September 30, 2022

Political Economy: Italy’s Crisis Has Few Good Solutions

The markets are too sanguine about Italy. The country’s politics and economics are messed up, and there are no easy solutions. And although Rome does have the European Central Bank as a backstop, it may have to get to the brink before using it.

Investors had jitters after the election last month, pushing 10-year bond yields to 4.9 percent from 4.6 percent. But by last Friday, they had fallen back to 4.7 percent. Investors have convinced themselves that some political solution will be cobbled together; that if one is not, it does not really matter; and that if worst comes to worst, the European Central Bank will pick up the pieces by buying the country’s bonds.

Mario Draghi, the E.C.B. president, gave some support to the latter two ideas last week. He played down the risks to Italy’s fiscal position by arguing that much of the country’s belt-tightening was on “automatic pilot.” He also made it clear that the E.C.B.’s bond-buying plan was still available for countries that followed the rules.

But messy politics and economics could make each other still messier. Months of political paralysis will squish investment and could dampen consumption. That will exacerbate the recession. Fitch Ratings — which downgraded Rome’s debt to BBB-plus from A-minus last Friday — thinks gross domestic product will shrink 1.8 percent this year. A deeper recession, meanwhile, means a worse fiscal position. The ratings agency expects government debt to reach the equivalent of nearly 130 percent of G.D.P. this year.

Political stalemate also means Italy will not come to grips with its long-term problems. The country has barely grown in the past 20 years. Even Mario Monti’s technocratic government did little to address problems like inefficient bureaucracy, cartels, a dysfunctional legal system and inflexible labor markets.

Without a long-term growth plan, Italy’s debt level may not be sustainable, despite a budget surplus before interest payments equal to about 3 percent of G.D.P. But further belt-tightening would be hard to implement, given the electorate’s reluctance to back austerity. So Mr. Draghi’s automatic pilot may not secure a safe landing.

What solution then is there to paralysis? Participants at the Ambrosetti Forum in Cernobbio last week had three main scenarios: a grand coalition, a minority government and new elections. None looks like a recipe for stable government.

The essential problem is that the Italian electorate split three ways — with Pierluigi Bersani’s center-left party, the Democrats; Silvio Berlusconi’s center-right party, the P.D.L.; and Beppe Grillo’s upstart group, the 5-Star Movement, each gaining nearly 30 percent of the vote. Meanwhile, Mr. Grillo refuses to work with either of the other groups and Mr. Bersani will not form a coalition with Mr. Berlusconi.

The electoral system makes things worse. It has given the largest grouping, the Democrats, a majority in the lower house of Parliament, but nobody is in control of the upper house. A majority is needed in both houses to govern.

Optimists say it may be possible to form a grand coalition if Mr. Bersani and Mr. Berlusconi make way for new leaders. Matteo Renzi, Florence’s young mayor, who lost to Mr. Bersani in the Democratic primary, would be an obvious choice. In an opinion survey last week by the polling institute SWG, Mr. Renzi was the favorite to be prime minister, with a level of support of 28 percent compared with 14 percent for Mr. Bersani, 13 percent for Mr. Grillo and 10 percent for Mr. Berlusconi.

The snag is that Mr. Renzi does not have support either in Parliament or in the Democratic Party machine. What is more, a grand coalition could easily collapse in bickering. Time would have been wasted, and Mr. Grillo would be well placed to lead the biggest group in a subsequent election.

Some observers think that would not be too bad. After all, the former comic wants to give the political system a much-needed shake-up. The snag is that Grillonomics is pretty scary. Mr. Grillo is advocating a 20-hour workweek and restructuring of Italy’s debt. He is also playing with the idea that Italy should quit the euro.

If a stable government cannot be formed, aren’t new elections the solution? The problem is they would probably produce another stalemate. The best hope for breaking that would be if Mr. Renzi were the Democrats’ candidate.

But even that might not work. Although he appeals to the center ground, some of the Democrats’ left-wing supporters might peel off to more extreme parties.

Another hope is that a minority government, led by Mr. Bersani, could somehow hang on until the tectonic plates shifted enough inside Parliament for a grand coalition to be formed. But Mr. Bersani will struggle to get such a minority government up and running. Even if he does, it is likely to collapse, having achieved nothing except wasting time.

Optimists hope the voting system can be changed before a second election. But even that seems unlikely. Although Mr. Bersani, Mr. Berlusconi and Mr. Grillo all want a new system, they have different ideas on what it should look like.

The most likely scenario, then, is that Italy will be forced into a second election that will still produce no clear winner. If the 5-Star Movement is the largest party, markets could panic. If one of the other two comes out ahead, there will have to be renewed discussions of a grand coalition. Even then, a further rise in bond yields may be needed to knock heads together. Meanwhile, the recession will drag on and the fiscal position will worsen. Not a pretty picture.

Hugo Dixon is editor at large of Reuters News.

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Home Sales and Bernanke Calm Market

The stock market rebounded on Tuesday from its worst decline since November after the chairman of the Federal Reserve, Ben S. Bernanke, defended the Fed’s bond-buying stimulus and sales of new homes hit a four-and-a-half-year high.

The Standard Poor’s 500-stock index had climbed 6 percent for the year and came within reach of its highs before the minutes from the Fed’s January meeting were released last Wednesday. Since then, the S. P. 500 has fallen 1 percent.

Mr. Bernanke, in testimony on Tuesday before the Senate Banking Committee, strongly defended the Fed’s bond-buying stimulus program and quieted rumblings that the central bank may pull back from its stimulative policy measures, which were set off by the release of the Fed minutes last week.

Mr. Bernanke’s comments helped ease investors’ concerns about a stalemate in Italy after a general election failed to give any party a parliamentary majority. Concern about the threat of prolonged instability and financial crisis in Europe sent the S. P. 500 to its worst decline since Nov. 7 in Monday’s session.

Mr. Bernanke “certainly said everything the market needed to feel in order to get comfortable again,” said Peter Kenny, managing director at Knight Capital.

“The fear is we were going to see a rollover, and the first shot over the bow was what we saw out of Italy yesterday with the elections,” Mr. Kenny said. “When it came to U.S. markets, we saw some of that bleeding stop because our focus shifted from the Italian political circus to Ben Bernanke.”

Gains in homebuilders and other consumer stocks, after strong economic data, lifted the S. P. 500, and a 5.7 percent jump in Home Depot to $67.56 pushed up the Dow Jones industrial average. The PHLX housing sector index rose 3.2 percent.

Economic reports that showed strength in housing and consumer confidence also supported stocks. Home prices rose more than expected in December, according to the S. P./Case-Shiller index. Consumer confidence rebounded in February, jumping more than expected, and new-home sales rose to their highest in four and a half years in January.

But Mr. Bernanke also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a “significant headwind” for the economic recovery.

The Dow Jones industrial average gained 115.96 points, or 0.84 percent, to 13,900.13. The Nasdaq composite index advanced 13.40 points, or 0.43 percent, to close at 3,129.65.

The S. P. 500 rose 9.09 points, or 0.61 percent, to 1,496.94.

Despite the bounce, the S. P. 500 was unable to move back above 1,500, a closely watched level.

The CBOE Volatility Index, or the VIX, a barometer of investor anxiety, dropped 11.2 percent, a day after surging 34 percent, its biggest percentage jump since Aug. 18, 2011.

The uncertainty caused by the Italian elections continued to weigh on stocks in Europe. The FTSEurofirst-300 index of top European shares closed down 1.36 percent. The benchmark Italian index tumbled 4.9 percent.

Home Depot gave the biggest boost to the Dow and provided one of the biggest lifts to the S. P. 500 after the home improvement chain reported adjusted earnings and sales that beat expectations.

Shares of Macy’s gained 2.78 percent, or $1.07, to $39.59, after the department store chain stated it expected full-year earnings to be above analysts’ forecasts because of strong holiday sales.

In the bond market, interest rates inched higher. The price of the Treasury’s 10-year note slipped 6/32, to 101 1/32, while its yield rose to 1.89 percent, from 1.87 percent late Monday.

This article has been revised to reflect the following correction:

Correction: February 26, 2013

Because of an editing error, an earlier version of this article misidentified the Senate panel before which Ben S. Bernanke, the Federal Reserve chairman, was testifying Tuesday. It was the Banking Committee, not the Finance Committee.


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Jobless Rate Dips to Lowest Level in More Than 2 Years

In the midst of the European debt crisis, lingering instability in the oil-rich Middle East and concerns about a Chinese economic slowdown, the American unemployment rate unexpectedly dropped last month to 8.6 percent, its lowest level in two and a half years. The Labor Department also said that the nation’s employers added 120,000 jobs in November and that job growth for the previous two months was better than initially reported. That looks like good news for President Obama as he heads into the 2012 presidential election — especially since just a few months ago the picture looked bleak.

“If you go back to August, all sorts of people were telling us that the economy was headed straight into recession,” said Paul Ashworth, senior United States economist at Capital Economics. “Since that point, we’ve become more and more worried about the euro zone and other areas of the global economy, but somehow, at least for the moment, the U.S. economy seems to be shrugging all that off.”

Even so, part of the reason the jobless rate fell so low was that 315,000 unemployed workers simply stopped applying for jobs. And resilient as the economy seems to have been since this summer, the fate of the fragile recovery is still tied to external — and especially European — events.

So far Europe’s problems have been relatively contained to the Continent. Many economists worry that a disorderly default of Greece or Italy, which still looks alarmingly possible, could plunge Europe into a depression.

If recent history is any guide, even a modest shock wave from across the ocean could throw the American economy off course; earlier this year, a series of shocks from higher oil prices, the Japanese earthquake and the stalemate over the United States debt ceiling managed to drain the energy from the recovery.

November’s drop in unemployment was a welcome relief, given that the jobless rate had been stuck at 9 percent for most of 2011. It is at the lowest level since March 2009; the rate has been above 8 percent for 33 months.

The share of workers who were unemployed fell in November partly because some people found jobs and partly because some discouraged workers dropped out of the labor force altogether. That left the share of Americans participating in the work force at a historically depressed 64 percent, down from 64.2 percent in October.

A separate survey of employers, which economists pay more attention to than the unemployment rate, found that companies added 120,000 jobs last month after adding 100,000 in October.

These numbers were not particularly impressive by historical standards — payroll growth was just about enough to keep up with population growth — but there were other signs of resilience.

Companies have been taking on more and more temporary workers, suggesting that more permanent hiring may be in the cards. What is more, help-wanted advertising, retail sales and auto sales have risen; jobless claims have fallen; and businesses seem to be getting loans more easily. Perhaps most encouraging was a recent survey of small businesses that found hiring intentions to be at their highest level since September 2008, when Lehman Brothers collapsed.

“Small businesses were cheering up at the end of last year but then got clobbered by the jump in oil prices, the Japanese earthquake and then the debt ceiling fiasco,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “Small businesses employ half the work force, and we need them on board.”

Still, serious concerns remain about the economy’s ability to weather the financial and economic turmoil from abroad. The public sector continues to lay off workers at the federal, state and local level. And excluding the hundreds of thousands who have left the labor force, the country still has a backlog of more than 13 million unemployed workers, whose average period of unemployment is at a record high of 40.9 weeks. The median period, the point between the top and bottom halves, is 21.6 weeks.

“They say businesses are refusing to look at résumés from the unemployed,” said Esther Perry, 59, of Bedford, Mass., who participated in a recent report on unemployed workers put together by USAction, a liberal coalition. “What do you think my chances are? Once unemployment runs out, I don’t know what I will do.”

Even those with jobs are in weak positions. Average hourly earnings fell 0.1 percent in November, and a Labor Department report released Wednesday found that the share of national income going to labor was at a record low last quarter.

These softer spots in Friday’s numbers underscored just how much President Obama could use additional stimulus, a tidy and fast resolution to the European debt crisis or some other economic breakthrough to reinvigorate the job market before the 2012 presidential election.

“As president, my most pressing challenge is doing everything I can every single day to get this economy growing faster and create more jobs,” President Obama said Friday in Washington.

On the issue of government action to stimulate the economy, there has been some movement in Washington toward extending the payroll tax cut, which is scheduled to expire at the end of this month. Economists have said that allowing the tax cut — which lets more than 160 million mostly middle-class Americans keep two percentage points more of their paychecks — to expire could be a severe drag on both job creation and output growth.

“If it isn’t extended, it will have an impact on consumer spending in the first half of next year because it’ll put a big dent in consumer income,” said Conrad DeQuadros, senior economist at RDQ Economics. “To the extent that reduces spending, there will be second-round effects on hiring.”

According to some estimates, an extension would probably lead to 600,000 to one million more jobs. The other major stimulus program scheduled to expire by 2012 is the extension of unemployment insurance benefits, allowing some jobless workers to continue collecting for as long as 99 weeks. Already, millions of people have exhausted their benefits. Failing to renew the federal benefit extensions will cause five million additional people to lose benefits next year, Labor Secretary Hilda Solis said in an interview.

Unemployment benefits are believed to have one of the most stimulative effects on the economy, because recipients are likely to spend all of the money they receive quickly and pump more spending through the economy.

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Split by Infighting, OPEC Keeps a Cap on Oil

In the short term, the stalemate, which is a rare public disagreement within the cartel, is unlikely to have more than symbolic importance. OPEC members are already pumping above their quota levels, and Saudi Arabia, the only OPEC country with the ability to increase production significantly, has promised to continue raising its output to satisfy world demand.

Oil traders were largely unruffled, with the price of the American benchmark crude rising less than 2 percent to settle at $100.74 a barrel.

But the discord highlights the widening split between Saudi Arabia and Iran, which are vying for influence in a Middle East that is being rapidly reshaped by populist uprisings throughout the region. The public disagreement also underscores that the 12 OPEC member countries are increasingly making their own decisions about production levels rather than bowing to the collective judgment of the group.

“This longstanding Iranian-Saudi competition is now being played out in OPEC,” said David L. Goldwyn, until recently the State Department’s coordinator for international energy affairs. “Unfortunately for Iran, and fortunately for the rest of us, it’s Saudi Arabia that has the spare capacity to give. So Iran can grab the headlines, but Saudi Arabia will follow its own judgment.”

At the meeting, Saudi Arabia, which has historically wielded the greatest clout within the group, argued for a change in production quotas that had been set nearly three years ago. But six other countries with quotas, led by Iran, the current leader of OPEC, refused to agree, arguing that the world’s markets were already flush with oil and that high prices were merely the fault of speculators.

“It was one of the worst meetings we’ve ever had,” the Saudi oil minister, Ali al-Naimi, told reporters after the meeting. He promised that his country and all the Persian Gulf members with spare production capacity, including Kuwait, the United Arab Emirates and Qatar, would assure that the world is well supplied with oil.

It was the first time in two decades that OPEC delegates could not arrive at a public agreement at a formal meeting.

With oil exports from Libya and Yemen essentially frozen because of the violent conflicts there, OPEC has faced growing pressure to increase its production to make up the difference.

On Wednesday, the Obama administration said it was disappointed by OPEC’s inaction.

“We believe that we are in a situation where supply does not meet demand,” a White House spokesman, Jay Carney, said. He said President Obama would consider releasing oil from the nation’s strategic reserves if necessary, although gasoline prices have eased a bit in the last month.

As a group, OPEC members are currently pumping about 1.5 million barrels a day above their quota levels anyway, and Saudi Arabia has been increasing output during the last several weeks by an estimated 200,000 barrels a day. Even Iran has been exceeding its allotment by about 50,000 barrels a day for more than a year to raise money to counter economic sanctions.

Fadel Gheit, an oil analyst and managing director of Oppenheimer Company, said that OPEC’s failure to adjust quotas made little difference.

“Everybody in OPEC is cheating and everyone knows that,” he said. “Don’t listen to what they say, but watch what they do.”

In a short statement after OPEC ministers met behind closed doors in Vienna on Wednesday, the organization said, “No formal decision was reached on a production agreement. However, the organization abides by its longstanding commitment to order and stability in the international oil market.”

OPEC ministers are likely to meet again within three months, possibly in Iran, to reconsider their decision.

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Moody’s Warns of Downgrade for U.S. Credit

The warning, from one of the agencies whose assessments of creditworthiness help determine interest rates, amounted to a stern reminder from Wall Street to Washington that global financial markets are watching the budget battle closely and that a standoff or brinkmanship could have economic consequences.

Both sides seized on Moody’s statement to reinforce their bargaining positions, with Republicans demanding that President Obama get more serious about deep spending cuts and Democrats saying that Republicans are risking a financial crisis in pursuit of an ideological agenda.

Moody’s said a review of the credit rating was “likely” in July, given that “the risk of continuing stalemate has grown.” Its warning followed a similar one from another major ratings firm six weeks ago, and it came as the administration met Thursday with both House Republicans and Democrats in search of a deal.

The treasury secretary, Timothy F. Geithner, met on Capitol Hill with House freshmen, including Republicans who have suggested that they see little or no risk in a showdown over the debt limit. Citing the Moody’s statement, Mr. Geithner urged them to support raising it or risk an economic crisis.

“We didn’t create this mess,” one Republican told Mr. Geithner, according to a person in the room.

Independent analyses have shown that more than half of the $14.3 trillion debt is from policies enacted during the past decade when Republicans controlled both the White House and Congress, and much of the rest from lost revenues and stimulus spending and tax cuts since Mr. Obama took office at the height of the financial crisis and recession.

Mr. Geithner, as he left the Capitol, told reporters: “I’m confident two things are going to happen this summer. One is we are going to avoid a default crisis. And we are going to reach agreement on a long-term fiscal plan.”

Representative Austin Scott, the Georgia Republican who is the leader of the freshman class, said after the meeting that House Republicans had a “fundamental” difference with Democrats on taxes: instead of new tax revenues, the Republicans want additional tax cuts to increase economic growth. Still, he said, “I think we are all hopeful we will get to a resolution.”

Earlier, Mr. Obama and Mr. Geithner met privately with House Democrats at the White House about debt-reduction matters, following a similar session on Wednesday with House Republicans.

“Just as he discussed with the Republican caucus, the president highlighted the need for both parties to work together to take a balanced approach to deficit reduction, one that allows us to live within our means without hurting our ability to invest in the future or burdening our middle class or seniors,” an administration official said. 

House Democrats said they would support Mr. Obama if he reached a compromise with Republicans that included long-term spending cuts, but not to Medicare benefits, as well as higher tax revenues, according to those briefed on the meeting.

The House speaker, John A. Boehner, said in a statement, “The White House needs to get serious right now about dealing with our deficit and debt.” He interpreted the Moody’s report as bolstering his contention that “a credible agreement means the spending cuts must exceed the debt-limit increase.”

Moody’s, however, made no mention of how a deficit-reduction deal should be structured.

The Moody’s report was unexpected. In April, Standard Poor’s lowered its outlook for the AAA rating on United States debt — but not the rating itself — to negative from stable. Moody’s cautionary note was more pointed in that it was pegged to the current political maneuvering over the debt limit and it urged a resolution weeks sooner than the White House and Congressional leaders were aiming for.

Its warning was two-pronged. First, Moody’s said, if Congress does not increase the Treasury’s borrowing authority in coming weeks, the nation’s credit rating may be lowered “due to the very small but rising risk of a short-lived default.” That is likely to translate into higher interest rates at a time when the recovery shows signs of slowing again.

And second, Moody’s said, with an implicit slap at both parties, that whether the United States keeps its triple-A rating “will depend on the outcome of negotiations on deficit reduction.”

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations,” the company’s statement said. “The heightened polarization over the debt limit has increased the odds of a short-lived default.”

The goal of the bipartisan budget talks that Mr. Obama initiated in April, led by Vice President Joseph R. Biden Jr., has been to reach agreement on deep long-term spending cuts by Aug. 2. That is when the Treasury Department has said it will run out of accounting maneuvers to meet the nation’s financial obligations without breaching the $14.3 trillion debt limit, which would provoke a crisis, even default.

House Republicans have said they will not agree to an increase without parallel action on spending cuts of an even greater amount. The debt limit would have to be raised $2.4 trillion to carry the government through 2012.

Republican leaders engineered a vote on Tuesday evening in which the House voted overwhelmingly not to increase the debt limit. They said that was their way of proving to Democrats that a rise in the debt limit could not pass without spending cuts attached. The Democrats countered that Republicans were risking an adverse market reaction by staging the vote, knowing it would fail.

Stock markets did fall more than 2 percent on Wednesday, but analysts generally attributed the slump to the day’s disheartening economic reports and anticipation that the government’s monthly jobs report on Friday would also be disappointing.

Even so, Republican Congressional leaders fretted that they could be blamed, according to Republican lobbyists who spoke with them. With Mr. Biden traveling in Italy this week, the negotiators are not scheduled to meet again until next Thursday. However, staff advisers continue working on proposals.

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