Monthly Archives: June 2005

Italy: Devaluation or Deflation

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Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said ‘stuff happens’, and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley’s Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: “with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw”?).

“If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view.”

So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo’s reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930’s and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.

This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival ‘escape strategy’?

Italy Referendum Campaign Launched

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The Italian Northern League have, as promised, launched their ‘bring back the Lira’ referendum campaign. Whilst at this stage there is something vaguely comic in all this, remember it is a wild card which will be floating around if Italy’s economic crisis worsens.

The Italian Northern League party launched a campaign to revive the lira at an 85,000-strong rally of its supporters on Sunday (19 June) The party, which holds minister posts in Silvio Berlusoni’s government, called for a revival of the lira as a “parallel currency” to the euro, which would remain the currency of the state budget, tourism and foreign trade. Under Italian law, a referendum must be held if half a million signatures are collected.

Bonfire Of The Textbooks?

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The Greeks had a word for it ‘:aporia‘. That state of ignorance and confusion you are condemned to pass through before you can entertain even the vaguest hope of achieving clarity and real knowledge. Well, taking a long hard look at what we know, what we think we know, and what we know we don’t understand for sure, I would say that this expression gives us a working definition of where economic science may be right now: in a state of ‘aporeia’.

Essentially we are in the frustrating condition of repeatedly finding that what is taught in the textbooks, and what we are encountering ‘out there in reality’, don’t make easy bedfellows. Above all it is China that has caused most of the head scratching. Morgan Stanley’s Andy Xie may have started it off by having the guts to come out and urge us to: “throw away the textbooks”, later an influential paper by Dooley Falkerts-Landau and Garber argued that conventional macro was all at sea when looking at goods and financial flows between China and the US. Today it is the turn of Robert Samuelson to say toss the textbook.
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Reverse-Plumbing Poland?

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Well, its the weekend, and even if domestic commitments keep me away from the beach, perhaps a lighter note is in order. The press have gotten hold of the Polish ‘anti-plummer’:

“He is blond, strapping and sexy. He holds the tools of his trade in a suggestive pose. But the news for the French people is that if they want to see the Polish plumber they will have to travel to Poland….

The Polish tourist agency in Paris has now tried to put the myth to bed through a tongue-in-cheek advert on its website aimed at encouraging the French to visit Poland. “Welcome to Poland”, the homepage says beside a picture of the Polish hunk, clad in green overalls and a white T-shirt.

Of course, as was to be expected, and to add insult to injury Polish plumbers are turning out to be highly popular in the UK, providing a much needed filling for a long standing gap in the local labour market. Have you tried getting hold of a plumber lately?

Incidentally, those domestic commitments involve painting and decorating. The people doing the more substantial works, well there was one from Argentina, two from Ecuador, one from Columbia, but no-one from Poland. Somehow reading the ‘Welcome to Poland’ blurb I felt cheated.

You’d Better Move On

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The papers this morning seem to be all full of ‘gloomy’ articles whose principal theme is that Europe has finally been plunged into a grave crisis by this weeks summit.

“People will tell you next that Europe is not in a crisis,” Luxembourg Prime Minister Jean-Claude Juncker, who holds the EU presidency, said after a two-day summit ended in acrimony. “It is in a deep crisis.”

As someone who is ‘crisis prone’ I would have imagined I would share that feeling. Somehow I don’t.

Some reasons why.
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Freedom Blog Awards

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The results of the Freedom Blog Awards organised by Reporters Without Borders are in.

Reporters Without Borders selected around 60 blogs that, each in their own way, defend freedom of expression. The organisation then asked Internet-users to vote for the prize-winners – one in each geographical category.

Go see. There are also a couple of European winners in this competition that reaches beyond the English-language blogosphere.

Well This Is A Reform…..

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But in which direction does it lead…….?

German lawmakers approved a bill Friday that would allow older unemployed people to collect jobless benefits for longer than previously planned, a move that comes as the government struggles in polls ahead of elections expected in September.

In unpopular reform introduced earlier this year gradually scales down benefits for the long-term jobless to the level of social welfare payments. The new bill would give unemployed people above age 45 an extra two years of full-level benefits.

The Lisbon agenda, and all our policies associated with the ‘ageing society’ ar meant to lead to higher particpation rates in the over 55 age group, it isn’t clear to say the least how this fits in with that.

France’s Finances Under The Microscope

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The OECD has a new country report out on France:

“France’s rising government debt threatens the sustainability of public finances in the eurozone’s second biggest economy, the Organisation for Economic Co-operation and Development has warned in its latest country report.

The Paris-based OECD said that a lack of control over public spending could leave France unprepared to deal with the financial consequences of an ageing society.”

I rest my case.
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The First Chink of Light

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There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB – Lucas Papademos – has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.
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