Daniel Gros on Italian Growth

If Italy is to be the Euro’s last stand, then a huge amount appears to be riding on hopes that “structural reforms” can get Italian growth going.  This paper from Daniel Gros provides reasons to be sceptical.

I think Daniel’s focus on the link between governance failures and growth is a bit speculative. Still, his conclusion that “it will be difficult to organise a sustained effort to combat corruption, foster adherence to the rule of law and improve the efficiency of the administration in general” might be too negative.

If the worsening of governance and control of corruption is associated with the rule of Berlusconi, then Daniel’s arguments would imply that his departure may have greater economic benefits than currently anticipated. Alternatively, a return to short-lived and unstable coalitions may just make things worse.

Anyway, it’s worth reminding our readers that economists don’t have a good track record at explaining differences across countries in long-run growth rates. Those claiming to have the recipe to produce a spurt in Italian growth while simultaneously imposing fiscal austerity are largely relying on guesswork.

19 replies on “Daniel Gros on Italian Growth”

It seems that nobody really knows the potential outcome…

“It is far from clear that the ECB is imposing the right fiscal medicine on Italy by demanding a balanced budget by 2013, just as the country crashes back into deep recession.
Chiara Manenti from Banca SaoPaolo said the greatest risk for Italy’s debt dynamics is a sharp slowdown in the economy itself. “That would be far more dangerous,” she said.
The IMF warned it is latest report on Italy that fiscal belt-tightening should be “at the right speed”. These words of wisdom seem to have been ignored entirely in the EU’s Calvinist dash for austerity.”

Expansionary contraction anyone?

Expansionary contraction indeed. The last time I looked at growth forecasts, Italy was heading towards negative territory and I suspect will be there for a while and the whole crisis – the bit related to Italy anyway – will come full circle.

I wonder what game Silvio is playing and whether he will be able to engineer elections instead of a handover to a ‘technocrat’ government? Two fingers.

Here we go with this ‘growth’ fetish thingie – again! In my younger days I had this beautiful idea that folk would be persuaded by dint of logical argument and solid empirical evidence. Poor me! Reality is that sentiment trumps all. And if ideological rhetoric looks like its on a loser: slime your critic. QED.

Growth works if more folk, do more, make more and sell more to other folk. Other being in a distant land (even a nextdoor land will suffice). Outcome: you earn some bucks. This worked a dream. Lots of folks in distant lands bought our surplus. Now? Those distant-land folk want, need, demand that we buy their surplus. The cheek of it! Don’t they know we’re busted like? We need to them to buy for us! If we make stuff, sell this stuff to ourselves, ourselves then buy the stuff from us … … “Hey! That’s great fun” -if your playing ‘shop’ with a bunch of Imaginary Friends, but in this real world? What’s the name of the medication they recommend for this type of behaviour?

I think some meaningful, grounded thinking, might be in order in some folk’s neural spaces, I think, like.


My own impression is that while structural reforms can work in the long run, it is seldom obvious over the short run that the desired improvements will materialise.

* A key issue is that there’s often a long lead time between the change and the positive outcome.

* Also, getting structural change right is often an iterative process that can take a decade or more to get right.

* Also, there’s every prospect that the programme of structural change will be sabotaged by insider interests or by inattention from policy makers.

No matter how positive an impact structural changes proposed for Italy have over the long term, the chances that higher growth potential will be obvious soon enough to save Italy from a funding crisis seem negligible.

I suspect private money is pouring out of Italian and Greek banks at the moment. Anyone in this blog in Italy this morning? What do the queues at the banks look like?

I’ve known this guys views from my time in the Commission during Maastricht. He not a trusted academic let alone a good advisor.

The difference between academic economists and political economists is more or less like looking at the debates between Galbraith/Myrdal and their academic equivalents at Ivory Academic Centres in US.

Recall then we’re discussing/debating Affluent Society & Challenge to Affluence.

If Brussels establishment was to follow these (foolish) mandarins of think-tanks, we’d be already under water.

The same argument applies to Whitehall mandarins who laughed at the introduction of Euro, although Magret Tatcher approved the SGP and her own Lord was Commissioner in-charge.

Yesterday Sarkosy spoke in Strasbourg and declared that two-speed EU is now in the cards. What do you suppose he was considering if not Cameron’s attempt to organize his own caucus of non-euro group….

“I’ve known this guys views from my time in the Commission during Maastricht. He not a trusted academic let alone a good advisor.”
Apart from the ad hom comment do you agree or disagree with his analysis?


