Why Italy, and the Eurozone, are a good bet when most people just expect the opposite

When Erik Nielsen writes about Italy, it is always worth (and it pays well) to listen carefully.

Hence, let me quote his most recent “Sunday Wrap”, this time dedicated to Italy.




The European project is 60 years old this weekend, the sun is shining and massive celebrations by political leaders and ordinary folks have been taking place across Europe.

Newspapers and other outlets are also celebrating, but mostly by questioning the future of European cooperation, as they dedicate a disproportionate amount of concern to Italy.

Last Sunday, I argued that the global economy is recovering strongly, including in the Eurozone (further evidence of that with Friday’s PMIs) and that the political risk in Europe has shifted from downside risk (of a Le Pen victory in France) to upside risk (of a strongly pro-EU French presidency along with a German government coalition more closely aligned with the rest of the eurozone.) And the overwhelming feedback was along the lines of “yes, broadly agreed, but what about Italy – you didn’t mention Italy. Italy will surely ruin the party”.

So let me dedicated today’s note to Italy.

I’m not going to argue that everything is fine, but I’ll argue that the Italian reality is quite different from the (too simplified) perception expressed in much of the investment community and in the Anglo-Saxon media.

Let me start by noting that putting Italy in the proper perspective feels a bit like a discussion we have had before. Not to pick on anyone in particular, but Dan McCrum’s piece in this weekend edition of the FT (“Analysis: Italian angst refuses to go away”) is a good example of the received wisdom:

It starts with a story of someone walking into a New York equity hedge fund in July 2011 only to find that these guys were not focused on equities, but all about shortening Italian sovereign debt. And it proceeds to argue – via a good line-up of fund managers and other experts – that Italy is again about to cause big trouble in Europe.

Well, that line of argument didn’t work out very well in late 2011 – and it’s no more likely to work out well this time.

As I argued in a note in October 2011, it made no sense that Italian 10-year yields were north of 5 ½% when e.g. 10-year Gilts traded with yields at 2.35%. I suggested that they should probably trade at broadly similar yields. I called my note: “Italy versus the UK: What am I missing?”

That note caused quite a debate at the time. Most thought I got the economics all wrong, but FT Alphaville mostly agreed with the macro part, although they suggested that the yield difference could be justified by the unpredictable and messy Italian politics. (The FT’s piece from October 10, 2011, is here, in case you are interested: https://www.ft.com/content/7f3d0d04-ef79-11e0-941e-00144feab49a)

The point on politics seemed a fair comment in late 2011, but I am less sure today. While Italian politics still seem messy, Berlusconi left and a number of government have since implemented a fair amount of reforms, while keeping the fiscal side in check. And we have a powerful display of Eurozone progress since then, ranging from the introduction of the OMT at the ECB to the ESM. Meanwhile, the UK chose Brexit and its politics must today range among the most unpredictable and messy ones around. But more on politics below.

Fair or not, I can’t help but reminding those hedge fund guys referred to in McCrum’s piece that if had had bought 10-year BTPs in late 2011 (instead of shortening them), they would have had an average annual return of 8.5% until now (which would have beaten most hedge fund returns), vs. a 4.4% annual return (in sterling), if they had bought Gilts (4.1% in euros). If they had bought Italian equities (MSCI) back then, they would have returned an annual average of 4.7%, while the MSCI-UK would have given them 6.3% in euros. (For good order, I have also had my share of poor calls along my way.)

But let me now turn to the present and the future for Italy, and specifically to the four key perceptions of Italy. I address them in turn::

■ Italy has suffered decades of stagnant-to-no-growth and there is little hope of improvement because Italy has become uncompetitive, tied down in rigidities.
■ The public debt is excessive, probably unsustainable and definitely weighing on growth.
■ Italian banks are unreformed zombies, weighing on growth as well and possibly causing systemic threats.
■ The politics is a mess and the population is about to vote Italy out over the deep end and into the unknown abyss.
I attach a number of charts from the impressive library of our Lead Economist for Italy, Loredana Federico, to illustrate my points below. The charts are pretty self-explanatory and I won’t refer to them all – and I’ll try to address each of the four (mis)perception in a way that does not require that you look at charts at the same time reading the note. The charts are here: Italy – Perception and Reality
1. Italian growth: Why it has been weak – and why the short and medium-term outlook is okay.
Italy has suffered more than two decades of growth below its European peers, as illustrated in charts 3 and 4. Importantly, however, it’s not like Italy never grows. Rather, the picture has two key messages: First, almost every year, real GDP growth (whether total or per capita) has been positive, but a bit below the rest of the Eurozone, and, second, Italy suffered two more severe crises than the rest of Europe, obviously taking down the average for the period.

