Italian politicians indulged in hortatory remarks Wednesday, telling German Chancellor Angela Merkel to loosen up or beware their wrath.
“You tell Merkel that if Germany keeps sticking to its current course, the Italian Parliament could react negatively to Germany’s policies,” Angelino Alfano, the head of Silvio Berlusconi’s People of Liberty party intoned in the presence of Prime Minister Mario Monti.
He warned of the “decline of the West” if the European Central Bank’s mandate were not changed to allow it to target economic growth and buy government bonds if needed. “This is a battle,” Mr Alfano added.
Other politicians made similar statements, expressing exhaustion at what they called the policy of rigor.
It’s understandable that Italians are alarmed. Their nation has €2 trillion in public debt, heavy redemption humps for the next three years, and Wednesday’s auction showed creditors now demand 4% interest to loan the republic money for just one year, up from less than 2% a month ago.
“Panic has set in,” said Nicholas Spiro, an independent analyst of sovereign debt dynamics.
Austerity fatigue may be a bit premature. It’s true that Italy’s economy has been contracting since last summer, but it’s the fourth recession in the past decade so hardly a cosmic shock.
And it’s true that unemployment is rising, but much of the increase is due to more people classifying themselves as job-seekers than in the past. That probably reflects the awful stagnation of wages since the euro was introduced, something that the honorable members of Parliament weren’t loudly complaining about in previous years.
The problem is that austerity hasn’t even really begun in Italy. The public debt-to-GDP ratio appears to be rising.
Tight fiscal policy in recent years means Italy’s budget deficit isn’t so huge, giving it a near-term edge over Spain, where bank bailouts and a collapsing economy have put enormous pressure on public finances. But “Italy’s structural problems are actually more serious than Spain’s,” said Ulrike Rondorf, an economist at Commerzbank in Frankfurt.
There’s growing resistance to Mr Monti’s reforms, even though the hotly-contested labor reform package doesn’t even aim to make the way wages are formed more flexible and thus more closely aligned to productivity, Ms Rondorf added.
Moreover, fixed investment is falling fast in the current downswing, making any future productivity gains even more contingent on wages rising less than those of Italy’s trading partners.
Italy’s unit labor costs — a proxy for competitiveness — rose 32% more in Italy than in Germany since 2001, noted Charles Gave of GaveKal, a boutique investment manager. Clawing that back could take a long time.
Alternatively Italy could just keep taxing itself away and try to curb public spending. Since the mid-1990s Italians have paid about €600 billion more in taxes than the government spent on non-interest spending, and yet the national debt ratio remains 120% of GDP.
Before the euro, Italy would devalue in a situation like this and gain temporary respite from a surge in exports. Inside the euro, that can’t be done.
Yet the serial currency devaluations of the past were not benign for Italy’s citizens, who are the richest in Europe in terms of private wealth.
Indeed, with total net assets of almost five times the public debt, any euro exit would be brutal for them even as it helped their state.
Meanwhile, Mr. Alfano accused Germany of “selfishness.”
“You tell Merkel that if Germany keeps sticking to its current course, the Italian Parliament could react negatively to Germany’s policies,” Angelino Alfano, the head of Silvio Berlusconi’s People of Liberty party intoned in the presence of Prime Minister Mario Monti.
He warned of the “decline of the West” if the European Central Bank’s mandate were not changed to allow it to target economic growth and buy government bonds if needed. “This is a battle,” Mr Alfano added.
Other politicians made similar statements, expressing exhaustion at what they called the policy of rigor.
It’s understandable that Italians are alarmed. Their nation has €2 trillion in public debt, heavy redemption humps for the next three years, and Wednesday’s auction showed creditors now demand 4% interest to loan the republic money for just one year, up from less than 2% a month ago.
“Panic has set in,” said Nicholas Spiro, an independent analyst of sovereign debt dynamics.
Austerity fatigue may be a bit premature. It’s true that Italy’s economy has been contracting since last summer, but it’s the fourth recession in the past decade so hardly a cosmic shock.
And it’s true that unemployment is rising, but much of the increase is due to more people classifying themselves as job-seekers than in the past. That probably reflects the awful stagnation of wages since the euro was introduced, something that the honorable members of Parliament weren’t loudly complaining about in previous years.
The problem is that austerity hasn’t even really begun in Italy. The public debt-to-GDP ratio appears to be rising.
Tight fiscal policy in recent years means Italy’s budget deficit isn’t so huge, giving it a near-term edge over Spain, where bank bailouts and a collapsing economy have put enormous pressure on public finances. But “Italy’s structural problems are actually more serious than Spain’s,” said Ulrike Rondorf, an economist at Commerzbank in Frankfurt.
There’s growing resistance to Mr Monti’s reforms, even though the hotly-contested labor reform package doesn’t even aim to make the way wages are formed more flexible and thus more closely aligned to productivity, Ms Rondorf added.
Moreover, fixed investment is falling fast in the current downswing, making any future productivity gains even more contingent on wages rising less than those of Italy’s trading partners.
Italy’s unit labor costs — a proxy for competitiveness — rose 32% more in Italy than in Germany since 2001, noted Charles Gave of GaveKal, a boutique investment manager. Clawing that back could take a long time.
Alternatively Italy could just keep taxing itself away and try to curb public spending. Since the mid-1990s Italians have paid about €600 billion more in taxes than the government spent on non-interest spending, and yet the national debt ratio remains 120% of GDP.
Before the euro, Italy would devalue in a situation like this and gain temporary respite from a surge in exports. Inside the euro, that can’t be done.
Yet the serial currency devaluations of the past were not benign for Italy’s citizens, who are the richest in Europe in terms of private wealth.
Indeed, with total net assets of almost five times the public debt, any euro exit would be brutal for them even as it helped their state.
Meanwhile, Mr. Alfano accused Germany of “selfishness.”