“Anyway, it’s worth reminding our readers that economists don’t have a good track record at explaining differences across countries in long-run growth rates.”

What do economists have a good track record at explaining?

I just reordered “the coming first world debt crisis” by Ann Pettifor. I lent the one I had to someone. It’s one of the best books I have come across to describe what is unfolding now.

I’m surprised by the speed at which the market has lost faith in Italy. Italy’s large national debt isn’t new. It’s been bumbling along for a long time. I had seen the possibility of dodgy/creative accounting as the most likely catalyst for Italy losing access to bond markets. But I guess we can stick the contagion label on this one.

IMO pre-Euro, Italy ran a partying/hangover economy – inflation, party, party, lose competitiveness, devalue lira, party. They’ve shown admirable discipline to last this far in the euro. (This also happens to be the cause of my concern that there’s some scope for creative financial vehicles)

An often overlooked part of Italy’s problems are coalition governments and frequent elections. If you depend on a small regional party, who expects the next election is 18 months away, you can expect they will only serve their own interests.

Rating agencies’ methodologies for rating Italian RMBS shed some light on how the local economy operates. You certainly get the impression that it’s more Athens than Berlin. For example, Fitch calculates a base default probability based at loan level using a simple matrix. For most countries, one axis is for debt to income and the other axis is LTV. However, in Italy ‘income’ isn’t readily available (i.e. recorded income mightn’t reflect certain ‘grey’ earnings). Instead the RA have to use regions (North, Centre and South). The North compares well to any EU region. The Centre is a little dodgy and the South is dodgier.

From my own experience the recorded ‘V’ of LTV isn’t as clear as it should be. It’s about as clear as mud. Anecdotally sellers/buyers don’t like the recorded sale being too high for tax reasons. Grey cash payments are supposed to be common. To complicate matters, for capital charge reasons, lenders like to ensure LTV’s are less than 80%.

When you see such degrees of ‘flexibility’; it’s a cause for concern. Perhaps Mr Bini has a solution.

@ Karl, perhaps grumpy and others

First just to be polite I read the paper and I agree with Karl’s conclusion: “Those claiming to have the recipe to produce a spurt in Italian growth while simultaneously imposing fiscal austerity are largely relying on guesswork.” I would put it more strongly than that.

After a series of thoughts sparked by these comments I was reading the “11 October 2011 – Statement by the European Commission, the ECB and IMF on the Fifth Review Mission to Greece” where I found the following:

“As evident from this weekend’s resolution of Proton Bank, the recent amendment of the banking law ensures that non-viable banks can be wound down while protecting depositors’ interest and preserving the stability of the financial system.”

Which I thought intruiging as it says nothing specific about bondholders.

I can find a Reuters article on it, which gives more detail including the international involvement of the FSF – but it also says nothing about the treatment of bondholders (I assume there were some).

Would you have more detailed knowledge as to what happened in this case?



PS You could get the younger sisters and brothers of your students ‘How to run a Central Bank’ ECB student quiz.

What will the Mrach Interest Rate adjustment be?


Italians have had unstable governments since Giuseppe Garibaldi cobbled the country together in 1861. Like the Irish the Italians are well represented around the world. Most left out of necessity, not necessarily motivated by a sense of adventure.

Today we have a replay of irresponsible government mired in debt, ruled by a 61 yr old randy teenager. The Italian people contrary to popular perception are socially and fiscally conservative and are amongst the least indebted in Europe.

In Ireland we were hit by the double whammy of a people who are over indebted and a government who of its own volition chose to flirt with bankruptcy.

Given a choice I would choose the Italians to come out of this in better shape than the Irish.

With the crisis now spreading to Italy, and continued passivity from the ECB, I consider that the probability of a complete Euro break-up has now risen to 50%.

I am surprised that there seems to be not much discussion here on what needs to be done in Ireland if that happens.

Ireland has shown a penchant for deer in the headlights or rabbits in the dazzler behaviour when crisis looms. At this point Ireland is dependent on the EU and all its institutions to throw us the lifesaver when things get truly out of control. The Euro Zone will not end with a bang, some members will leave of their own free will, lured by the siren call of a debased currency. Those who are made of sterner stuff will tough it out and reap the benefits.

The Irish gov’t placed all its bets on rescue by the EU, the process should be allowed to run its course. The best course for all of us now that the gov’t remains inactive. Do not forget what they did when they were active.

Welcome to the new tag, Italy. It is quite congenial here on skid row, Italy and you’ll feel at home in no time. Molto bene.

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