The low average has two distinct characteristics: A structural weakness and a cyclical one. I am going to argue that some of the structural weakness has now been addressed, and that there are some low-hanging fruit, which could be dealt with quite easily, providing substantial upside. And I’m going to argue that the cyclical downturn is over for now.

First, the structural stuff: At just below EUR 26,000, Italian per capita GDP is about 12% below the eurozone average. This lower level of average national income is predominantly explained by a lower participation rate in Italy – at 65% vs. 73% for the eurozone average: If a smaller share of the population works, it’s no surprise that the average income for the entire population is lower. (Interestingly, those who do work in Italy, work considerably more hours per year than in the rest of the eurozone – all illustrated in chart 5.)

The low participation rate in Italy is predominantly an issue of almost half of working age women not participating, although the rate has been drifting higher in recent years, as illustrated in chart 6.

Structurally, the single most important thing the Italian government could do for growth would be to encourage women to participate actively in the labor market, e.g. via changes to taxation for couples, provision of more affordable child care, etc. Broadly speaking, if Italy manages to lift women’s participation rate to German levels during the next ten years, it would add about 0.7pp to annual GDP growth, even if only half of those entering the active labor force actually got a job. That’s stuff that needs to be done!

Other parts of the structural weaknesses have already been addressed to some extent. The lazy commentator always seems to talk about rigidities in the labor market and/or general competitiveness of the Italian economy.

Yet, as illustrated in chart 7, on OECD data, following the Italian Jobs Act, Italian labor market rigidities are no worse than, e.g., Germany and Sweden, and less severe than, e.g., the Netherlands. Of course, it’ll take a year or two for the positive effect of these changes to fully kick in, but there is no reason not to expect that that will happen.

And yes, competitiveness was an issue in the past, but with reforms and the weaker euro, since 2014, Italian export growth has comfortably outpaced global import growth, meaning that Italy has been gaining market share around the world in traded goods (illustrated in chart 8). That’s hardly consistent with a claim of being uncompetitive!

And now the cyclical story: Yes, it has been ten brutal years for Italian households, first as the global financial crisis hit, and then as the European sovereign crisis forced then PM Monti to introduce eye-watering tough fiscal tightening. As illustrated in chart 9, real disposable income took some severe hits during those two periods, and Italian households adjusted their real consumption broadly in sync, although cushioning the blow a bit by lowering their savings rate from around 14% to 10%-11%. Now, real disposable income is growing nicely again, providing a solid base for growth in consumption – and maybe some restoration of savings rates back to traditional very high levels.

So, not surprisingly, Italian PMIs are moving higher in line with the rest of the eurozone, having now passed 55, which for Italy is consistent with annualized GDP growth of close to 1.5% (charts 10-11). For a country with virtually no population growth, that’s not bad because it’s mostly, therefore, productivity growth.
2. The public debt: Bigger than desirable, but less of an issue than the number suggests.

Few things dominate the conversation with casual observers on Italy more than the public debt, standing at 132% of GDP, which is the second highest in the eurozone (chart 15).

There are two – related – key issues when it comes to the public debt, namely sustainability and whether it is a drag on growth, which could make the sustainability concern self-fulfilling.

To be sure, public debt to GDP in Italy is a lot higher than desirable, but the related issues deserve much more attention than what transpires from just one number.

First, the issue of debt sustainability: Debt sustainability is a simple function of nominal GDP growth, primary surpluses and funding costs over the cycle.

As argued above, the Italian recovery is in good shape, and structurally, there is no reason to think real growth will not be (at least) about 1% over the cycle, and that the GDP deflator will move closer to 2% as the output gap closes. (Importantly to any skeptics out there, it not reasonable to both argue that Italy’s potential growth is very low, and that inflation will never pick up – output gaps do matter!) That gives you a nominal GDP growth rate of close to 3%. But for these calculations, let’s be conservative and call it 2.5%.

