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.

Life and Style
A teenager boy wakes up.
life
Life and Style
It is believed that historically rising rates of alcohol consumption have contributed to the increase
food + drink
Voices
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
PROMOTED VIDEO
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
Arts and Entertainment
The White Sails Hospital and Spa is to be built in the new Tunisia Economic City.
architectureRussian billionaire designs boat-shaped hospital for new Dubai-style Tunisia Economic City
Arts and Entertainment
You could be in the Glastonbury crowd next summer if you follow our tips for bagging tickets this week
music
Sport
Husain Abdullah returns an interception off Tom Brady for a touchdown
nflLeague has rules against 'sliding to ground on knees'
Life and Style
tech
Extras
indybest
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
food + drink
News
i100
News
i100
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
Arts and Entertainment
film
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

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style