A plan for reforming the Italian economy and the International Monetary Fund

4th November 2011

This week has certainly been a roller coaster ride and let me illustrate this by the closes in the Dow Jones Industrial Average equity index so far this week. They are -276,-298, +179 and +208! So an high level of inter-day volatility but I also note that we have in fact in total only fallen some 187 points overall. So running fast to stand still seems to be the state of play. Later today we have the US non-farm payroll numbers which are the prime economic statistic in these times where we get a monthly update on the both the employment and unemployment situation in the United States so we could have a rocky rise! There is also the not so small matter of a vote of confidence in Greece but this is likely to happen after European markets have closed.


Weekly jobless claims figures

Yesterday we received these numbers from the US Department of Labor


In the week ending October 29, the advance figure for seasonally adjusted initial claims was 397,000, a decrease of 9,000 from the previous week's revised figure of 406,000. The 4-week moving average was 404,500, a decrease of 2,000 from the previous week's revised average of 406,500.


So we have begun to see headline numbers below 400,000 (although the usual upwards revision often takes that away) and if we look at the more important four-week average of 404,500 we do see signs of an improvement. Not so long ago we were looking at the four-week average being between 420,000 and 430,000.


However the numbers have not improved enough to make a real dent in US unemployment. In essence we appear to have moved from numbers which indicate a worsening trend to ones which indicate an element of treading water. So we are in a btter place and employment may improve but will an improvement take place in unemployment? That is not so sure. As ever great care is needed withthe numbers as they can on a one month basis be erratic and as they are constructed from two different surveys they do from time to time contradict each other!


The problem that is Italy

I analysed her situation back on the 11th of July and on the 12th of July I compared her to the UK. If I were two pick two sentences which express my view from these two articles they are below.


If we look back to the past decade Italian economic growth has some similar characteristics to that of Portugal as the average growth rate in the first decade of this millennium was less than 1% per annum.


As we stand Italy is producing an output level equivalent to that of 2004 whilst her debt level has grown substantially


I replied to a comment yesterday asking for my views on what Italy should do and I am adding a further explanation here to my reply as it is perfectly valid to ask what would you do Shaun? By my choice of quotes above you can see that like Portugal a major problem has been a lack of economic growth and my views on how to improve it are below.


1. My suggested solution for UK banks could be applied to Italy to improve her banking sector. My modus operandi here is reform rather than funding. That is not to say that funding will not be needed but that reform is the priority.


2. Her economy needs supply side reform in many other ways to improve her competitiveness. I believe that this can be done but there is a hard benchmark in that to have real success she would have to approach Germany's level.But in truth Berlusconi's government has had little interest in this. Her weak economic growth figures indicate that if this was properly persued there should be some relatively easy gains.


3. Unless the fiscal deficit numbers are being misrepresented Italy does not have a large problem here and turning her economy around with the moves above could begin to re-establish confidence.

If this does not work inside the Euro she could leave but she would be leaving with a stronger better balanced economy which would allow her to avoid at least some of the problems of her Lira past..

In the end it is reform that will help her. My contention since the beginning of the Securities Markets Programme of the European Central Bank is that it is a tactical move that has been dressed up as a strategy. The saddest part of the ECB/EU/IMF response to the Euro zone crisis is that there has been little or no strategy. If you "kick the can down the road" you need a strategy to make things better by the time you catch back up with the can. Much time has already been lost but one could start now with bank and economic reform.


I think that many would be surprised at how markets would respond if there was genuine reform and signs of improvement. As it would probably have to come with the removal of Silvio Berlusconi ( as he has been a blocking ball to reform) then there could easily be quite a quick improvement in perception.


So my criticisms of the Italian bond buying by the European Central Bank are based on the fact that it is an element of a face saving exercise for Europe's politicians. As there have been actual losses for the ECB and potentially for European taxpayers there is a cost here. What is needed on the other side of the ledger is some economic improvement whereas in reality all we seem to be getting is deterioration. Accordingly we find ourselves seeing more of this type of new data.


Markit Services Purchasing Managers Index for Italy

Posting 43.9, down from 45.8 in September, October's seasonally adjusted Markit/ADACI Business Activity Index  signalled the fastest monthly contraction in Italian service sector output since June 2009.


As a reading of 50 indicates neutrality we can see that 43.9 is somewhat ominous for future prospects. More low growth or maybe contraction? Possibly. And as a counterpoint to the ECB's decision to cut its official interest-rate by 0.25% to 1.25% yesterday we see this too.


Input prices, meanwhile, continued to rise, extending the current period of inflation to 27 months.


My contention is that whilst the consequences maybe  unpleasant in the short-term it is better to deal with inflationary pressure early and in this context I would like to remind readers that one of the central problems Italy faces is a lack of price-competitiveness with Germany and the Germanic nations.


My conclusion remains the same as it was on July 11th

In my opinion what we are seeing is the intellectual and moral bankruptcy of a system that has prioritised saving banks and banking systems over saving nations and people. The irony is that it is looking like it has failed to save the banks either but perhaps the game was so cynical that the plan was to buy any time they could….


Today's latest news

Italy is coming under more and more pressure to accept a monitoring programme from the International Monetary Fund and some news agencies are already reporting that this will happen. If the IMF was to implement a programme along the lines I have suggested above then we are likely to see an improvement. Sadly its recent  track record on this front is poor and we are more likely to see instead an emphasis on yet more austerity. This type of plan which sems to have become a mantra ( regular readers may remember me pointing out that the Polish Finance Minister complained that a plan for Poland came with another countries name on it!) is simply not working in the credit crunch era.


Sadly rather than a leader who can reform and drive the IMF forwards we instead have Christine Lagarde who lest we forget was one of the arc
hitects of the "shock and awe" plan of May 2010 which is failing as I type this.


The International Monetary Fund

An expansion of its role is being mooted. This is following the by now well established theme for a problem which is that it starts in the private-sector gets transferred to a nation and then to a supra-national organisation with politicians usually hoping that the fact that nothing has really changed does not get spotted!


The UK media is already beginning something of a softening up operation by implying in many cases that as we are in effect lending money from our foreign exchange reserves and that the IMF has in its past rarely lost money everything is OK. So here is a question for readers, what has happened in the last decade that before was assumed it could not happen because it had not happened up to that point?


I will open the bidding with the scandal surrounding "zeros" in the UK.


And before I move on the current position is that the largest contributor to the IMF which is the United States has failed to put even the 2009 expansion before Congress yet… If you recall that was badged by some in the UK as "saving the world"


A song for the Greek Prime Minister Mr. Papandreou

I did spot someone suggesting that a Madonna song "Papa don't preach" might be appropriate but for me the words of the Clash seem to sum up his position.


"Should I stay or should I go now?

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