Unlike most EU countries, including the UK, Italy has simply switched off a vast array of government spending
Italy is just like Spain, just a bit more Catholic. That may seem like an obvious statement in religious terms after a steep fall in observance across Spain and when the Vatican City remains the home of the Catholic leader. Yet this was not intended as a religious observation, but an economic one.
The prevailing view is that Italy’s economy is safer than Spain’s. After six months of repenting for its sins and self-inflicted pain Italy will more than satisfy strict EU debt rules.
Mario Monti, the softly spoken eurocrat who took over as prime minister from Silvio Berlusconi, has won plaudits from the high priests of austerity in Brussels for whipping a reluctant parliamant into submission and acquiescence.
In terms of government spending, Monti’s plan has secured the desired effect. While Italy’s debt rose last year to 120% of output, the annual deficit fell to 3.9%. It should come under the 3% target this year.
However, the achievement is no miracle. Unlike most EU countries, including the UK, Italy has simply switched off a vast array of government spending. To take the heat off central government, much of the austerity is being imposed by regions and local municipalities.
The extent of the spending cuts and tax rises can now be seen in the wider economy and show how a short-term debt victory has clearly become a long-term economic disaster.
The European commission’s country-by-country review today makes miserable reading.
James Nixon, an economist at Société Générale, points out that while businesses and consumers are struggling across the EU, Italy is the worst affected.
“The headline [eurozone] sentiment index fell by 2.3 points, to reach its lowest level since October 2009,” he says, “while roughly similar sized falls were recorded in many European countries, Italy stands out in particular with a 4.3 point fall in May.”
He says a more detailed examination makes for more depressing reading.
“The Italian economy looks to be in serious trouble at least on the basis of this report with manufacturing activity and new orders dropping precipitously. Service sector activity is also dropping sharply,” he says.
Italy has already reported three negative quarters of growth and is likely to have contracted over an entire year when GDP figures are published in July. Just to reprise the numbers, it contracted by 0.8% in the first three months of the year after a 0.7% slump in the last quarter of 2001 and 0.2% in the preceding three months.
Unemployment rose in March to the highest since 2000 as the public sector continued its cuts and companies failed to hire. The joblessness figure increased to a seasonally adjusted 9.8%.
On Monday the national statistics institute Istat said business confidence fell more than expected in May, hitting its lowest level since August 2009. A collapse in orders was chiefly to blame.
Bond investors are taking fright. Today Italy sold €2.3bn (£1.83bn) of 10-year debt at a rate of 6.03%, the highest since 30 January and up from 5.84% at the previous auction in April. Borrowing at rates above 6% are crippling and show that the plaudits in Brussels for Monti are much the same as the praise an Opus Dei follower might win from the pope.
Surely it cannot be long before the Italian parliament realises that austerity is a one-way ticket to poverty and asks Monti to step aside. The economic answers provided by a fragmented parliament may be incoherent and hasten a collapse or lead eventually to an autocratic leader taking charge, but maybe sense will prevail.