Neither is there is any particular reason to worry about the fiscal stance. As illustrated in chart 16, come rain or come storm, Italy has been running one of the largest primary surpluses in Europe – in spite of changing governments. Keeping a steady primary balance does not take much political effort, and it has no net impact on growth. Indeed, when the cyclical upswing comes through, the fiscal balance tends to strengthen for a while.

There is – of course – greater uncertainty with respect to future funding costs because these will increasingly be set by markets as the ECB begins to taper – and in markets, perception is sometimes more powerful than reality. This is an area that I think deserves attention. On balance, however, I’m not worried because with the growth and fiscal outlook, there is good room for yields to move higher without triggering an increase in debt/GDP:

First the simple math: With nominal GDP growth at about 2.5% and a primary surplus of, e.g., 1.5%, as was delivered in recent years and as the European Commission forecasts for this year, debt-to-GDP will not rise so long as the average funding cost does not exceed 3.9%, or about 100bp higher than today. If the average funding cost were to settle over multiple years at, e.g., 4.5% while neither real GDP growth nor inflation moves higher (i.e. still sticking with the conservative 2.5% for nominal growth over the cycle), then the primary surplus would have to be increased to a range of 2.0%-2.5% of GDP, which would not be an insurmountable task in any normal political set-up.

Second, as Italian cost of issuance almost certainly begins to increase later this year with expectations of ECB tapering, remember to use for this calculation the average cost of the debt, rather the cost of issuance. As illustrated in chart 17, the average cost is, of course, higher than recent years’ cost of issuance (because of QE) – and, incidentally, it has fallen less than the marginal cost because Italy has – wisely – used the opportunity of low yields to lengthen the average maturity, which now stands at the eurozone average of 6.7 years. This means that it’ll take several years of higher cost at issuance before the average of the entire stock moves measurably.

Third, if markets were to get on a self-fulfilling, yield-increasing, upward spiral, which challenges sustainability, the ECB has the OMT with which to knock it back. To be activated, the OMT requires the country to have a program with the ESM, which includes policy conditionality. My view is – firmly – that if Italian funding costs, over an extended period of time, move away from underlying fundamentals and the Italian policy stance – as judged by Frankfurt, Berlin and Paris – then an ESM program will be agreed swiftly with conditionality basically in line with those existing policies. (If the yield increases are caused by policy slippage, however, it’s a different story, which I’ll return to in Section 4 below.)

Then there is the issue of whether the debt is a burden for growth, as suggested by some. To answer that question you have to consider whether the debt is held by domestic or by foreign creditors – i.e. whether the debt service payments are payments to economic agents in the country (which wouldn’t hurt growth per se as it’s a “simple” domestic reallocation issue), or to foreign creditors (which is equivalent to a tax on the economy.)

As illustrated in chart 19, only 33% of Italian public debt is held by foreigners (down from 47% six years ago). And even better, 11% of the debt is now held by the Eurosystem (which means that interest payments are virtually recycled via the central bank and higher profits back to the budget, at zero cost.)

Finally, there is surprisingly little attention paid to the issue of the governments’ contingent liabilities; i.e. entitlements stemming from the aging population in the shape of future pensions and healthcare costs.

By any reasonable political calculation, such liabilities put a burden on fiscal policies which easily matches that posed by explicit debt obligations. As illustrated in chart 27, on IMF calculations, the net present value of such contingent liabilities stands at just below 40% of GDP in Italy, which is well below most other countries. This leaves the Italian government a degree of fiscal flexibility not enjoyed by most other countries (but not used), and broadly matching the lack of flexibility usually highlighted by the existence of the contracted debt.

3. The banks: A political dilemma, but not a financial or systematic one.

My bottom line on Italian banks is that it’s a political dilemma because successive governments didn’t recapitalize the banks they wanted to keep (and close the rest) at the time when everyone else in Europe mobilized taxpayers’ money to fix their banks – but it is neither a systemically important issue, not is it a measurable issue for Italian growth.

