Cocaine and prostitution will not rescue Italy from its economic depression

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One of the themes of this blog has been that the economy of Italy has struggled through the credit crunch period as the initial impact was added to by the Euro area crisis. Unfortunately this exacerbated the issues raised by the fact that in the supposedly good times that preceded it, Italy only managed weak economic growth of around 1% per annum. So it had been left vulnerable by its past performance and then found itself in a reinforcing crisis where economic contraction put pressure on the government’s fiscal deficit and both led to rises in its national debt to Gross Domestic Product ratio. At the end of 2013 this had risen to 132.6% or if you prefer was then 2.069 trillion Euros.

So a success of past Italian policy which was that its fiscal deficit had been brought under some control was lost. It found itself in a familiar Euro area cycle where economic weakness pushed the fiscal deficit higher which required austerity which weakened the economy further and repeat. The best way of highlighting what has gone on is to point out that GDP in 2013 was lower than that in 2000. If we use 2005 prices then 2000 saw 1.367 trillion Euros and 2013 saw only 1.365 trillion Euros.

Accordingly Italy is on the edge of having a smaller economy than when it joined the Euro which is a very far cry from the promises made then. The impact per person is worse that this as back on the 1st of January 2000 the resident population of Italy was estimated at 56.9 million whereas on the same day in 2013 it was 59.69 million. So less economic output has been divided amongst 4.9% more people as we wonder why there have not been more protests about this in Italy. Or to put it another way I think that this qualifies as being called an economic depression.

The recovery?

As 2013 progressed the general outlook improved which has continued into 2014 so Italy would have hoped to join in with this along the lines of a rising tide lifting all boats. Whilst  quarterly economic growth of 0.1% may not be much this performance in the last quarter of 2013 was the first positive reading for nine quarters. But the recovery theme has struggled to gain traction in Italy.

In the first quarter of 2014 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.1 per cent with respect to the fourth quarter of 2013 and by 0.5 per cent in comparison with the first quarter of 2013.

So another quarter of contraction with only a glimmer of better news from the annual comparison.

Will the black or shadow economy help?

We have analysed and debated this issue many times before but the last 24 hours has provided some light relief. From

Italy to include drug and prostitution money in GDP calculations.

Zerohedge has covered this subject in its own inimitable style too.

Hookers And Blow: How Changing The Definition Of GDP Officially Jumped The Shark

Max Keiser has joined the fray also.

Stacy Summary: By these measures, Afghanistan, Colombia and Mexico will move into the G8 next year.

As ever there is some truth and some what might politely be called poetic licence going on here. I have written several posts on the expected impact of the new “improved” accounting standard ESA-10 which arrives in the autumn across most of Europe and Italy is expected to be one of the smaller gainers from this with its addition to recorded GDP likely to be between 1% and 2%. The main mover here is the treatment – I would argue double-counting of research and development – which of course is much less newsworthy than coke and hookers! But even if we ran with that theme Italy is not being fairly treated here as for example my own country the UK expects a larger boost of between 3% and 4%.

Although if we look back in time it is clear that Italy has been running with a more favourable interpretation of GDP for some time which I guess surprises precisely no-one.

In the midst of this does give us some estimates for the black economy in Italy.

The Bank of Italy in 2012 estimated the value of the criminal economy at 10.9 per cent of GDP……The ‘grey economy’ of businesses that do not pay taxes is already calculated in Italy’s GDP and was estimated to be worth between 16.3 per cent and 17.5 per cent of the economy in 2008 — the last year for which the calculation was made.

Trying to measure such a concept is fraught with obvious difficulty but if pressed I would suggest that they are likely to be on the low side. I would be interested in reader’s thoughts on this subject.

What is the latest evidence?

Retail sales

This morning’s release was yet another disappointment.

In March 2014 the seasonally adjusted retail trade index decreased by 0.2% with respect to January 2014 (-0.4% for food goods; the non food goods index was unvaried). The average of the last three months compared to the previous three months decreased by 0.3%.

The unadjusted index fell by 3.5% with respect to March 2013.

The underlying index is now at 94.8% of the average for 2010 as we note that so far domestic demand is not recovering at all in Italy. This is unlikely to be helped by this.

In April, the index of hourly contractual wages remains unchanged from the previous month and an increase of 1, 2% in relation to April 2013.

According to Reuters this is the lowest reading  this series has had which is a phrase that feels it is on repeat in the credit crunch era especially in the area of wages. However you spin it such levels are unlikely to provide a boost to domestic demand, although with consumer inflation so low (0.5%) there has been a nudge higher in real wages.

What about the future?

Yesterday’s business survey based on purchasing managers are optimistic for the Euro area as a whole.

(Euro area) GDP looks set to rise by 0.5% in the second quarter after the lacklustre 0.2% rise in the first three months of the year.

