The long depression in Italy

Italy has a referendum this coming weekend.  Italy’s Blairite (Clintonesque) prime minister Matteo Renzi of the ruling the centre-left Democrats called a referendum, British Cameron-style, to ‘reform’ the electoral constitution.  He wants to reduce the size of the upper house of parliament, the Senate, from over 350 senators to just 100 and also have them come from the regions and cities, namely the elected mayors etc.  Most important, he wants to end the ability of the Senate to send back policies or measures passed by the lower house assembly (elected by popular vote in proportional representation – i.e. seats according to the share of the vote).  Thus, the Senate could no longer go on with ‘ping-ponging’ tactics back and forth with the lower assembly.

Renzi has staked his political reputation and his position as PM on winning this vote, like David Cameron did in the UK over the Brexit referendum.  And, according to the opinion polls, he looks as though he is heading for the same defeat as Cameron, throwing another major capitalist state into confusion, uncertainty and paralysis.

But it is all relative – after all, Italian politics and the economy have been in a state of paralysis for decades, with the situation only worsening since the end of the Great Recession.  Italy is now in a Long Depression that it seems unable to escape from.

Italy GDP

The immediate problem is Italy’s banks.  Europe’s banks currently hold €1trn of what are called ‘non-performing loans’, loans that the borrowers are no longer paying interest on and could be about to default on.  Of that €1trn, around one-third is held by Italy’s banks.  These bad debts are like a millstone around the necks of Italy’s finance sector.  The myriad of small Italian regional and large national banks have been lending to small businesses and property companies.  But thousands of these small companies are bust and cannot pay back their debts as the economy stagnates.

As I said in my book, The Long Depression, (Chapter 9) in some ways, Italy is in the most dire position of the top seven capitalist economies.  Italian capital was in the doldrums before the Great Recession.  Profitability has been falling since 2000 and is now down 30% since 2004.  Net investment has dried up and productivity of labour is not just growing slowly, as it is in other major economies, it is contracting outright.  Italy cannot recover because the Long Depression in Europe continues.

Italy ROP

And as a result, its banks are close to bankruptcy.  Banking analysts reckon that up to eight banks, led by Italy’s third largest and oldest, the infamous Monte Pachi, risk failing if Renzi loses the referendum.  That’s because potential investors in these banks, badly needed to recapitalise them if they write off these huge bad debts, won’t cough up.

I made some simple estimates of the likely losses that the Italian banks face (based on the Bank of Italy’s recent financial review).  The banks have lent up to now €2trn to Italians businesses and households.  About €330bn of these loans are ‘bad’ (i.e. won’t be paid back).  That’s about 20% of Italy’s GDP.  The banks have built up reserves to cover these potential losses of about €150bn and they could expect to sell off some of assets of bust businesses over time.  Even so, there would still be a potential loss of about €100bn on the banks’ books if they grasped the nettle and ‘wrote off’ these bad loans.  That would completely wipe out the value of the shares of the investors in many of these banks.  For example, the hit to Monte Paschi would be nine times more than the bank is worth on the stock market right now.  And Italy’s largest, Unicredit, which is supposed to helping the other smaller bust banks like Banco Veneto, would also be wiped out.  Indeed, Unicredit wants to raise €13bn for itself to shore it up.

I reckon that a bailout of the banks would cost at least €40bn, just to put the larger banks back on their feet.  Where is such a bailout to come from?  The Renzi government set up a special fund called Atlante, which was funded by the other larger banks, with a little from the state savings bank.  This raised just €4bn, most of which has already been spent on Monte Paschi to no avail.  But that is not the worst of it.  Under the new EU banking bailout rules, insisted on by Germany, state money cannot be used to bail out the banks.  The bank shareholders and bond holders must take the hit – at least first.