First the NPLs: On latest available data (at mid-2016), the Italian banking system had EUR 356bn in NPLs, split between EUR 214bn of “bad debt” and EUR 142bn of “less troubled debt”. (The number now is lower, not least because one fine bank has taken matters in its own hands and started a restructuring process, which included a sale in December of about EUR 17bn of NPLs.)

If you account for the coverage ratios for the two categories of NPLs, and assume you can sell the rest for 20 c/euro for the “bad debt”, and for 40 c/euro for the “less troubled debt”, then the total bill for cleaning up all Italian banks for all NPLs stands at EUR 95bn, or 5.5% of GDP (illustrated in chart 28.)

Nobody is suggesting that this is the route Italy should take, but it puts the magnitude of the problem in perspective. As illustrated in chart 29, there is hardly a country (apart from Italy and France) which did not spend 5.5% of GDP or more on their banks during the crisis, and only the US, Belgium, Spain and the Netherlands have since recovered enough to now be sitting on a net bill of less than 5.5% of GDP.

In other words, putting the politics of bail-ins aside, the size of the key issue in Italian banking is not even remotely a systemic one out of proportion to what virtually all other European countries have been through. (If deciding to eliminate the NPLs by providing government guarantees for them, Italy’s place on the list of government’s contingent liabilities would not even move one place, as illustrated in chart 27.)

And is it an issue for the economy (apart from what damage the issue does to perception)? I find that hard to argue. There is a lot of noise in the Gross Value Added (GVA) data, but as illustrated in chart 30, Italian banks (and a few others boxed into this category) contribute about 3.8% to the country’s GVA, ahead of the eurozone average.

All this is not to say that medium-sized banks do not need to be sorted out, but the magnitude of this task is not of systemic proportions. The issue is that Italy signed on to the bail-outs-only-with-bail-in (in spite of the large number of households holding bank securities in Italy) – and that has turned into a political issue – and one of perception.

4. Political risk

And that leads me to politics, which is – undeniably – complicated in Italy. But, again, you need to put this in perspective – like most business people seem to do:

In the most recent survey, out this past week, by the Economic Research Council, of 600 eurozone based firms’ perception of political risks to their business (conducted between mid-January and mid-February), 28% named Brexit as their key concern, 27% named Trump and the US administration as their key concern, 18% worried mostly about the minority government in Spain, while 17% named the Italian political climate as their key concern (less than 15% worried about the French election). To me, that ranking is about right.

Let me first make three points:

First, I suggest one has to be careful not to feel too certain about the predictability of shifts and movements in the political landscapes these days; after all it is the UK and the US – and so far none of the Western European countries – that has fallen to populism, and just as most people thought Austria would elect a nationalist president, and the Netherlands a xenophobic party as their biggest, the tide seemed to turn. Also, as illustrated by the opinion polls in France and Germany, the population seems quite happy to embrace a pro-European political line, so long as it’s delivered by relatively newcomers.

Second, while there is not any great difference between the share of the population actually supporting populists (with the exception of Germany), whether populists actually gain power or not largely depends on the institutional specifics of the democratic systems in each country. Trump lost the popular vote with almost 3 million votes, but won the election. The UK is throwing into jeopardy decades of policies – with huge inter-generational consequences – on the back of a single, simple-majority guiding referendum, something that would run into constitutional barriers in any of the Continental European countries.

Third, from a markets perspective, the Italian political landscape is more complicated – and indeed, on the face of it, more troublesome – than in most other countries because of two issues: (i) They have no less than three nationalist, or populist, parties, namely The Five Star Movement (M5S) with a support of about 30% of voters, the Lega Nord (LN) with about 12% support, and the Brothers of Italy (FdI) with about 5% support. But while that adds up to almost 50%, it is difficult to see a scenario in which these three parties would cooperate; and (ii) the mainstream parties are presently in a good deal of disarray as the Democratic Party (PD), now with about 25% support, has split, while Forza Italia (FI) continues to struggle with support of only about 13%. At the same time, the cumbersomeness of policy making in Italy, which many would argue is one of its weaknesses, is also safeguarding against too radical changes – which may turn out to be one of its strengths.