Some care is needed with such optimism though if we recall that they expected 0.4% GDP growth in the quarter just gone. If we look at Italy specifically we see that the retail and service sectors are fairly stagnant.

Italy’s retailers recorded only a marginal dip in sales in April, the slowest for more than three years,

Service sector output increased in April, driven higher by a further rise in new business and reversing a marginal contraction in activity one month earlier…..Meanwhile, job shedding continued.

Although the outlook is considerably brighter for manufacturing.

Growth in Italy’s manufacturing sector gathered pace in April, with businesses signalling the fastest expansions in output and new orders for three years.


If we look at the economic experience of Italy in this century it is clear that it has been quite a disappointment which of course coincides with its membership of the Euro. This is now being reinforced by the fact that the recovery which the overall Euro area is experiencing has only moved Italy’s economy up to flatlining. So far expectations have been positive but the actual numbers disappoint. This leaves Italy extremely vulnerable to any future slow downs and hoping that the recent retreat in the value of the Euro to the mid 1.36s will not only continue but last so that her exporters get a boost.

Perhaps a boost will come when Italy plays England in the World Cup as Italians will advance more confidently on that than us English. As to an economic boost from coke and hookers actually Italy is a relative loser here in the international GDP “improvement” league table and there is food for thought in the fact that even in the murky world of football tables are seldom revised for the past! Also Italy will be ruing the fact that the Euro area set 120% of GDP as a national debt benchmark when Greece hit trouble as unless it can sustain some economic growth it will move ever further above that level.






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  • Anonymous

    Fascinating, if depressing reading Shaun. Regarding your Max Keiser quote, there is actually a pretty good case for having Mexico in the G-8 even without the drugs and hookers. The 2013 IMF estimates of GDP on a purchasing power parity basis show Mexico with the 10th largest economy in the world. Italy is 11th and Canada 13th. If you think of the G-8 as a club for the leading middle-income democracies, it’s not obvious that Italy or Canada has a better right to be a member than Mexico.

  • Anonymous

    Hi Shaun,

    Firstly, with free movement of goods – Italy becomes a region. Measuring the EU economic output (especially in purchasing power parity) is fraught with difficulties due to EU expansion in 2004 and 2007. I suggest Italy’s GDP is heavily influenced by EU expansions.

    Secondly, the USA has started toward legalizing marijuana and prostitution is legal in Nevada. US fiscal position reportedly improving – I’m not sure how much improvement is due to pot taxes….

    Only a failing state registers illegal activities as GDP – surely the appropriate response is to either crack down on tax evasion either by legalization or prohibition enforcement. The FBI got Al Capone for tax evasion …

  • therrawbuzzin

    “and prostitution is legal in Nevada.”
    This must be worrying for the unemployed. as, the way our govt. treats them, first it will be legalised, then taxed, and when it is, it will become just another job…
    DWP: “Jo/e Soap, you haven’t found a job in six weeks, we’ll be suspending your benefits if you can’t come up with a good reason why you shouldn’t hawk yer mutton.”

  • midge

    Hi Shaun and thanks for another week of blogs.
    Just looked at Italy’s national debt clock which has been rising since end of last year and suggests debt as % of GDP just short of 138%.How can a economy like Italy ever service this debt?.

  • Anonymous

    I notice that Italy’s net debt at 132.6% of GDP is a whole 0.5% bigger than the figure you gave yesterday for the UK’s net debt, unless you exclude the “temporary” effects of financial interventions. Surely the Italians could identify something “temporary” to exclude from their figures?

  • Anonymous

    No mention of this?

    “former US Treasury Secretary says that EU officials approached him in the white heat of the EMU crisis in November 2011 with a plan to overthrow Silvio Berlusconi, Italy’s elected leader.

    “They wanted us to refuse to back IMF loans to Italy as long as he refused to go,” he writes.”

  • Pavlaki

    In a similar vein it has emerged that they forced Papandreou from office in Greece. A bit like the Irish vote on the Lisbon treaty – if you don’t do what they EU wants they will force the issue. I notice that the so called bank stress tests are already being watered down with Dexia now a special case! Quite happy to move the goal posts when it suits their ends!

  • Anonymous

    lenders do have the right to set loan conditions. given the IMF is funded with taxpayers money, I’m glad to hear of responsible action against reportedly crooked leaders.

    The Economist has many articles about Berlusconi and corruption. How do you think Bunga Bunga Berlusconi became Italy’s richest man ?

  • therrawbuzzin

    Do you not mean, “ELECTED crooked leaders”.
    If the IMF won’t lend to countries with crooked leaders, then I suggest they set up their headquarters in Antarctica.

