Europe Waits for Italy

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Lambert here: With the Italian parliamentary elections finishing up, this is a very timely piece.

Back in July 2012 I posted on the potential for renewed European economic instability due to the 2013 Italian election outcome. The election is occurring as I type and I must admit that the parallels to last year’s Greek election are quite easy to draw, and it isn’t just the country’s economic situation that makes that so.

Much like Greece’ Alexis Tsiparis, Italy’s 5 star movement leader Beppe Grillo is running a campaign based on renegotiating the country’s relationship with the rest of Europe, including the scrapping of austerity, while the centre-left Democratic party of Pier Luigi Bersani is doing its best to be Italy’s version of Greece’s New Democracy by being both the favourite and attempting to hold the current policy line.

In the most recent polls Bersani holds around 35% of the vote but in order to form a government he needs a larger percentage and he is expected to struggle to capture the Senate outright. Silvio Berlusconi is also in the picture, but has been consistently behind Bersani in the polls. Obviously a greater result would see Italy’s political risks grow rapidly.

Mario Monti, the technocrat turned politician, is expected to do quite poorly in the election, as he is seen responsible for a rise in unemployment to a record 11.2% during his 15 month term while the economy shrank by 0.9% in Q4. However, if his party can hold onto 8% of the vote then a coalition party opportunity is the most likely possibility.

As I said in the previous post, the question is whether Italy will come out of the elections with a government with the strength to appease the rest of Europe, yet wear the burden of the political fall-out to defend those policies domestically, while somehow finding economic growth. It is a huge ask, and even if the election outcome is one of the less politically risky outcomes the threat of further instability cannot be ruled out over 2013.

Over the weekend Cyprus also held an election for a new president who is expected to steer the country through it’s massive bailout request and new protests came to Spain as yet another tax scandal erupted, this time involving the King’s son-in-law.

In the meantime the European Commission released their latest economic forecast for the zone, with yet another downgrade hidden behind optimism:

While financial market conditions in the EU have improved substantially since last summer, economic activity was disappointing in the second half of 2012. However, leading indicators suggest that GDP in the EU is now bottoming out and we expect economic activity to gradually accelerate. The pick-up in growth will initially be driven by increasing external demand. Domestic investment and consumption are projected to recover later in the year, and by 2014 domestic demand is expected to take over as the main driver of strengthening GDP growth.

The weakness of economic activity towards the end of 2012 implies a low starting point for the current year. Combined with a more gradual return of growth than earlier expected, this leads to a projection of low annual GDP growth in 2013 of 0.1% in the EU and a contraction of -0.3% in the euro area. Quarterly GDP developments are somewhat more dynamic than the annual figures suggest, and GDP in the fourth quarter of 2013 is forecast to be 1.0% above the level reached in the last quarter of 2012 in the EU, and 0.7% in the euro area.

The contrast between the improved financial market situation and the muted macroeconomic prospects for 2013 is to a large extent due to the balance-sheet adjustment process, which continues to weigh on short-term growth. As this process advances, it will also strengthen the basis for growth in 2014, which is projected at 1.6% in the EU and 1.4% in the euro area.

Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said: “The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term. The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past, and growing investor confidence in the future. The decisive policy action undertaken recently is paving the way for a return to recovery. We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation.”

A gradual pickup of consumption and investment expected

Important policy measures adopted since last summer have shifted markets’ assessment of the viability of EMU and the fiscal sustainability of its Member States.

A combination of cyclical weakness, uncertainty and the protracted adjustment of balance sheets and redeployment of resources across the economy – typical of the aftermath of a deep financial crisis – is currently holding back domestic consumption and investment. The return of confidence among households and businesses should however reduce the negative impact of these factors. As the easing of financial market tensions is expected to feed through into better lending conditions, this should open the way for a gradual return of consumption and investment growth in the course of 2013.

The current weakness in economic activity is expected to lead to an increase in unemployment this year to 11.1% in the EU and 12.2% in the euro area.

As the impact of higher energy prices on inflation is expected to wane, consumer-price inflation in the EU is forecast to decrease gradually in the course of 2013 and to stabilise at around 1.7% in the EU and 1.5% in the euro area next year.

So again we see a downgrade of existing predictions. The data is poor now, and unemployment is expected to worsen, but the confidence fairy is expected to make her return very soon now and when he does all will become better (there has been some hint of the revival in the ZEW and IFO surveys). However, the ECB’s banking surveys have shown for well over two years that the lack of borrowing has been a demand not a supply issue. So, much like other false dawns of the last 5 years, I expect these predictions to be overly optimistic. Not that this is unexpected, the Commission has been at the forefront of the current economic policies of Europe so anything but positivity would be tantamount to an admission of failure, even if 2013 is now predicted to be yet another year of contraction.

The latest data out of Europe, specifically the PMI data, shows that France is becoming further entwined in the downfall of the periphery while Germany continues to be the only real area of sizeable economic strength in the area. As we saw in Moody’s downgrade of the UK the lack of overall growth continues to leak out of Europe. The problem is that this is just more evidence that the current policies are forcing one-sided retrenchment on debtor economies and the much needed re-balancing is failing to occur because creditor nations have not introduced their own policies to compensate.

So as I said back in January:

As I’ve been covering over the last few months the downturn is beginning to creep into other AAA rated countries with The Netherlands and France looking particularly vulnerable as we enter 2013. On top of that, all of the original PIIGS, with the probable exclusion of Ireland, still have the potential to miss their existing fiscal targets and that is even after the latest Greek write-downs.

This year we will see renewed fiscal tightening in Spain, Portugal, Italy and France which is again likely to dampen growth. We also have major elections in both Italy and Germany which have the potential to change the political landscape, while the on-going question of what to do about Cyprus and further increases in unemployment creates the potential for “black cygnet” events.

Nothing has changed since.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


      1. different clue

        Didn’t a possibly-German commenter first offer the acronym GIPSIs just a few threads ago?

        I hope EuroCore Europeans start using whichever acronym is the MORE racistly offensive. With any luck, it will offend the targeted nations into all leaving the Euro together at the same time and going back to their national currencies. Maybe they will all Leave Ugly, and burn the fucker down on their way out the door.

        1. Maju

          I think that was me years ago. It sounded less offensive than PIIGS, which is obviously an intentionally insulting choice in the time that German but specially English-language media were launching the bankster-orchestred campaign to demolish Southern Europe (and Ireland, and maybe all Europe in the end).

  1. Can't Help It

    Overrated just like all previous “crisis”es. Too many people wanting to have the cake and eat it too i.e. I want less austerity but stay in the Euro. Now that the stock market is at a high, a timely “crisis” is required so that mom and pop will not feel cheated when the rug gets pulled again just when they are jumping in. The same song and dance will then ensue where politicians fly around for tax payer funded vacations … oops sorry I mean to attempt to “solve the crisis”. Super Mario will then come up with a 3 letter acronym solution, followed by a strong rally towards the end of the year. Yawn….

    Winner: hedge funds, politicians, and banks.
    Losers: everybody else.

  2. Hugh

    The periphery is in a death spiral and it is a spiral that is expanding. Spain is where Greece was last year. Italy is where Spain was. France is where Italy was, and Germany is where France was. This allows everyone to say that their position has not worsened relative to anyone else even as they all sink. As retrenchment, consolidation, reforms, what I call looting, continues demand destruction will continue to outpace efforts to improve balance sheets (yet more code for looting). This is what fuels the spiral. There is no source of growth evident anywhere. A Europe wide spending program is not even on the table. Taxes on the rich either won’t happen or will be inconsequential. And the world economy is slowing so exports are out too. That leaves exactly nothing. So the looting and the downward spiral will continue.

  3. MyLessThanPrimeBeef

    We know Spain is on the verge of a nervous breakdown and Greece’s big fat politicians are wedded to corruption, but whatever happened to la dolce vita?

  4. Aussie F

    The dysfunctional dynamic might continue for another decade. Like the US, Europe now has a corporate political system buttressed by a powerful police state. Whoever you vote for the banks stays in power. The formally social democratic parties are out in the lead in enforcing ECB diktats, with their captive unions in tow. When effective dissent breaks out it’s met with police violence.

    Greece provides an example of the shape of things to come – workers ‘conscripted’ into the miltary if they take industrial action; the police acting as a paramilitary force to crush unions, and the tacit threat of military intervention hanging over the exhausted social movements.

    Europe is facing a very ugly future with no way out within the existing system.

    1. from Mexico

      So what’s to prevent Europes’s current reign of fascism (aka neoliberalism) from degenerating into Nazism?

      1. ambrit

        The lack of any truly ‘charismatic’ leaders. The elites of Weimar Germany thought they could ‘manage’ the NSDAP. I would contend that true “Nazism” was and is a social movement, not an economic one. Hence, not amenable to the blandishments of the Technocrats. Plus, as an added bonus, the apparatchiks of the Police State often end up wresting power from the hands of the technocrats.
        We live in interesting times.