With the caveats of all this, I think the most likely outcome of the next election in Italy (latest by spring 2018) will be an extended period of either a caretaker government or a rather ineffective one, held back by one or the other chamber of parliament. For a year or two, that’s not a major issue when the underlying macro balances are okay and the recovery is under way – not least in a scenario where a new German-French initiative next year seeks to deepen the eurozone policy set-up, e.g. via the completion of the banking union, capital markets union and possibly a set of labor market and social policies, maybe via a “Juncker Plan” for youth unemployment and targeted public investment.

For M5S to gain power they’ll have to break – in this environment – the apparent glass ceiling of about 30% support (not made easier by the trouble they have administering Rome) and move through 40%, and/or break their pledge not to go into a coalition. I’ll happily bet my money against M5S getting more than 40% of the votes – and it takes quite some imagination to see them co-govern with any of the potential parties sharing their anti-European views.

But if it happens – you would expect them to try to deliver a possible exit from the euro. But they’ll be unsuccessful because it would require changes to the Italian constitution, which entail a long process, as we were reminded of last year, with two rounds of voting in both chambers of parliament and a wide parliamentary majority (a 2/3 majority is needed), if not a popular referendum will be required. To believe that they would be able to pull this off, you’ll need to create a political earthquake-like scenario. Possible? Sure, but very unlikely indeed.

But while almost certainly unsuccessful in this endeavor, a populist government would likely introduce market unfriendly policies, thereby challenging the “European consensus” – and most likely trigger ratings downgrades. My guess would be that – just like in 2011 – market pressure would win out. Maybe there would be a program (or a shadow program) with the ESM, and maybe we would have to go through a couple of iterations of policy changes, but chances are that we would then reverse to better policies again.

Just over five years ago, the hedge fund community was betting on a collapse of the eurozone, but it didn’t happen. Two years ago, they were betting on Greece leaving, but it didn’t happen. Then – as I argued last Sunday – we got Brexit, Trump, a radicalized Erdogan and PiS in Poland, and voters (actual and in opinion polls) in Western European seemed to pull back from the populists once they saw their unpleasant faces.

It seems an odd time to double-down on people’s long-held (but misplaced) skepticism towards the political commitment to the European project.

But there is one odd – if not completely serious – thing about Italy: By most important indicators and any casual observation, life is very good in Italy – but Italians are still a rather unhappy bunch:

This past week, the new “Bloomberg Global Health Index” was released, ranking 163 countries according to life expectancy, a number of debilitating diseases, including mental health, quality of air and water, etc.

Coming out on top, as the world’s healthiest people, came Italy! – ahead of Iceland and Switzerland and with France and Germany at number 14 and 16, respectively, ahead of the UK (number 23) and the US (34).
https://www.bloomberg.com/news/articles/2017-03-20/italy-s-struggling-economy-has-world-s-healthiest-people .

Are Italians happy about that? Apparently not! Also released this past week was the “World Happiness Report 2017” (where health is a major component, but it’s supplemented with a number of surveys on how people feel), and Italy ranks a pathetic 48.

There is no country in the world with such divergence between health and happiness! Maybe Italians read too many Anglo-Saxon and German tabloids, which seem to keep telling them that they are miserable?

Or maybe the Happiness Index got it all wrong this year – after all, Denmark was dethroned by Norway for the first time. By Norway! How can they be happy up there in the rain, living by EU rules, paying into the EU budget, but having zero influence? Funny world. http://worldhappiness.report/

And on that note, my apologies for what become a rather lengthy Sunday note (but it’s important issues!) – I’m off for a long walk along the Thames. Tomorrow, you’ll see me enjoy some of that healthy Italian life style (in Milan).



Thank you Erik for another stimulating and thought provoking piece.
Tommaso Arenare


On President-elect Donald J Trump, the Simpsons, Leonard Cohen and making sense of it all through the clarity of Erik Nielsen

In times of uncertainty, Erik Fossing Nielsen, Global Chief Economist of Unicredit, is for me once again an example of clarity.

Let me entirely quote Erik’s first “Sunday Wrap” post the election of Donald J. Trump.

Happy Sunday –
– if that’s the right greeting today, the first anniversary of the multiple terror attacks in Paris. It seems a good time to think of the victims and their families and friends, and to reflect on the challenges facing our Western democracies.

