We The Consumer

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As if the Italians hadn’t got enough to worry about at the moment (what with the latest round of economic data being predictably poor : growth is slowing down, industrial production is falling, consumer confidence is plumbing the depths). Now comes news that the Italian government is heading for conflict with some leading European airlines (and later with the UK and German governments, and then Brussels presumeably). The reason for the problem: their prices are too low, and Alitalia can’t compete.

Italy has ordered leading European airlines, including British Airways and Germany’s Lufthansa, to stop offering lower fares than Alitalia, the struggling majority state-owned Italian flag carrier, on competing long-haul services.

The move by the Italian government comes as it seeks to prevent Alitalia collapsing into bankruptcy by agreeing an emergency state-guaranteed ?400m ($493m) loan to the airline.

But it has sparked a fierce protest by BA to the European Commission and has triggered a row with the UK government.

The UK transport department said the Italian government had been told ?in strong terms? that BA should be allowed to continue with its fare offers.

Lufthansa said it was in talks with Italian authorities after it had been told to raise its fares to Alitalia’s levels.

So much for the white heat of structural reform!

Watch Your Piggy Bank!

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Interesting piece in the FT today about the imagined consequences of the new German “Hartz IV” laws. These laws will among other things reduce non-means-tested unemployment benefits to one year’s duration. The measure forms part of the package of labour market ‘structural reforms’, and personally I see little to argue with here.

The interesting part relates to the perceived consequences:

Last week in the eastBerlin suburb of Hellersdorf a man forced three youngsters at gunpoint to take off their clothes, burn them, and dance around an improvised bonfire. The incident may have looked perplexing, but local reaction quickly blamed the usual suspect: the reform of Germany’s unemployment laws.

“When the new rules about unemployment benefits take effect, incidents like this will multiply,” a resident told the Berliner Zeitung daily. “I’ll have to get a pit-bull.”

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Anyone Feel Like Hiking?

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At the time of writing the Monetary Policy Committee of the Bank of England is busy deliberating as to whether to raise the base lending rate (currently at 4.5%). The consensus view is that the rate will go up a quarter point. Others speculate on a half percent rise (the National Institute of Economic and Social Research – NIESR – is even advocating this). Of course there is always the possibility that the rate will remain unchanged.

Whatever the speculation about the final decision, there is little mistaking the key factor in the decision: the Uk housing market. The centre of debate is really whether the UK housing market has peaked, or whether more rate raising is needed to bring the market back into line with reality. This is a classic bubble bursting situation.
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Who is Elga Bartsch?

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Apart from the fact that she is German, aged 37, and works for Morgan Stanley, perhaps, until recently, little more of any importance would have been known about her. But you try a ‘search news’ click on Google, and you will see how many times the name of ‘our Elga’ shows up in connection with what we might choose to call the ‘German disease’. (In reality the German economy has expanded by an average of only 1.2 percent every year since 1992, which is the same as the Japanese one – and less than half the growth achieved in the U.S. and the U.K. over the same period – so why don’t we say Germano-Japanese disease? This might help us get a bit nearer to the underlying causes). The reason for this: Elga is fast becoming the best known champion of the view that the key problem facing the Germany economy is the high cost of German labour.

“The reason that we go more to India and those countries is we get highly skilled young people in a flexible labor market for cheap prices,” said Henning Kagermann, 56, chief executive officer of SAP, in an interview at the Cebit fair in Hanover, Germany. “This is highly competitive against our home market.”
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A Tale of Two Search Engines

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With Google all set to start their IPO this Wednesday, many analysts are busy scratching their heads trying to work out whether the numbers add up.

One little detail that is exercising their minds is the recent fate of the once acclaimed Lycos. Terra Lycos announced this week that it will sell U.S.-based Web portal Lycos, which it bought just four years ago in a deal variously valued at between 7 billion and 12 billion dollars, to South Korea’s largest Internet company – Daum – for just $105 million.
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Italy: Pay Now Live Later?

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The Italian government appears to be making plans to get to grips with the mounting burden of its debt. This is a move which is being widely welcomed. Under the latest plan, the deficit is forecast to be 2.7% in 2005, down from the 2004 target of 3.2% of GDP.

Without the changes, experts were suggesting the deficit could rise as high as 4.4% next year.

Apparently the only remaining tricky problem appears to be that of the promised tax cuts. Bloomberg today cites Bank Governor Antonio Fazio as joing the ranks of those questioning the viability of these cuts:

Bank of Italy Governor Antonio Fazio urged Prime Minister Silvio Berlusconi to focus on lowering debt and eliminating bureaucracy to boost economic growth rather than making tax cuts the country can’t afford.

Berlusconi’s government Thursday approved plans to cut taxes and adopt deficit reduction measures worth 24 billion euros ($29 billion) in 2005 to keep Italy’s budget from breaching European Union limits. The document didn’t say how 13 billion euros ($15.6 billion) in promised tax cuts for 2004 and 2005 would be funded.

As is not uncommon I have a different question: what will happen to economic growth in Italy if these cuts are implemented. Italy’s economy is projected by the IMF to grow at a rate of 1.2% this year. The previous two years were also extremely ‘lacklustre’. So the problem is that if you can only obtain a growth crawl when you are increasing the deficit, what are you likely to get when you start reducing.

Of course the attempts to get to grips with the problem – however inadequate they may be – are to be welcomed, but what will be the consequences? That is the uncomfortable question which noone seems to be facing up to at the moment.

When Bad Things Happen to Powerful People

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Even cowgirls get the blues, and even world leaders get sick and die. Sometimes it happens while they were in office, although the public seldom knows. It was a long time before we knew just how much Woodrow Wilson’s stroke affected his second term. John F. Kennedy’s medical problems were successfully concealed throughout his time in public office. When Reagan’s fall to Alzheimer’s first set in will probably be a secret for another couple of decades. Miterrand’s cancer was hidden from the French public. The Italian press wasn’t writing about how serious Bossi’s health problems are.

The Rt Hon Lord David Owen, CH, a former British foreign secretary, tackles this issue in QJM, an Oxford journal on medicine, and not your usual place for political reading

Diseased, demented, depressed: serious illness in Heads of State

As both a physician and a politician, I was first touched by the question of how illness can affect the decision-making of Heads of State or Government when I met the Shah of Iran in Tehran in May 1977. He appeared to be at the height of his power: self-confident, and enjoying his global role in helping to determine world oil prices. It would have been a great help to have known then, and particularly a year later, that he had been suffering from chronic lymphocytic leukaemia. …

The French Foreign Minister Louis de Guiringaud told me later, when we had both left office, that he had known of the diagnosis. But he never told me when I was Foreign Secretary, or Cyrus Vance, the US Secretary of State. Had I known I would have pressed far more vigorously early in 1978, and certainly been adamant in the late summer and autumn of that year, that the Shah should stand down immediately on health grounds. … However, we were still treating him as an imperial leader, capable of making bold decisions, when in retrospect what he needed was to be told what to do and virtually forced to take treatment in Switzerland. If he had done so, the Revolution in Iran would not have taken place in the way that it did, President Carter might have won a second term, and certainly the history of the Middle East would have been very different.

There aren’t any easy answers to these questions, as Owen suggests at the end of the article

Reluctantly, I must also conclude that if a Head of State or Government becomes ill in office, different considerations apply and there can be no set rules. … Formal procedures for fixed medical examinations for an elected incumbent is a process with a pseudo-objectivity which can be blind to the complexities and dynamics of government, as well as the uncertain relationship between disease and the capacity to make decisions.

Thanks to Electrolite for the tip.