        1. Valissa

          Agreed, except you left out the plutocrats, whom the technocrats both work for and complete with for share of the money & power pie. The police state in the US as it currently exists is basically subservient to the elite. Unlike in Russia where the police state still has some power over the elites.

      2. Aussie F

        Banks don’t like full blown fascism. The prefer what Edward Herman and Noam Chomsky once characterised as ‘sub-fascism,’ that’s fascism without any social component – health care, public works, etc. Sub-fascism is also more friendly towards business elites, and doesn’t undermine their sacred right to bleed the population.

        Conventional fascism lorded it over bankers, as well as workers, and is hence unacceptable, despite its obvious attractions to the rich. Sub-fascism slaughters the people, but leaves the Banksters in charge.

        1. from Mexico

          I think we agree, though we have different vocabularies.

          What you call sub-fascism I call fascism or neoliberalism. It’s the capitalists in control, a good example being Italy under Mussolini, Chile under Pinochet, Argentina under the military dictatorships and the Menem administration, or as you say contemporary Greece. They want a strong state when it comes to the instruments of violence (the security state: a police state and an imperialist army) but a weak state when it comes to the instruments of social welfare — health care, public works, etc.

          And what you call fascism I call Nazisim ( or national socialism), which as you say “lorded it over bankers, as well as workers, and is hence unacceptable” to the bankers.

          1. from Mexico

            So employing your vocabulary, what’s to prevent Europes’s current reign of sub-fascism from degenerating into fascism?

          2. different clue

            Lingering memories of a bad outcome accruing to the last major nations which went EthnoRacial Fascist in a real big way?

          3. different clue

            And maybe the most likely candidate “in” Europe for ethnocultural fascism this time around is Russia.

  5. Susan the other

    For over a decade now development in Africa has been the goal of Western capital. Christine Lagarde said it clearly when she told Europe that Africa needed IMF help more than they did. As if altruism were the inspiration of the banksters. I doubt it. But even Lloyd Blankfein said GS wasn’t gonna do business in the US anymore, except for some investments in silicon valley; that GS was going to Africa. Africa has been a feeding frenzy banquet for the rich “developers”. I’m sure the EU banksters are there along with everyone else. Leads me to believe that the need and the opportunities are so great in Africa, and the devastation so stunning in Europe and the US, that confusion reigns. The banks just up and took their money to Africa. They are busy priming the pump there, but it’s such a deep, dry well it could suck up all the money in the known universe and still ask for more. The fact that western economies are suffering is of no concern to the financiers of the world. It is the problem of society and government.

    1. Valissa

      Yup! Follow the money. US military expansion… note how recently this command was formed: AFRICOM

      Africa: The Next Rare Earth Frontier?

      BAR’s Glen Ford… There is No Effective Constituency for Africa in the United States

      1. from Mexico

        Yep. That helps explain the following from Tom Dispatch. Despite the fact that liberal internationalism has been proven to be a myth a gazillion times over the past 200 years, our dear leader still regalies us with the Big Lie:

        Under President Obama, in fact, operations in Africa have accelerated far beyond the more limited interventions of the Bush years: last year’s war in Libya; a regional drone campaign with missions run out of airports and bases in Djibouti, Ethiopia, and the Indian Ocean archipelago nation of Seychelles; a flotilla of 30 ships in that ocean supporting regional operations; a multi-pronged military and CIA campaign against militants in Somalia, including intelligence operations, training for Somali agents, a secret prison, helicopter attacks, and U.S. commando raids; a massive influx of cash for counterterrorism operations across East Africa; a possible old-fashioned air war, carried out on the sly in the region using manned aircraft; tens of millions of dollars in arms for allied mercenaries and African troops; and a special ops expeditionary force (bolstered by State Department experts) dispatched to help capture or kill Lord’s Resistance Army leader Joseph Kony and his senior commanders. And this only begins to scratch the surface of Washington’s fast-expanding plans and activities in the region.

        To support these mushrooming missions, near-constant training operations, and alliance-building joint exercises, outposts of all sorts are sprouting continent-wide, connected by a sprawling shadow logistics network. Most American bases in Africa are still small and austere, but growing ever larger and more permanent in appearance…

        The U.S. is now involved, directly and by proxy, in military and surveillance operations against an expanding list of regional enemies. They include al-Qaeda in the Islamic Maghreb in North Africa; the Islamist movement Boko Haram in Nigeria; possible al-Qaeda-linked militants in post-Qaddafi Libya; Joseph Kony’s murderous Lord’s Resistance Army (LRA) in the Central African Republic, Congo, and South Sudan; Mali’s Islamist Rebels of the Ansar Dine, al-Shabaab in Somalia; and guerrillas from al-Qaeda in the Arabian Peninsula across the Gulf of Aden in Yemen…

        With the Obama administration clearly engaged in a twenty-first century scramble for Africa, the possibility of successive waves of overlapping blowback grows exponentially. Mali may only be the beginning and there’s no telling how any of it will end. In the meantime, keep your eye on Africa. The U.S. military is going to make news there for years to come.,_america's_shadow_wars_in_africa_

        1. different clue

          The US military makes news, and China makes investments. Who will gain more exploitable resources?

  6. Ignacio

    Once it is apparent that Bersani (centro-sinistra) will win with about 35% votes, but will need to make agreements, the press (or at least certain kind of press) is saying that the eurozone stablishment would like a coalition Bersani-Monti (Monti = about 10% votes) for the sake of stability. A coalition with Monti would mean exactly the same stupid politics. A big change in votes for nothing. Hopefuly this is not the outcome. The eurozone needs political shifts against austerityamongst their countries. Please don’t do it Mr. Bersani, it will be your political death.

  7. Maju

    The protests in Spain are not particularly related to the corruption (not “tax scandal”) of the royal in-law (Urdangarin case). If any corruption case is most scandalizing Spaniards now, it is one directly affecting the core of the ruling People’s Party (conservatives), as it demonstrates that they have been rotten to the marrow (nearly every leader past or present is involved) for decades (Bárcenas case). Or as the only small serious parliamentary opposition there is put it: the state is systemically corrupt.

    What really angers Spaniards however is not so much corruption but social cuts of all kinds: from draconian salary reductions (not for politicians however) to extremist reduction of worker collective negotiating ability, from privatization and reduction of basic services like health care to generalized layoffs and closure of companies that either find themselves with too few consumers overnight (small business) or decide to delocalize their activities to the Third World (big ones). It is a real social collapse that closely follows the script of Greece and it is happening right now with dramatic consequences (suicides have grown a lot for example but also there are thousands of families with no income whatsoever). So it can only go to worse unless someone chooses to rule over business and banks and ignore EU diktats (not the current government of course).

  8. barrisj

    Centre-Left plus Beppe Grillo coalition to forestall Berlusconi Right in the Senate, and C-L/5Star in Chamber of Deputies enough to hobble along until new polling no doubt later in the year…”technocrat” Monti and his ilk: BASTA!

    1. Maju

      Looks like a parliament of buffons then: not sure which is the greatest one, if Bunga Bunga Berlusconi, the hyper-populist and fascist-backed Beppe Grillo or the supposedly serious pseudo-left sockpuppet of the BCE Bersani. Poor Italy!

        1. Maju

          More correct than fascist-backed would be fascist-penetrated or fascist under a cover up.

          “Grillo’s informatic guru Gianroberto Casaleggio is often seen as the true inspirator of M5S. His ideas about democracy, expressed in two videos called “Prometeus” and “Gaia”, are far from orthodox: in his opinion, human hopes dwell only on a nuclear holocaust that will drastically reduce Earth’s population; and on the internet, which is seen as the incarnation of Freedom itself”.

          “One of the “economic counselors” of Beppe Grillo is financial operator Eugenio Benettazzo, whose controversial articles are often published on Grillo’s weblog. Benettazzo can be seen sometimes at meetings organized by the neofascist party Forza Nuova, and he wrote a controversial article where he argued that the financial crisis occurred in the USA because of “racial promiscuity””.

          They pretend to be “not left-wing nor right-wing”, exactly as traditional fascists did.

          It is a similar case to that of Spanish Union for Progress and Democracy (UPyD or UPD), lead with iron hand by former Basque “Socialdemocratic” Councilor (regional minister) Rosa Díez (a hardcore and outspoken Spanish nationalist), which is also benefiting from popular discontent but in reality aspiring to be the next ones in charge when all the rest fall, and surely do the same after all. In this case, several renowned fascists have shown their support for them, even saying that is “the new Falange”.

          These phenomenons are at best opportunist and their “anti-system” discourse will collapse as soon as they reach power. In the worst case they are wolves in sheep skins.

          It must be mentioned also that the new electoral law, which hurts smaller coalitions (demanding a minimum of 20% at national level for such formations to reach parliament) has been very harmful for the real Left, divided in two blocs: a Communist-lead one and another led by the Greens.

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