Not entirely unrelated, Donald Trump won the US election on Tuesday, and the world went crazy with stories of how wrong the polls had been about this “populist wave” sweeping America, and how – in extension of Brexit – Europe is about to fall to nationalism and populism as well.

Markets reacted broadly as expected (risk-off) – for the grand total of about five hours. Then Trump delivered his victory speech (in which the campaign’s mostly kindergarten language was replaced by standard presidential victory stuff), people concluded that Trump will be a relatively traditional GOP president, Carl Icahn announced that he had walked out of the victory party to buy a billion dollars worth of US stocks, and equities rallied, the long end of the treasury curve sold off dramatically, the dollar got stronger and EM weakness continued.


There are certainly reasons to think that the Trump presidency will be less bizarre than what he outlined during the campaign, but I’m amazed by the general comfort expressed in markets by what could become the biggest shift in American domestic and foreign policy since the Second World War, and – maybe even more importantly – steered by a reality TV star, who has never held public office, never has been involved in public policy, who has a somewhat questionable business record (with due respect to all the money he has made), facing tens of legal actions against him, and with a rather erratic behavior and word choice the moment he gets away from his handlers.

Maybe it’ll all end well, but at this stage, optimism must depend more on belief than on knowledge or analysis. So let me bookend today’s note with pieces of wisdom from two of my heroes from the creative world, hoping they’ll provide some guidance:

In 2000, The Simpsons had a now famous episode called “Bart to the future.” In this prophecy, Simpsons writer Dan Greaney predicted that Donald Trump would be president one day (he has this week explained that he was just trying to come up with the most absurd idea possible.) The episode deals with the immediate aftermath of the Trump presidency, when Lisa Simpson has been elected president. As she settles in to the Oval Office, she complains that she has “inherited quite a budget crunch from President Trump.”

Did Greaney maybe see the future back then: Trump presidency, irresponsible budget expansion, and a woman to replace him to sort out his mess?

  • I’ll first briefly argue why you don’t need to worry that the US “populist wave” will wash ashore in Europe.
  • I’ll then outline why you do need to worry about Trump, maybe not for the very short term (although not even sure about that), but for the medium term – and for the democratic world more broadly.

1. Don’t worry about Europe.

I’m going to make two key points in this section: First, in spite of the outcome of the election, the US is not experiencing a “populist wave”, and second, European democracies are designed (maybe by luck) in a way that prevents an extremist (or a TV star with no coherent policy vision) from gaining measurable power.

First, forget about the headlines: There is no “populist wave” in America. Yes, Trump won against the odds, but – as I noted last Sunday – going into the election, the serious aggregators of polls in the US had his chances of winning at about one third, (a number that changed quite a bit during the last weeks as the FBI announced new concerns about Clinton’s emails, and then – not really.) Stating the obvious: A one third probability comes out every … three … times. So it was not that surprising, after all.

Turning to the actual outcome, Trump’s victory was not a big nationalist or anti-establishment movement rolling across the US – but Trump may choose to interpret it that way and act accordingly. (I see some similarity here with the Brexit vote and Theresa May’s interpretation of it, as laid out in Birmingham.)

While Trump won the election by gaining more electoral college votes than Hillary Clinton, he still lost the popular vote – as have the Republicans in seven out of the last eight presidential elections. On the latest numbers, Clinton won about 400,000 more votes than Trump, and the estimate (when mailed-in votes are all counted) is that she’ll end up having beaten Trump by about 2% in terms of actual votes. Trump got fewer votes than Romney did in 2012, and even less than McCain in 2008. So, I fail to see the “wave” of populism here.

Also, in spite of the fact that US presidential elections increasingly resemble a TV reality show, American democracy continues to be characterized by a shocking decree of apathy in the population. Even with all the hype about Trump getting new voters out, only 55% of eligible voters actually voted on Tuesday. In terms of numbers, Trump’s 59 million votes represent only about 27% of the 219 million eligible voters, who could have gone to express their protest against the establishment in hope for the “I’m Your Man” who claimed to be able to fix it all! And those 27% surely include a large number of traditional “establishment” Republicans, who are far from being populists.

So is that it? Some unknown fraction of 27% of eligible voters is all the anti-establishment movement could muster? Not much of a wave in my opinion!