  • Anonymous

    Hi Andrew

    You make a good point about the G-8 as Italy’s economic stagnation both absolute and relative has challenged its position on such a body.

    By the way interesting news from Canada “The Consumer Price Index (CPI) rose 2.0% in the 12 months to April,” has it created much of a stir in what are supposed to be times of disinflation?

    Was it the Canadian Dollar? “The larger year-over-year rise in the CPI in April compared with March was led by energy prices, which increased 8.4% in the 12 months to April, after rising 4.6% in March.”

  • Anonymous

    Hi ExpatInBG

    I had a wry smile when I spotted this.

    ” ‏@cr3dit 22h

    if it’s in gdp, it’s endorsed by the state and should be legal. basic logic”

  • Anonymous

    Papandreou lost his nerve and cancelled the referendum. His CHOICE ! A referendum would be good result for Greek democracy – whatever the outcome.

    The EU and IMF does not use tanks or paramilitary thugs in plain clothes. If Papandreou had managed Greece’s finances responsibly – he would not need to go cap in hand to the troika.

  • Anonymous

    Hi Midge

    A debt servicing problem is one which mostly comes on very gradually a bit like a runner having weight added to a backpack ounce by ounce. But each rise in debt and weak GDP number leaves Italy more vulnerable to what can be a more rapid shock which is a rise in bond yields.

    For now the promises of the ECB and the worldwide chase for yield have reduced Italian bond yields and provided a haven in time, but they must not waste it.

  • Anonymous

    Hi Ian

    Good point! However on a like for like basis (Eurostat) the UK was at 90.6% in terms of national debt to GDP at the end of 2013. So as we have a growing GDP we are better off although not so different as we might like to think.

  • therrawbuzzin

    Indeed, or the state has a disincentive to tackle the black economy & organised crime. (other than the obvious as in Birds of a feather…)

  • Noo 2 Economics

    Many a true word spoken in jest – 7 years ago I copped a redundancy and signed on for contributory JSA whilst I sorted out setting up my business and waiting for the new tax year (Otherwise I would be paying 58% tax & NI on everything I earned – a disincentive to work!!).

    One day the “jobs adviser” showed me a job registered with the Job Centre – a pole dancer (and me a middle aged male!!) I pointed this out to him and he responded “they can’t exclude you on grounds of gender or age – thats sexism and ageism”!!!.

    I noted benefits could not be suspended if a claimant did not apply for that particular job, at that time, that may not be the case now……

  • theyenguy

    Italy is playing a pivotal role in the unfolding of global economic events.

    The apostle Paul presents the concept in Ephesians 1:10, that Jesus Christ has been tasked with the economy of God, to mature and perfect all things in every age, bringing them to maturity and perfection, much like a ship’s captain completes the manifest before setting sail.

    The age of currencies, was fathered by Milton Friedman with his Free To Choose Manifesto, and the age of credit was fathered by Ben Bernanke with his QEs, Mario Draghi with his LTRO1, 2, and OMT, and Hiroki Kuroda, with this Abenomics.

    God purposed for a debt based money system, and provided the Banker regime to establish currencies and credit to achieve His purposes. It was by God’s design from eternity past, and ongoing fulfillment of His will that the central bank leaders’ provision of currencies and credit, provided seigniorage, that is moneyness, for investment gain, and very little stimulus for economic recovery since the Great Recession, as the investor was ordained from eternity past to be the centerpiece of economic activity.

    Each of economic geniuses, Bernanke, Draghi, and Kuroda, provided his own credit stimulus for trust in risk on investing; these birthed and defined the investor as the centerpiece of economic activity.

    The sovereign’s monetary policies defined investment choice and established both the confidence and the platform for risk-on investing, and resulted in peak banking equity wealth, IXG, on May 13, 2014, and resulted in peak credit wealth, AGG, on May 15, 2014, thus establishing peak moral hazard.

    Sovereign monies, that is Major World Currencies, DBV, such as the Euro, FXE, are now trading lower. This loss of seigniorage communicates a dwindling of sovereign authority.

    As is seen in Revelation 6:1-2, Jesus Christ, on October 23, 2013, partially opened, on then again on May 13, 2014, fully opened, the First Seal of the Scroll of End Time Events, thereby releasing the Rider on the White Horse, who has the Bow of Economic Sovereignty, that is the Bow Without Any Arrows, to effect coup d etats world wide, to transfer sovereignty from democratic nation states to fascist regional leaders and bodies, by calling the Benchmark Interest Rate, ^TNX, higher from 2.49%, thus destroying the monetary authority of the world central banks, and establishing the economic authority of regional governance in the world’s ten regions, and totalitarian collectivism in mankind’s seven institutions, as is seen in Revelation 13:1-4.

