Wednesday, June 13, 2012

Today And Tomorrow Are Really Key Days For The Italian Economy If Future Sums Are To Work

Posted by Peter Quennell

[Above: a demonstration against austerity, in Turin, one of several hundred in recent days]

The Italy central bank is selling a lot of bonds today and tomorrow to keep the government in business.

Today’s sale of 12-month bonds did not go well. It sold E6.5 billion of bonds at nearly 4 percent, almost double what it was charged just last month. And tomorrow’s sale of long-term bonds could be looking at interest rates so high that it puts real growth almost permanently out of reach.

In effect it could bake in youth unemployment up to 25 percent. The good news, if there is any, is that the disappointing sale today gave Prime Minister Monti a reason to light a fire under the parliament. 

talian Premier Mario Monti is urging lawmakers to accelerate passage of reforms to help the country escape the deepening debt crisis and assure international markets that the eurozone’s third largest economy will follow words with actions.

Monti addressed the lower house before a vote on anti-corruption measures, and the morning after meeting leaders of three main political forces to urge them to intensify the reform course.

Spain’s decision over the weekend to seek a bailout for its banks has heightened pressure on Italy. The Austrian finance minister suggested this week that Italy too will need a bailout, then backtracked under criticism.

Monti has firmly denied that Italy will need a bailout, and told lawmakers that Italy is on much better footing than a few months ago.

One thing going for Italy is that those bonds are largely purchased by Italians themselves. Savings have been flying out of Greece and Spain but Italians still seem optimistic at some level that their economy can get back to former heights

Mr Monti’s pruning and tightening of laws don’t seem a bad thing. His main growth-thrust idea for all of Europe, Italy included, is to press the pedal to the floor on rebuilding all the physical infrastructure. Angela Merkel might come around if that doesnt tank Germany’s own boom.

The notion that there should be a sort of skeleton Department of the Treasury or Ministry of Finance in Brussels to harmonize fiscal policies and oversee the banks seems to be taking hold.

Still only dim comprehension (as in the US) though of how the best kind of growth really works. Hint: economists and bankers are not the first professions one turns to, to find out all about that.

Posted by Peter Quennell on 06/13/12 at 04:24 PM in The wider contextsItalian context


Ironic that the still-accused might have a vested interest in the economy worsening leaving no public funds for anything. Re-runs of appeal trials included.

No sign though that Mr Monti and Parliament are thinking that the police and court and prison systems are highly inflated or should be Target One.

Italy does have a police presence above average size, with its many different forces, but the court and prison systems are proportionally among the smallest in the world.


Interesting charts here (click on them for larger) which illustrate a couple of points.

This top one compares the performances of exchange tradeable index funds for (from the top) the US, the UK, Switzerland, Germany, France, and (bottom curve) Italy, down 40% in one year.


You may have anticipated that but the main banks might be more of a surprise. Not one is even keeping up with the main US stock index (the average) and they all seem devoid of a business model that works.

Add all of their combined net worth today and you get a figure not much bigger than Apple. Part of the problem is interest rates so low. Banks making loans doesnt pay.

Euro-banks: below, from the top: the US stock index (red), US’s JP Morgan Chase, Germany’s Deutsch Bank, and Switzerland’s UBS and (gulp) Credit Suisee.


US banks:  below, from the top the US stock index (green), JP Morgan Chase, Goldman Sachs, Bank of America, and (gulp) Morgan Stanley.


Italy is blessed in the sense that it has few big firms, many real entrepreneurs, many good exports, and still a terrific national brand despite all of Curt Knox’s efforts to destroy it.

Posted by Peter Quennell on 06/13/12 at 05:37 PM | #

Poor PM Monti. He is increasingly less popular and on the defensive. “He reacted bitterly last week to criticism by two leading Italian economists in top daily Corriere della Sera.”

Today in the Italian parliament the head of what was once Berlusconi’s party has “warned of the “decline of the West” if the European Central Bank’s mandate were not changed to allow it to target economic growth and buy government bonds if needed. “This is a battle,” Mr Alfano added.’s-political-class-says-merkel-may-trigger-decline-of-the-west/

The real problem for growth is INSIDE the Black Box which is what economists call the giant machine that is the actual economy at work. Millions of systems, in fact, which economists leave to other sciences (if you can call economics a science! the smart billionaire George Soros just said no). 

It has only become fully understood in this past decade and still for the most part only at enterprise level in the US (not at Washington level) WHY those mature systems have a habit of locking up, and the several tricks required to get beyond that.

I wonder if Mr Monti has done his homework in that. Despite being the head of an illustrious business school, there is so far no sign that he has.

Italy is one of the few countries in the west that has a Ministry of Economic Development. Set up in 2006. The US has no equivalent at federal level (real pity) though most US and Canadian states and cities have a small version of the same thing.

That’s potentially very good for Italy, though there are no signs I can see on the website of any inspired spread of growth knowhow. The ministry seems in the back seat for now. Maybe the only safe place to be!