But given the somewhat peculiar design of American democracy (designed in 1787 and never revised), marred by the two most unpopular candidates in history, that’s what it took to propel a TV star to power.

Second, such a rise of a completely inexperienced populist is very unlikely to be repeated in Europe for at least three reasons:

(i) While there is good evidence that some European countries include a bigger share of extreme-leaning voters than, say, maybe the 14% in the US (I’m generously guessing that half the Trump votes were extreme protest votes), any fraction of extremists below 30%-40% won’t come to significant power in Europe because of our different electoral systems.

Remember, there is no case of extreme politicians hijacking existing parties in Europe, like Trump master-minded his hostile take-over of the GOP in the US, so their only realistic way to power is via the establishment of a new party – which is time consuming and generally complicated.

Of course, new extreme parties have been formed in most European countries, and they have made an impact. Mainstream parties have adjusted their policies somewhat, particularly on immigration, to stem the rise of these new parties. You can think of this as an unfortunately slippery slope towards less good policies by the mainstream in power, and/or you can think of it as a useful safety valve in the system. In one extreme case (the UK), the newcomers (Ukip) didn’t gain power, but eroded the historically weak spine when it comes to EU policies of an existing party (the Tories). But there is no similar picture anywhere else in Europe.

Getting to power via a new party requires a large share of the public vote. Even in France, where Marine Le Pen is expected to make the second round of the presidential elections next year, opinion polls show that it’ll take an exceptionally weak alternative candidate for her to win the final prize. The most recent regional elections may be the best guide: After the first round, Le Front Nationale was leading in half the French regions, but mainstream parties then cooperated in the critical regions, and the Front failed to win a single one of them, including where Marine Le Pen was the candidate.

And even if Le Pen were to win the presidency (terrible as that would be), she would still have to rely on parliament to an entirely different decree than Trump has to deal with Congress, where “his” party has a majority. I remind you that in spite of all the huffing and puffing about the Front, they have just two members of parliament. There is a very long way to go for them to win serious power in France!

But much of the media love contagion story. Here is what has driven me completely mad: Even otherwise well informed media have drawn parallels between Trump (after Brexit) and the upcoming Italian referendum. As you hopefully know, the Italian referendum is about simplifying governance and has absolutely nothing to do with populism. I hope Renzi wins the referendum because it’ll then become easier to get reforms through, but if he doesn’t, it’ll be “more of the same”, rather than a sign of any “populist wave” (certainly, the several respected Italians who, for various reasons, say they’ll vote “no”, would surely object to being thought of as part of a populist wave.)

(ii) Freewheeling US television, where news and views are increasingly being mixed in programs, with no regulatory oversight, surely played a role in the rise of Donald Trump. No European country suffers this degree of unaccountability in television with comparable politically bias at several TV stations. (Yes, Trump’s use of social media also helped, but here I’m sure European politicians are learning the lesson real fast.)

(iii) The frequently suggested “inspiration” from Trump’s victory to Europe’s nationalists is not a concern for me, at all. Plain and simple, for that channel to work, the nationalist experiment in Trump’s US (or in the UK, on its way out of the EU) will need to show reasonable signs of economic and political success to become models for European nationalists. Personally, I have no doubt about the effects on growth and income distribution of nationalistic policies, so no worries here. (Immigration is a more complex issue, which mainstream European politicians will need to address – and for now it looks like they are doing so with a good degree of success.)

2. The worries about Trump’s America.

Importantly, I do not intend to make any projection of the future here; the uncertainties are simply too great at this stage. Instead, I’ll highlight what I like and what I don’t like from what I have seen so far with some suggestions of what I’ll look out for: in coming months:

First, in terms of who’ll actually run things, we’ll need to wait and see the key government appointments, both to key departments, but also to the White House. The transition team got off to a rocky start, with VP-elect Pence quickly replacing Christie as chairman – a change reportedly masterminded by Jared Kushner (Trump’s son-in-law), whose family has a long running conflict with Christie.

