Italy back to recession

By Valentina Magri

Mamma mia, here we go again. But this time is different: neither Abba nor Mr Berlusconi are part of the story.

Despite this fact, there is an eerie feeling over déjà vu in the air. Italy has dipped back into recession for the third time since 2008. The latest Istat preliminary estimate of GDP fell by 0.2 per cent in the second quarter 2014. It is the minimum level in 14 years. How could this of happened (again)?

The Italian economy

In the second quarter 2014 Italian GDP shrank due to a diminishing value in every area of the economy: businesses, agriculture (-0.8 per cent) and services (-0.2 per cent). Looking at companies, the worst-performing industries are refining and mining (-11.7 per cent year over year in June) and electronic equipment (-10.8 per cent). Even exports, the component of the trade balance that usually helps the Italian economy, is diminishing (but precise data over this issue are going to be released by Istat on August 29th). Finally, consumption is at a standstill: its contribution to GDP is equal to 0 per cent. Economists expected bad data, but not like this. Bloomberg analysts, for example, had in mind a 0.1 per cent decline.

What is the impact of this data?

The economic consequences of GDP

In the short-term, this bad news had a negative impact on the financial markets: Borsa Italiana fell by three per cent shortly after the release of GDP data on 6 June 2014 and closes with a 2.7 per cent at the end of the day and an increase of the spread from 163.2 to 170.7 basis points. In one day, €12.81 billion (£10.24 billion) had vanished.

Even worse, this diminishing GDP pattern will have bad consequences for the Italian economy as a whole in the long-term. Pier Carlo Padoan, Italian minister of Finance, interviewed by the business title “Il Sole 24 Ore” swears: “We do not need another corrective budget law, but 2015-2018 are going to be challenging years”. The deputy minister of Finance Enrico Morando admitted: “It is clear we are going to miss the expected targets”. Indeed, the Government spending plans for the rest of the years considers a (very unlikely) GDP growth of 0.8 per cent for 2014.

The budget deficit target of 2.6 per cent is dubious and has caused the EU to worry: “This data will have a negative impact on Italian public accounts. But it is too early to evaluate their impact on the deficit”, said Simon O’Connor, European commission spokesperson for economic and monetary affairs. The ECB governor Mario Draghi is as well concerned about the Italian situation.

Mario’s version

“One of the factors of the low Italian GDP is the significant low level of private investments. The general uncertainty over the lack of structural reforms discourages investment”, said Mario Draghi at the press conference after the last meeting of the Governing Council of the European Central Bank (August, 7th). Mr Draghi explains that the excessive amount of bureaucracy does not allow entrepreneurs and youngsters to invest in Italy. He also states that Eurozone countries that carried out structural reforms (in the labour market, competition and justice system) are better off now than the others.

Take Spain. After a serious labour market reform, it has been recovering from the crisis, even if so far only UK, France and Germany have passed the pre-crisis peak of the second quarter 2008. Eventually, Draghi advises to set up an European governance of structural reforms in Peripheral countries. Many economists agree with him. Let’s have a look to the debate over restoring growth.

How to exit from the tunnel of the recession?

“Italy needs investment in new companies and infrastructure”, says the economist at Catholic University Giacomo Vaciago to the Italian news agency AGI. French economist Jean Paul Fitoussi uttered similar sentiments and is convinced that Renzi must go to EU and ask for flexibility in order to leave austerity policies in favour of growth-oriented ones. Regarding this issue, Bocconi University economist Francesco Giavazzi has been calling for reforms for a number of years in exchange of flexibility in the deficit GDP ratio, which should be greater than the three per cent threshold imposed by the European Stability and Growth Pact for a period.

Bocconi University professor Tito Boeri, interviewed by Il Fatto Quotidiano, stresses Renzi’s missed goals: “Too many announced reforms. The Government should had done another thing: start one reform and bring it to the end. Renzi should had done just one thing, but in an effective way. Most of his declared reforms are no more than a Power Point presentation”.

The professor believes that the priority should labour market reform: the Jobs act, announced many times this year but so far postponed. Francesco Daveri, economist at Parma University, has a different view: “Italy needs a fiscal reform as soon as possible in order to help consumption and investments (, 6 August 2014). Eventually, there are several suggestions for the PM Matteo Renzi: will he make the most of them?”

The plans of the “demolition man”

Mr Renzi shows as usual an high level of self-confidence in his last interview with the Financial Times (August, 10th): “I intend to hand this country over to who comes after me in good order. Time will show whether this is arrogance or courage. On my part, I’m not going to budge one inch and I will go ahead”. He assures that Italy will not exceed the three per cent deficit threshold and that neither troika, nor ECB and European Commission will carry out reforms in Italy: his Government will do that.

At the inception of the third recession of their country, Italians should learn at least one lesson: instead of waiting for the recovery (and chatting in the meantime), they should recover from waiting. Unless they are willing to convert the Italian growth into the modern version of Godot.

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