That sounds okay, you might say.  Let the bank shareholders pay.  But here is the rub.  The Italian banks have been engaged in crude mis-selling to all their customers with their savings.  Customers were encouraged to ‘save’ by buying the bank’s own bonds – in other words lending to the bank itself.  So hundreds of thousands of older (not so wealthy) people would now lose all their savings if the banks write off their bad debts and ‘recapitalise’ by writing down their own borrowings (bonds to zero).  This would be political dynamite, apart from causing misery to hundreds of thousands – and it has already happened to ‘savers’ with Banco Veneto and Monte Paschi.

Renzi has been pressing the Germans and EU leaders to relax the rules and allow state funds (ideally European ‘stability’ funds, which are available) to bail out his banks.  But the Germans are stubbornly holding to the rules, particularly as bailing out the Italians, after the Greeks, is anathema in Germany and fuel to fire to the Eurosceptics in the upcoming German election in 2017.

So if the vote goes against Renzi on Sunday, international and Italian investors are going to be very reluctant to stomp up funds to Italian banks when they fear the Italian government will fall and possibly be replaced in an early general election by the populist Five Star alliance, which has already won mayor’s positions in Rome and Turin and is leading in the opinion polls.  Could there be a ‘populist’ leading Italy out of control of the elite, and this time not Berlusconi?  At best, there will be a government unable to act through parliament to implement ‘reforms’ in the interest of capital, namely reducing labour rights; more privatisation and government spending cuts.

It’s possible that Renzi will win the vote against all the expectations as ‘no’ voters don’t bother to turn out.  Even if he does, the problem of the banks won’t go away.  And the problem of the banks is merely a symptom of the failure of Italian capitalism and the paralysis of its political elite.  Italy remains deep in depression and we have not even had a new slump yet.

10 Responses to “The long depression in Italy”

  1. Ben Says:

    Assuming your graph for Italy’s rate of profit is true (despite the complete lack of sources), you have to ask, why has it fallen so much (even from a Marxist perspective as it has fallen more in Italy than other countries)?

    The obvious reason seems to be that the Euro makes Italian firms less competitive compared to if Italy has its own currency which would be naturally valued far less than the Euro. Given Italy is not very productive per worker and has relatively stringent labor laws, it means firms, especially exporters, need to devote more spending to labour compared to their more productive peers in Germany etc which hits their profitability. You could have at least mentioned the hugely flawed single currency in the article.

    • michael roberts Says:

      The sources are available in my book and from several papers on the subject. FYI, it is by calculations using the Extended Penn World Tables.
      Yes, in a short blog post on Italy I failed to mention the ‘hugely flawed single currency’.it is clear from looking at the ROPs of the various southern economies like Portugal, Spain and Italy that profitability fell after joining the euro. Indeed, in another article, I show that ONLY Germany’s ROP has risen since 1999. The single currency means that the weaker capitalist economies (as you say, less productive) lose out to the stronger. Of course, if everybody goes up, uneven and combined development in the currency union works. In recessions, all is exposed. Then either the strong must bail out the weak for the sake of the union or, as in the case of EMU, the strong try to make the weak pay for their ‘failure’, thus threatening the sustainability of the union. But it’s still a capitalist crisis, not just a euro crisis.

  2. Shane Mage Says:

    It is simply not true that “the lower house assembly [is] (elected by popular vote in proportional representation – i.e. seats according to the share of the vote).” The reality is that, by a law already enacted under Renzi, the party with a mere plurality of the votes receives an automatic and substantial majority of the lower-house seats–proportional representation be damned. It is also untrue to claim as possible that “Renzi will win the vote against all the expectations as ‘no’ voters don’t bother to turn out.” In Italy, as distinct from “Cameron’s” idiotic UK “referendum,” not only is the result legally binding but its validity depends on participation of an absolute majority of Italian voter. So by “not bothering to turn out” (as Labour ought to have called for in Cameron’s stupid “advisory referendum”) Italian voters will be voting NO to the whole deal.

  3. Federico Pagello Says:

    In fact, this particular referendum – because it is about reforming the Constitution – does NOT requite the participation of 50% of the voters.

  4. bill jefferies Says:

    But the Penn World Tables use PPPs. How can you estimate the rate of profit if the figures for the fixed capital stock are based on a physical not a value measure?

    • michael roberts Says:

      PPP does not give you a ‘physical’ measure but instead removes the effect of variations in the exchange rates between economies. Using PPP to measure the rate of profit in economies is not the issue as long as all your categories are in PPP. There are more difficult measurement issues: eg the question of the depreciation of the fixed assets; the measurement of the numerator from GDP and employee compensation etc, as you know. Nevertheless, I have found that when I compare results using the Extended Penn World Tables with official national data measuring an economy’s rate of profit, say the US, the trends are not that much different. That gives me confidence in the robustness of the results from Penn for countries where official data are inadequate or where national research has not been done. I discuss these issues in my paper A world rate of profit.

      • bill jefferies Says:

        It does give you a physical measure. Physical quantities of various outputs are matched between different economies and then a “price” (imputed not real) is attached to them to account for differences in spending patterns. PPP is an issue as the value of the fixed capital stock is imputed and not real and any rate of profit derived from it is also imputed and not real.
        PPPs were originally developed to measure the output of the USSR, a centrally planned economy, as if it were a capitalist one. You might discuss these issues in your paper, but that doesn’t stop you from working out a “rate of profit” for China in 1978 when it was a planned economy with no capital or profit, which rather neatly illustrates the problems with PPPs IMO.

      • michael roberts Says:

        Bill – you are up early. What is the matter with us?

        PPP gives you a physical measure in the same way as real GDP as deflated by a price index does for a national economy, with the added complication that it tries to develop a law of one price to remove the exchange rate effects across countries. But within one economy, it is a deflated measure similar to the usual deflated measure (real GDP) for a national economy. I say again, when you use national data to compare, the trends using this cross country measure for ROP is broadly the same. The problem of imputed values for fixed capital stock remain in either case.

        I agree that to talk about a Chinese ‘rate of profit’ in 1978 is stretching it to say the least. But as I consider that the law of value is distorted by state control in China even now, that makes the ROP measures in China suspect anyway. I tend to leave out China in any world measure. But we do the best we can – ignore the results if you want. This paper by Bai Chong on measuring the rate of profit of the capitalist sector in China was the best stab at it. http://www.nber.org/papers/w12755.pdf

      • bill jefferies Says:

        Way too early I agree.
        Again the paper illustrates the problem very well. The Stalinist imputed “prices” to planned production so that they could estimate the “national income” of the planned economy. A planned economy cannot have national income as national income is an aggregate of market prices, not imputed ones, but so what, Stalin said do it, so they did. This dovetailed with the CIA who followed essentially the same procedure, developed for them by Abram Bergson, it was then applied by all the official Western agencies.
        This NBER paper does the same thing. It ignores the distinction between imputed unreal physical “prices” and real “prices” derived from exchange. Consequently its “rate of profit” is nothing of the kind. Indeed it is not just false but bogus as it does not differentiate between real and imputed prices.
        The fixed capital stock in China had no value at all until the mid-1990s at the earliest, as it was means of production produced under the central plan.
        The difference between the fixed capital stock estimates for say the USA and the ones based on PPP is that the USA use real prices whereas the PPP ones make up “prices” based on what they “would be” if they were in (say) the USA. This is essentially false as the differences in exchange rates reflect the different imperial might of the economy, so the use of PPP measures to estimate profit rates is fundamentally misconceived.
        There is a further problem with US estimates of the FCS, the application of neo-classical estimates of “value” to it. These assume a direct relationship between the value of the FCS and the rate of interest. For the NCs as the rate of interest rises so does the value of the fixed capital stock, as one is the function of the other, so the rate of profit (or interest) never changes. If you want an explanation for allegedly “stagnating” profit rates here it is. As profit rates recover so they increase estimates of the value of the fixed capital stock so the rate of profit never changes.

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