Ashoka Mody on Italy


9 replies on “Ashoka Mody on Italy”

Any interested in macroeconomics should read Tim Harford’s piece in today’s FT.

It is called “An astonishing record of complete failures”.

He is referring to the forecasting pretensions of macro economists.


I think the paper being referred to is here:

‘“There will be growth in the spring”: How well do economists predict turning points?’

I think the FT article and to some extent the article itself misrepresents the data it looks at. What the paper is looking at is the failure to predict recessions – not turning points in either direction.

Very simply it says that economic institutions and actors failed to predict recessions in 2008 and again in 2010 – see figure 1.

Yet that fits very well with those at the time who said that as this was a financial crash (unlike, say the dot-com bust) and similarly those, for example Koo, who said it was also a balance-sheet recession that it would be necessarily more severe than than consensus predictions and that the pivot to austerity (and/or insufficient stimulus) would have more negative impact than predicted. Within the Eurozone with its the same interest rates for all, no ability to devalue and collective simultaneous austerity between trading partners it was going to be worse again and this was pointed out repeatedly at the time and this is what has happened.

Again, it is not a case of predictions being randomly wrong but being consistently wrong to one side until the near future becomes the present and the situation becomes undeniable. If it were ‘astrology’ it would be scatter shot.

I think it was Felix Salmon (but it might have been Wren Lewis) in a paper a while back on whether austerity could ‘work’ within its own terms said, no, but made an exception for Ireland with our famous small open economy and this has proved fairly accurate too though the country is by no means out of the woods. At first glance the UK is doing better than anti-austerity predictions might suggest but actually, (a) the own currency, own CB holds, (b) Osborne quietly eased off and has put more cuts back until after the elections, (c) a chunk of it is lending for housing plus zero-hour contracts.

These things are improvident because the they are written into the terms and conditions of the MoU. The behavioural issues mentioned at the end of the vox article are interesting – I’m sorry the DoF and CBI could not have stood apart more in troika negotiations and pointed out robustly that the troika predictions for what would happen on the implementation of the programme were all way off.

It is also true the the Irish Fiscal Advisory Council have said the the four economists charged with making forecasts for the DoF do, in fact, phone up other bodies (eg IMF, OECD) to see what they reckon when their info looks ‘funny’ and that seems to be a dangerous way to proceed to me.

But for all the behavioural stuff, I think it is more worth looking at including total balance sheets, impact of a credit crunch, impact of capital flow changes, etc.

Saying ‘they’re all useless’ is very close to ‘no one can know’ and lets a load of people off the hook when a very strong case was being made that the recessions could be and were actually predictable if certain policy decisions were made.

It would help if Draghi could force down the value of the euro and in recent times he has said outflows from Russia were a factor in the elevated level.

Rome wasn’t built in a day and Matteo Renzi needs many days and luck to make a difference.

In Q1 2014, among the 7 G7 countries and 5 BRIC countries, only Germany and Italy posted increases in trade.

Italy has some fine firms but this is what Mario Draghi said in his valedictory commentary as governor of Banca d’Italia in 2011:

“Italian firms, on average, are 40 per cent smaller than their euro-area counterparts. The top 50 European corporations by sales include 15 German and 11 French but just 4 Italian firms. Italy’s industrial structure seems static; rarely do firms grow and move up to the next size class.

In the early 1960s, plants with over 100 workers employed 43 per cent of Italy’s manufacturing workers, as against over 60 per cent in France and Germany. Since then the employment share of large plants has declined much more sharply in Italy than in France or Germany, to under 30 per cent.

Sixty per cent of all Italian manufacturing firms with ten or more workers are exclusively family controlled and managed, compared with under 30 per cent in Germany and France. These firms have less propensity to innovate, engage less in research and development, and rarely penetrate emerging markets.

[…] Women’s low labour market participation is a crucial weakness of the Italian economy, and one on which we are now concentrating our research effort. Today, 60 per cent of Italy’s university graduates are women. They earn their degrees faster and with a better academic performance than their male fellow-students; and they are less and less restricted to the traditional women’s disciplines in the humanities. Yet the employment rate for women is still no more than 46 per cent, 20 points less than for men. It is lower than in practically every other European country, especially in the higher positions and among women with children.”

On firm structure and performance of small firms, Ireland also has problems and John Moran, the outgoing s-g of the Dept of Finance on Friday in a rare departure for a public official in modern times, spoke as his predecessor TK Whitaker had a half century ago and told some home truths at an ISME conference:

The Fiscal Compact requires all sinners to get debt levels down to 60 per cent from well over 100 and means all the piggies will be running surpluses for the next decade at least -meanwhile growth has not turned up , at least not for the 99 per cent. Italy is on its third unelected Prime Minister. Markets are mainlining CB money and the wolf has been moved away from the door but growth hasn`t turned up yet. Italy will probably be the cockpit for the next stage of hostilities.

The crucial point, it seems to me, is that the EP vote demonstrates that Renzi has the wind in his sails as far as the Italian electorate is concerned and he is evidently on the same wave-length as Merkel; something that cannot be said of Hollande, it remaining to be seen of what timber the new French PM, Valls, is made.

A generational change is taking place but with Merkel still in an unassailable position. By way of example, she is seen as being outsmarted in relation to her lukewarm support for Juncker as “Spitzenkandidat” for the post of President of the Commission. However, another and more plausible reading is that she was flushing out the level of opposition to him and has established that it does not add up to a blocking minority in the European Council (UK, Sweden, Hungary and ?) which, post the Lisbon Treaty, decides the issue of who to nominate by qualified majority, thus removing the veto available previously to member states (read UK!).

The same treaty is unequivocal as to the role of the Commission which “shall promote the general interest of the Union and shall take appropriate initiatives to that end” (Article 17 TEU). In short, the head of that body having a particular political colour is not a good idea. The insertion of the vague wording Article 17.7 “Taking into account the elections to the European Parliament and after having held the appropriate consultations, the European Council, acting by a qualified majority, shall propose to the European Parliament a candidate for President of the Commission” was bound to lead to political conflict with regard to the role of the Commission itself.

Renzi shows his mettle in this nuanced assessment.

“For the moment, he says, what Europe does is more important to him than who gets which job: a neat way – accompanied with a flourish of Latin, “Nomina sunt consequentia rerum” – of avoiding getting too involved in the battle over the top posts coming up soon in Brussels, primarily that of commission president. He does not explicitly say whether or not he backs Jean-Claude Juncker, the divisive pick of the Christian Democrats who is supported by Merkel but rejected by David Cameron. Still, he notes that “it’s hard to imagine that a person could be chosen [as commission president] without an overall agreement”.

Ashoka Mody is, no doubt, an eminent economist but regard must also be had to the wider political context.

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