Posted by Peter Quennell on 06/13/12 at 09:55 PM | #


If economics is not science, then perhaps it is an art! But then Italians should understand it very well, if I am not mistaken. Is it a black art then?

For long time I called medicine as a quack science. Because of strong consternation from my colleagues, I have now revised my description of medicine as a “meta-science”.

I am not an economist but economics has some similarities with thermodynamics. More appropriately, to a branch of thermodynamics called “non-equilibrium thermodynamics”. To a common man, both may appear as “black art”, rather than science.

I can tell you this much that what goes inside the “black box” is really incomprehensible- in particular the dynamics. Nobody knows why it crashes from time to time, far less how and when.

But I know that much that when people are complaining, perhaps you are trying to right some wrong.- Just like this forum is trying to do in a broad sense.

I do not know where family doctors acquired illegibly perplexing handwriting; nevertheless extraordinary pharmaceutical intellectuality, counterbalancing indecipherability, trascendentalizes intercommunications incomprehensibleness

Posted by chami on 06/14/12 at 09:26 AM | #

Thursday and reports on today’s long-term bond sale suggest that it could have gone worse. Rate was just over 6 percent.

Chami, thanks, always amusing and insightful though I talk merely of the mundane managed systems for growing corn, building cars, curing pneumonia, and so on. Not general systems theory though there are management people (Peter Senge etc) who have tried that way.

The UN’s global development structure which is 90% of all the UN flowed from the functionalism of the League of Nations: bind countries together at working people level, common vested interest, so that the costly flash wars being created by top people would be resisted.

In the 80s parts of the UN system began to wise up to the fundamental fact that putting in better systems is the absolute guts of growth and development. Each of the UN specialised agencies - for food, health, industry, educational, etc - is meant to help all members advance those systems.

It still doesnt work very well.  The organization I worked for here in NY and in the field (UNDP) was central to advancing the methodology for countries to upgrade their own systems organically. But the sciences themselves were not enough advanced.

More damaging, the World Bank and IMF thundered in with a very different top-down model heavy with very expensive experts telling countries what to do. No focus on systems. They did a lot of damage before the East Asia model proved them wrong.

Growth is still a mess. But now that things are hitting bottom and even the head of the IMF is saying “we need growth, now does anyone know how we do it?” I think there is a real shot at Italy - and India - getting it fully right this time around.

I’ll post more in a few days, as this impacts on the prospects for a new appeal trial, as you guessed. Its not hard to grasp and work with, just different.

Posted by Peter Quennell on 06/14/12 at 08:45 PM | #

Friday and the mood seems to be growing in London etc that Greece will indeed after a while pull itself out of the Euro zone, with the possibility of contagion among diligent savers in Spain - and Italy.

It must be pretty weird to be handed a deal by Germany and the ECB which in effect says:

(1) Okay you can have all these loans but the interest will be high and you need to swallow this austerity which will have the effect of crippling yoyr growth.

(2) Oh and by the way you need to achieve HIGH growth so that you can pay off these loans and the interest within the next decade or two.

Austerity should have been put on the back burner. First, do everything they can to accelerate growth. Including getting up to speed on the knowhow. The Asians are more on top of it than them.

Posted by Peter Quennell on 06/15/12 at 08:04 PM | #


Sorry for being somewhat flippant. However, you have summarised the current situation very appropriately “It still does not work”.

There are several reasons for the UN models not working. Yes, there may be several reasons but some are really glaring.

target: Perhaps the Trickle-down model is wrong? It has not worked in India and the nation’s rating in Transparency is dismal. Remember, the real target is the middle population, like the way you say the people who does manage “growing corn, building cars, curing pneumonia, and so on”. At present India has no mechanism to target directly this group.

culture: The key word here “organically”, as you have rightly pointed out. This has not happened- why? The approach is seen as 100% foreign. Perhaps these international organizations should take hint from the way multinational companies organise and adapt their business models for local environments.

political: only china has resisted successfully all foreign influences and done economically well. Local feeling here is that there is too much American influence in even petty decision making and we should focus more on regional developments (Asian models) together rather than focusing on the global powers. I do not understand this well, mostly because I do not know the details, but the arguments appear convincing.

It is a common belief that these world bodies are just a tool to regulate the world’s poor. However, their term is over.

Europe’s problem is mostly because of poor management, in my opinion, and its strong dependence on American models. India’s problem is its own making.

Anyway Italy is far well off compared to some other european countries.

How long a minute is depends on which side of the bathroom door you’re on.

Posted by chami on 06/15/12 at 08:29 PM | #


“It must be pretty weird to be handed a deal by Germany and the ECB…”

You mean the same medicine that was given to Germany after the first world war is now being given to others by Germany

I hope now you will agree that medicine has not yet become a full fletched science.

We all are heading to a dangerous future!

Posted by chami on 06/15/12 at 08:37 PM | #

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