks posed a risk that the recession might become even more severe, as consumption might slump or banks might collapse. Now, however, that storm has passed.

            Italian families do have impressive reserves of wealth. But their consumer spending is not much of a positive for the economy, for the simple reason that their incomes, in real (inflation-adjusted) terms and after tax, have fallen for three consecutive years, in 2008, 2009 and 2010. Their consumption fell by less than their incomes did in the first two of those years, and did revive in 2010, because households chose to save less in those years than before. In fact, the fabled Italian household savings rate (which has genuinely been a strength in the past) has been falling ever since 2002, and in 2010 was, according to ISTAT, lower than the savings rates in both Germany and France. That habit of spending out of savings could continue, but if it does, pretty soon Italy will no longer have a high savings rate but rather a low one. This is what has happened in Japan during the past 20 years.

            This question, about the strength and relevance of household savings, provides a clue as to why these delusions about the Italian economy are so widely and fondly held. They are a way of drawing eyes away from the true weaknesses: in this case that household incomes have been falling, and indeed have been weak for more than a decade. This has been true even during periods when the unemployment rate was falling, for it fell chiefly thanks to the creation of millions of low-paid, precarious jobs on short-term contracts. Now that unemployment has risen again, and so far shows no sign of falling, it is this inability to create jobs capable of producing rising household incomes on which public policy and debate truly needs to focus.

            Mr Vigni has suffered enough. Let me bring in a very senior official at the Italian Treasury as my next victim, who I cannot name because the statement I am about to quote was made “off the record” at a seminar for British journalists held in Venice in January. His statement, however, found its way into an article on the Italian economy in the magazine of which I was once direttore, The Economist, so it naturally caught my attention. He told the journalists that the Italian economy could be summarized as consisting of the North, which grows by 3% a year, and the South, which shrinks by 2% a year, producing the apparently weak annual average growth rate of about 1%.

            This statement is nonsense on every level, but it is damaging, distracting nonsense too. It is nonsense in mathematical terms: since the South has a smaller GDP it would take much more than a 2% annual shrinkage to neutralize the national effect of 3% growth in the North. But also it is nonsense in factual terms: during the past decade, the South’s GDP has shrunk only twice: by a tiny amount in 2003, and then in 2008-09 it actually shrank by less than the North did. In no year of the past decade did the Centro-Nord grow by more than 2%.

            Now, this is not to deny, for one moment, that the South is a problem. Its economic growth ought in fact to be faster than that of the North, since its labour costs are lower and it has so much room to catch up. But the point is this: this very senior official at the Treasury was using this falsehood as a way of saying that nothing really needs to be done in the heartland of Italy’s economy, for there the growth rate and wealth are at German levels. The truth is that this claim can only be accurately made if you focus just on some parts of northern Italy, and exclude not just the South but also central Italy and indeed many northern regions. It is thus no more meaningful than to say that America must be doing well because Silicon Valley is rich and successful, or that Britain is healthy because London is thriving.

            It is a distraction, born out of a willful desire for self-delusion. Even manufacturing is not doing as well as its equivalents in other European countries, but also to focus just on manufacturing is to lose sight of the bigger picture: that jobs are not being created, that productivity is not rising, and so neither incomes nor living standards are rising. This weakness is true right across the board, in both services and manufacturing. Companies of all kinds face too many obstacles for them to grow, from bureaucracy, labour laws and bargaining arrangements, tax, professional privileges, monopolies, mediocre education, and many more. Thanks to this, even the most fundamental claim about Italy, that its great strength is its entrepreneurs, is statistically untrue: the rate of creation of new enterprises in Italy was below that in both France and Germany during the years running up to the economic crisis.

            But to focus on removing those obstacles, and on annoying those who benefit from them, would be hard, perhaps even painful. Better then to stick to the delusions of national strength and resilience.


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