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Sunday, August 12, 2012

How Inevitable

Grilli is claiming that Italy is going to reduce its debt-to-GDP ratio by 20% over 5 years. Once this recession is over, that is: 
Grill[i] said that when the government gets back to work after a brief summer recess, a debt reduction plan will be introduced that is composed mainly of state real estate sales, spending cuts and prudent budget management. "When this recession is over, (the debt reduction plan) would permit a lowering in the debt-to-GDP ratio of 20 percentage points in five years," he said.
But he's also admitting that Italy will miss its nominal deficit target this year.  Italy has been in recession for a year, and the result has been to shrink the overall economy by over 2%. Confindustria predicts the 2012 contraction to be over 2%. Actually 2.4%, but at this stage who is quibbling? The government is projecting about 1% less, which is remarkable, because GDP has already contracted this year by more than the projected decrease. In other words, the government is projecting rising GDP in the second half. 

By the end of the year, then, we can expect Italy's debt-to-GDP ratio to be over 125%. 

Tax revenues are falling short of projections. Raise the property tax, and VAT receipts fall. Who'd 'a thunk? Heck, tax revenues this year are falling short of the prior year's tax revenues, and the tax revenues of the year before that, and the year before that, and:
Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession, government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006.
There's this thing called a "Laffer curve". It exists. So economists are now calling for spending cuts. 

Pretty obviously, spending cuts are not going to be sustainable over the long term. The two population slices in their 20s are outnumbered by the two population brackets in their 60s. More workers must exit the workforce than can enter. It's really quite extraordinary that Italy has achieved such a high unemployment rate with these demographics. 

I don't want to kick a country when it's down, but short of seizing the Vatican and selling everything in it, there is not much that Italy can do about its situation - other than exit the Euro. It is in a worse position to do that than it was a year ago, which is why the Finance Minister is going around telling bald-faced lies.

Spain is in a relatively good position to exit the Euro. Devaluation would bring a lot of money into the country. Italy has mucked up its banks with the ECB money, so now they are in a rough situation. They will try to run this out, but they are in the end game now.

In the meantime, Japan released its Q2 GDP. 1.4%. They're planning to raise sales taxes, but they are going to have to spend more government cash to keep from sliding into contraction again. Net exports were a drag on the economy in Q2. Consumer spending barely rose. On a nominal (not real) basis, Japan's GDP contracted in the second quarter. I.E. deflation. This is not new for Japan, nor is it surprising, but it points up their fiscal difficulties.

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