Hamish McRae: Should Italy push for more fiscal prudence in this age of austerity?

 

Rome

It is a funny time in Italy. On paper the country's economy has now shrunk for seven consecutive quarters, making it the longest recession since the Second World War, and leaving it some 8 per cent below the peak reached in 2007.

The recession will, I am afraid, go on for a lot longer. Istat, the Italian national statistics agency, forecasts the economy to fall by 1.4 per cent this year, following a decline of 2.4 per cent last year. The two main consumer associations think things are even worse: they expect a fall of 2 per cent. It is easy to see why. Sales of the largest single consumer item, motor cars, were down 11 per cent in April on the previous year, making it the worst of the five main European markets (see right-hand graph).

You can go on trotting out the list of negatives. National debt will rise to a record of more than 131 per cent of GDP by the end of this year, according to the OECD, and will be more than 134 per cent by the end of next. The government still maintains that the budget deficit will come out below 3 per cent this year, but the OECD thinks it will be 3.3 per cent this year and 3.8 per cent next.

But, as always in Italy, there is another side to the story. It is not just that Rome feels comfortable and reasonably prosperous – capital cities always seem to resist recession better than the hinterland – or that the tourist season is getting under way. The positive side of the story includes the fact that the country is close to running a current account surplus and that it is able to borrow at what, six months ago, would have seemed astonishingly low rates. The yield on 10-year Italian debt is now down to 3.9 per cent, which compares with nearly 7 per cent last summer. This is in line with a decline in borrowing costs for nearly all European nations, particularly those that were hit by the crisis in confidence last year. There were some successful auctions of bonds by Italy and Spain on Friday, which suggest that yields for "fringe Europe" may have further to fall.

Being able to fund itself cheaply is vital for Italy, given the size of its outstanding debt, the third largest in the world after the US and Japan, and the relative shortness of that debt's maturity. Maybe investors are comforted by the fact that though it has huge debts it also has a huge stock of gold, the third largest of any country in the world. I know the size of a country's gold reserves should not be taken as a proxy for the quality of their economic strength, but I found the statistics published by the World Gold Council on Friday (and shown in the main graph) fascinating.

Should a country hold three-quarters of its reserves in gold, as do the US, Germany, Italy and France, or should it try to earn as big a return on them by investing in other assets? Over the past 20 years it would have been right to stay in gold. Maybe for the next 20 years other assets will outperform gold. At any rate Italy, for all its problems, scores high on this element of monetary prudence.

That leads to an even bigger question: how far should one push fiscal prudence in this age of austerity? It is a practical question facing much of Europe right now. Italy's new coalition prime minister, Enrico Letta, has promised to come up with a pump-priming plan this summer. His particular target is to do something about youth unemployment, now at around 40 per cent in Italy.

"Europe must respond to youth unemployment, which has reached absolutely unsustainable levels," he said. "We ask that the next European Council summit in June concentrates on an extraordinary plan for youth unemployment that launches concrete measures immediately."

Fine words, but you see the point: he can only move if the powers that be in Europe move with him. It is hard to judge quite how this will play out. There will inevitably be some pan-European plan to cut youth unemployment and there may be some easing of the profile of deficit reduction. Fringe Europe, which in this case includes France, will be given more time to get deficits below the 3 per cent Maastricht ceiling, still notionally the target. But past experience has taught us that in the absence of general economic growth, specific initiatives such as one targeting youth employment have only limited impact. And yes, let's assume that Europe does ease up a bit on austerity, for that is what will surely happen, but will that really bring more growth?

That is a question you are very aware of in Italy. The economy is back to where it was 20 years ago and thousands of ambitious young people are leaving for jobs in Germany, the UK, US and beyond. But the place is lovely. It frequently tops the league tables for quality of life, is creator of the famous "slow food" movement, and more parochially is the place where a lot of Britons want to spend their summer holidays. It is easy for an outsider to see a list of reforms that could take place that would encourage growth, but getting the balance right between fast growth and slow food is a tricky one, and I am not sure the rest of the EU can or should have much to do with it.

Sport
Premier League Live
footballLIVE Follow all the Premier League action as it happens
News
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
Life and Style
3D printed bump keys can access almost any lock
gadgets + echSoftware needs photo of lock and not much more
News
James Argent from Towie is missing, police say
peopleTV star had been reported missing
PROMOTED VIDEO
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
News
i100(and it's got nothing to do with the Great British Bake Off)
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
News
i100
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

DevOps Engineer (Systems Administration, Linux, Shell, Bash)

£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

£50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone