Renzi making efforts to cut Italy's ridiculous public spending

Outlook

Mr. Draghi has been rescued from easing on Thursday in the nick of time by the OECD, which said this morning that the rate of inflation is falling everywhere. The 34 OECD members are now getting 1.4% from 1.7% in Jan, and G20 is seeing a third month of decline, from 2.6% to 2.3%. Even the core is dipping (to 1.6% in the OECD). The eurozone’s CPI dip to 0.5% is nothing special—even Brazil, China and India are seeing inflation fall—although 5 of the OECD’s 34 members with falling inflation are in Europe. Does this give Draghi an excuse to take no action on Thursday? Yes. He can point to a global trend that lets him off the hook. He may not accept the excuse and do something anyway—just because everyone is seeing the same economic data doesn’t excuse a central banker from working on a problem—but it can buy him time if he chooses.

The new Italian PM Renzi, the darling of economists everywhere, sees clearly that debt cannot be inflated away in the current environment. The WSJ has a story today on Renzi’s efforts to cut ridiculous public spending, including selling the government’s luxury car fleet on eBay. His right-hand man is a former IMF guy named Cottareli who seeks to save €34 billion (2% of GDP) over three years. “Italy's approach to public spending—which accounts for €800 billion, or half of gross domestic product—is a major source of the country's competitive weakness. For two decades, Italy has raised taxes and resorted to indiscriminate, across-the-board cuts to public spending to finance its public debt, which now tops €2 trillion and is the fourth-largest in the world. Still, Italy's government-operating costs remain 50% higher than the European average.”

Renzi is attacking pork-barrel spending, like the auto club that has 800 executive and the agricultural research agency where only a quarter of the expenses are actually related to research. Italy has 40,000 different procurement systems—to be cut to 40. And senior bureaucrats get a salary 12 times the national average wage (vs. 4.3 times in Germany). Even fighter jets may get scrapped. Civil servants and unions are up in arms.

Renzi may not succeed—heaven knows, Italy’s systems are a tough nut to crack. But acknowledgement of the problem is a big part of finding a solution. If not Renzi, then some other guy farther down the road. Italy can be very resourceful sometimes. After all, this is daVinci’s country. Spain, too, is surprising. Today the Markit manufacturing PMI rose to 52.8 from 52.3.

The relentless lack of respect for the dollar may get its usual pre-payrolls respite today and tomorrow—it’s our observation that the dollar often rises just ahead of payrolls Friday, presumably on short-covering. Today we get the ISM manufacturing index, expected up to 54 from 53.2 in Feb, according to the Bloomberg survey. We also get construction and auto sales. Then tomorrow it’s the ADP private sector employment forecast, expected to show a build of 195,000 jobs in March (from 139,000 in Feb)—even though March weather was awful, too. Bloomberg adds that the Citigroup “Economic Surprise Index” fell to a low of -32.60 yesterday, meaning the economists are getting their forecasts right these days. This is nice if you are an equity market investor—no unhappy surprises.

So again the US is making the world safe for risk-taking, although Putin gets some credit and possibly Draghi on Thursday. We will probably get some respite in dollar-selling, but the euro can’t lose no matter what Draghi does. If there is some kind of stimulus or even a cut, the euro gains. If not, the improving PMI’s point to a good underpinning. Everything is hunky-dory today—what can possibly go wrong?