A little while back I was part of a small exchange of views on twitter. It was about Italy.  I was arguing against a claim that Italy's woes are all about its past fiscal excesses.  It is not just about about Italy's legacy.

It is true that Italy runs a primary budget surplus. The primary budget surplus has averaged in excess of  2% for nearly two decades.  Over this period, Italy debt has soared.  I took exception with a reporter claiming that Italy is among the most fiscally sound countries in Europe. The fiscal condition of a country is not just about its budget balance (flow) but also its debt (stock).

It debt is not simply a legacy of past fiscal profligacy.  The debt burden has increased because Italy is unable to grow faster than its interest rates. The Italian economy has expanded by an average of 0.6% in the 2014-2016 period. Over the past 17 years it has averaged 0.3% growth (since birth of EMU). It averaged 2.1% growth in the previous 17 years.

This Great Graphic comes from the IMF.  It shows that real wage growth in the four largest member of EMU. Italy (red line) is the obvious outlier.  It moved in tandem with Germany (black line) until around 2007.  The timing of the break down suggests that it is not a function of EMU or Italy's pass fiscal excesses.  The IMF warns that it could take Italy another decade for its average take home pay to recoup the ground that has been lost since 2007. 

Chart

Part for the issue, according to the IMF, is that Italian wages have grown faster than productivity for the past two decades.  That is what this second chart shows--unit labor costs relative to Germany (100). The red line shows that in terms of labor, a unit of output in Italy's factories is considerably higher than the other major European countries.  In turn, the IMF argues this adversely impacts, investment, employment, and growth. 

Chart

The IMF argues that Italian wages should be tied to productivity at the firm level rather than on the national level. The IMF estimates that this would boost employment by 4%, as well as boost other macro economic performance measures. Of course, the IMF has other reform proposals in the area of government spending and taxation. 

A full three-quarters of Italy's revenues go to wages, pensions, health care, and debt servicing. It has little room to finance public investment.  The traditional approach has focused on Italy's debt burden and the NPLs at banks. This is the creditor's narrative. The response is not to dismiss Italy's problems as having been caused in the past, but the debtor's narrative is to boost growth. The failure of Italy to grow is not simply the austerity (primary budget surplus) but its willingness not to challenge rent seeking behavior by the private as well as the public sectors. 

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

Recommended Content


Recommended Content

Editors’ Picks

GBP/USD bulls retain control near 1.3300 mark, highest since March 2022

GBP/USD bulls retain control near 1.3300 mark, highest since March 2022

The GBP/USD pair trades with a positive bias for the third straight day on Friday and hovers around the 1.3300 mark during the Asian session, just below its highest level since March 2022 touched the previous day.

GBP/USD News
USD/JPY pops and drops on BoJ's expected hold

USD/JPY pops and drops on BoJ's expected hold

USD/JPY reverses a knee-jerk spike to 142.80 and returns to the red below 142.50 after the Bank of Japan announced on Friday that it maintained the short-term rate target in the range of 0.15%-0.25%, as widely expected. Governor Ueda's press conference is next in focus.  

USD/JPY News
Gold consolidates weekly gains, with sight on $2,600 and beyond

Gold consolidates weekly gains, with sight on $2,600 and beyond

Gold price is looking to build on the previous day’s rebound early Friday, consolidating weekly gains amid the overnight weakness in the US Dollar alongside the US Treasury bond yields. Traders now await the speeches from US Federal Reserve monetary policymakers for fresh hints on the central bank’s path forward on interest rates.

Gold News
Shiba Inu is poised for a rally as price action and on-chain metrics signal bullish momentum

Shiba Inu is poised for a rally as price action and on-chain metrics signal bullish momentum

Shiba Inu remains strong on Friday after breaking above a symmetrical triangle pattern on Thursday. This breakout signals bullish momentum, further bolstered by a rise in daily new transactions that suggests a potential rally in the coming days.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures