Austerity Contracts Italy and in turn Germany

ISTAT, Italy's National Statistics Institute has had a busy December 2011-end.  ISTAT released October's monthly stats. The results are not good. In fact, the results were not good for any of the critical markings: the releases confirmed decreases in the Orders, Production in Construction, and Trade Balance. Then, ISTAT published Italy's quarterly GDP. 

Notwithstanding the bleak setting above-mentioned, Italy's national accounts are particularly alarming.

The decease in GDP suggests that the Austerity measures being promoted by the Euro-Area and traditionally recommended by the IMF for struggling economies are counterproductive: detrimental to the health and growth of the Italian economy. That's not new. The results are, however, significant because they offer the economist-Prime Minister Mario Monti an acid test that the austere remedy preferred by the markets, in the longer run, will weaken the economic infrastructure of the country, induce social tensions and may trigger social unrest thereby further stiffening Italy's already fragile capacity to access reasonably priced funds from future markets. After all, once reimbursement of capital is made, there is no obligation on the part of the investor to revisit and refinance a palliative patient.

For the obstinate, the position that austerity is not necessarily linked to contracting economies is a reasonable stance. In fact, for the majority of austerists, if one can coin the label, there is no necessary relationship between austerity measures and contracting economies, where contraction is usually defined as an economy in which gross domestic product weakens for two consecutive quarters.

Orders were down in October 2011 by 4.8% over the same month in the previous year 2010. In October 2011 the seasonally adjusted industrial new orders index decreased by 1.6% with respect to September 2011 (-1.0% in domestic market and -2.4% in non-domestic market). The percentage change of the average of the last three months compared to the previous three months was -2.3 (-0.7 in domestic market and -4.7 in non-domestic one). Although adjusted industrial turnover index, which measures current dollar sales was up by 1.1% for the same periods, the medium and longer term effect of orders is critical to the growth and stability of the country, whereas industrial turnover results are an historical metric that is already integrated into the fourth quarter's projections. Traditionally, orders underscore the basic fabric of small and medium business which constitute the majority of regional economies in central and southern Italy. The significant indicator to watch is the Order Book, especially for export orders since Eurozone orders will certainly decrease all around given the need to cut back on spending: consumer spending will drop and business will limit its investments in order to buffer cash for a 'transition' towards a better investment climate.

Germany, on the other hand appeared to be steering through the storm. Unfortunately, recent indicators, especially the Order Book for Exports is designing a pessimistic future. Counterbalance to a drop in export orders is a suggested increase in consumer spending. I think pundits are overly optimistic about Germany's population continuing to bear the load of a European economic stall. Not only is unemployment inching up in 2012, savings will also inch up and business investment will decrease quickly and for a prolonged period.

The lesson of Austerity is that its negative effects profuse through the system much more quickly than market reinvestment. Once markets realize that an economy is slowing down, they will forestall decisions to reinvest capital, which in turn will stall growth. Austerity leads to a vicious circle and insidious downturn,especially during a global slowdown. We said it in an earlier post:

Evidently, once investors realize that the longer term confidence required to justify purchasing Eurobond securities is not justified by output figures from the region's business sector, then even if your brand name is Germany, and even if the rating agencies mark you tops,  it won't help keep yields down. Germany is as susceptible to being dumped as is Italy and its next candidate France which witnessed its yields increase, and its yield gaps widen against the German counterparts. There is no Immune Boutique in this Shopping Mall. There isn't any vote of confidence for Germany; rather it signals that investor concern is becoming pandemic within the Euro-Area and no sovereign, especially a non-sovereign issuer, is immune.

and we will repeat again: Mrs. Merkel, like all others including Mr. Monti, is neither immune to the consequences of Austerity nor to the whims of the markets. It's time to change tune before the audience boos the performance or rather lack thereof.

Fictional Reserve Barking invites Keynes and Godley  to Dinner 

Fictional Reserve Barking (FRB), not yet completed its first anniversary from inception, has assumed the role of one of the most daring commentaries on national and international political and economic policy on the B-sphere. Admittedly sympathetic to post keynesian monetary theory, FRB has again challenged the reasonableness and timeliness of everyman's expectation that Central Bankers cause and hence should solve all the problems of Government and Public Finance. In its December 31, 2011 issue, FRB has demonstrated again why it is considered a must and best read for economic policymakers and pundits alike. Never faltering from its underlying prescriptive mission, FRB continuously substantiates the empirical legitimacy of its optics, realigning and calibrating vision as the facts require, but never wavering on the paradigm invoked.

To say that Fictional Reserve Barking and its prolific author Circuit, is merely a keynesian sounding board is to demean the intellectual prowess of its endeavor. To even suggest is to stunt the brilliant insights that Circuit and moreso the FRB's Wall of Fame profess. And Wall of Fame it is! Among the cherished heritage FRB preserves and promotes, one finds classic Keynes, Galbraith, Godley in continuous medley with such contemporary classicists Lavoie, Seccareccia, Volcker, Bernanke, Wolf, Wray, Krugman, Mosler, Lerner,  the BIS. Never admonishing, always respectful, FRB is a classical Podium of Great Policy in the making.

As one of its readers noted a while back, FRB never assumes as own the merit of others: it is by far the most serious and integral online conversation in political economy in the language, similar to Martin Wolf of the Financial Times for both scope and depth, and come the day, as notorious.

You may not agree with the script , but you never move on offended. Accessing FRB is like sitting back for a brilliant and enjoyable conversation over the dull-made-glamorous. There was a time when accountants and investment bankers were boring. Then they became glamorous-pin-up persons for the young and ambitious. History has shown them rich yet infamous and forever dull. FRB makes policymakers, economists and central bankers the new pin-ups: exciting, audacious, bright and magnanimous when they have courage, but not necessarily rich. Therein lies the rub! or is it the crux?

The latest FRB commentary on the role of the Bank of Canada in defining economic policy and delimiting monetary responsibility from fiscal initiatives, and then going on to analyze the impact of deficit spending on household and business investment is a superb application of Godley's sectoral balance to Canadian political economy and the planning process for 2012 Canadian public finance.

Take the time to savor the latest Classic on Carney, Household Debt, Bank of Canada and Government spending:

It'll change the way you look at economic policy.

Happy New Year.