    Wealth destruction commence on Tuesday, May 13, 2014, in the Eurozone on the failure of credit, specifically the failure of trust in the world central banks to continue to stimulate investment gains as well as global growth. With the trade lower in Italy’s Sovereign Debt, ITLY, and Italy, EWI, and the European Financials, EUFN, the world has passed through an inflection point: the world has pivoted from the age of credit into the age of debt servitude.

    On Tuesday, May 20, 2014, the world entered Kondratieff Winter, the final phase of the Business Cycle, with a credit market reversal and a partial equity market reversal, as investor’s greed turned somewhat to fear, specifically fear that the world central banks’ monetary policies, no longer sustain investment gains and global economic growth, and have made money good investments bad.

    The see saw destruction of fiat investments commented Tuesday May 20, 2014. While World Stocks, VT, and Nation Investment, EFA, may trade higher, Global Financials, IXG, and Dividends Excluding Financials, DTN, as well as Credit Investments, AGG, are trading lower, as the bond vigilantes have control of the Benchmark Interest Rate, ^TNX, which traded lower to 2.51%, but remains above support at 2.49%.

    The failure of credit, that is trust in the monetary authority of the world central banks, is beginning to cause the death of currencies, starting first with the Major World Currencies, DBV, such as the Euro, FXE, the Swiss Franc, FXF, the British Pound Sterling, FXB, and the Swedish Krona, FXS. And coups throughout the world, such as in Thailand, and the Ukraine, are starting to cause the dissolution of traditional democratic nation state governance.

    Inflationism is turning to destructionism.

    The world has pivoted from the age of currencies and the age of credit … and into the age of diktat and the age of debt servitude.

    On going disinvestment of currency carry trades and debt trades will introduce the much feared economic deflation on a worldwide scale.

    And out of soon coming economic chaos, people will come to trust in new sovereign authority and monetary and economic policies of regional economic governance and schemes of debt servitude to establish regional security, stability, and sustainability, where the debt serf is the centerpiece of economic activity, and ever increasing poverty is the way of economic life.

  • Anonymous

    Wow, Shaun, I am constantly impressed at how you keep
    yourself abreast of everything that is happening in the world economy, even the latest Canadian inflation numbers. The 2.0% inflation rate for April amounts to
    a forecasting error of Carneyesque proportions by the Bank of Canada as the April 16 Monetary Policy Report didn’t see the CPI All-items rising to the target rate until 2016Q1. It is all the more surprising as a big hike in the
    inflation rate in April was virtually inevitable.

    In April 2014 British Columbia reinstated a provincial sales
    tax (PST), eliminating the Harmonized Sales Tax (HST) it had had since July 2010. (BC voters most unwisely voted to get rid of the HST in a referendum in 2011.) Prince Edward Island instituted its own HST, replacing its PST, in the very same month. The HST is so called because it is harmonized with the federal Goods and Services Tax, which is basically a VAT. The provincial portion of the
    HST, which in BC was at a 7% rate, was applied on a lot of services that were not covered by PST. It also applied to new housing purchases, but due to special rebates, the effective rate was considerably less than 7%.

    Therefore BC returning to the PST led to a 1.1% decline in
    prices from March to April 2013. April 2014 was influenced by the exit effect of this one-shot decrease from the 12-month rate of price change, so BC inflation went from 0.1% in March to 1.5% in April, stimulating a big increase
    in Canadian inflation rate as well. Of course, the April 2014 change in tax regime in PEI had the opposite effect, but this lovely province is so small the exit effect of its move to an HST had little impact at the national level.

    The BC HST exit effect can be seen in a number of series at the national level. Food purchased from restaurants went from 1.0% in March to 2.1% in April, taxi services from 0.3% to 1.7%, clothing materials, notions and services from 2.5% to 3.4%, housekeeping services from 0.9% to 2.0%, household maintenance and repairs from 0.8% to 1.5%. (The latter would have had a bigger impact on the Canadian CPI and likely the increase in the component itself would have been stronger, were it not for the ill-advised decision to remove replacement expenditures, such as retiling of roofs, from the CPI basket,
    effective with the 2005 basket update). The Canada-level index for homeowner’s replacement cost of depreciation actually went from 1.6% in March to 1.5% in
    April. Nevertheless, the BC HST exit had an important impact on this component too. In BC the same index went from -2.0% in March to -1.6% in April.

    While BC switching back to a PST regime was a one-shot
    event, which caused the Canadian monthly inflation rate to go negative in April 2013 (-0.2%), from May 2013 to September 2013 the monthly inflation rate always
    lies between 0.0% and 0.2%. Therefore, just a repetition of the 0.3% monthly inflation rate for April 2014, month after month, will be enough to generate continuous increases in the inflation rate, exceeding the 2.0% target rate, to
    the end of the third quarter. Andrew Baldwin