I’m not sure if Pence’s elevation in the transition team is good or bad news because both are experienced lawmakers (with a broadly equally conservative political tilt.) Maybe more importantly is the position of the Trump dynasty. I was stunned to see that all three of Trump’s adult children, as well as son-in-law Kushner, are on the transition team. Such family involvement in key appointments is unheard of in the US, and – frankly – resembles more family dynasties in developing countries than that of a mature democracy.

Second, on economic policies, it seems relatively clear that we’ll get some fiscal expansion, including both tax cuts (mostly for firms) and a spending boost for infrastructure and defense. The announced order of magnitude is an eye-watering USD 1 trillion, but Congressional leaders, including Mitch McConnell, have warned against too much deficit spending.

I don’t know what share of his fantastic spending plans Trump will get through Congress, but I would be surprised if it’s not a decent chunk. Standing up to a new president, who won against the odds, and helped deliver a majority in Congress, is not straight forward, I suppose. But to what degree Trump will fight for a big number, or “cut a deal” I don’t know. (I just can’t wait to hear the Gobbledigook from Paul Ryan and other deficit hawks when they explain why they now support a larger deficit.)

This will increase the probability of the US extending its growth run through 2017 and into 2018 – but fuelling the economy at this late in the cycle with debt-financed stimulus will significantly increase the probability of a hard landing in 2-3 years.

Third, there is a high probability of liberalization, particularly of environmental standards, to encourage energy production, but possibly also for the financial sector. That’s all good for (at least short-term) growth, but it also tends to lead to further concentration of industries in these sectors, an issue which is increasingly weighing on US competitiveness, and fuelling profits over wage growth.

Globally, I’m more worried because of the measurable probability that we are facing the end of US leadership. While there have been some serious misfiring in US foreign policies in the past, and Continental Europe has been perfectly capable of leading it’s own foreign policies, sometimes to better effect than what comes out of Washington with usual support from London (e.g. the Ost-Politik in the 1970-80s, the opposition to the Iraq war, the Iran nuclear agreement and to some extent the Minsk agreement), I don’t think there is any doubt that the democratic world would benefit from continued US leadership. But the prospects are not good.

On trade, I think it’s a given now that TPP won’t be ratified, TTIP ends right here, and NAFTA will probably see some (minor) amendments. Will the US really walk away from the Paris climate deal? I just don’t know. Even China is warning against this prospect. And will Trump really try to amend or cancel the Iran agreement (which is a multilateral – not bilateral – agreement)? Maybe. And Russia/Ukraine? Trump has a peculiar relationship with Russia, which I suspect goes well beyond what is publicly known. We’ll see – but Europe will (wisely) renew the sanctions in December.

Here is my point: A big fiscal boost will help the US economy for a year or two, and facilitate normalization of interest rates by the Fed. This lends support to a bullish view of equities (particularly in energy and construction) – at least so long as people don’t start to worry too much about the expansion of public debt (presently at 114% of GDP!) or the increasing probability of a hard landing.

This will push the treasury curve upwards, probably with further steepening to come. The dollar may well remain strong in this scenario, also because of expected tax-related corporate profit repatriations.

But the steam won’t last. When exactly the roof comes down, I don’t know. It’ll depend largely on the “standing” of the president, the route he takes on international trade, as well as on the type of fiscal measures.

The bigger questions, therefore, are:

(i) How will Trump fare on the policy front while fighting an estimated 50-70 existing private legal cases? The US has never had an incoming president so challenged in court (he’ll next appear in court in early January before taking office, but this will occupy his time for months or years to come, unless he manages to settle – assuming he can afford it.)

(ii) How long he’ll remain interested in policy making, and might he zoom out when he realizes that dealing with even a GOP-dominated Congress is somewhat different (and surely less enjoyable for a man with his temperament) from dealing with sub-contractors on a building site?

(iii) How will he react if his relationships with key Russians are indeed more complex than known, and it is made public? Key commentators have suggested that the Russian connection could be the real reason why he refused to make his tax returns public.

(iv) How will he respond to his core voters in the Mid-West (and the rust belt) when they do not see the promised results from his campaign? He has already run into problems on the fiscal stimulus plans, he has said – after meeting Obama – that he no longer wants to repeal ObamaCare, just fix some parts of it, and key advisors have said that there’ll be no wall on the Mexican border.

So many questions and issues. Respected commentators, including David Brooks, traditionally a conservative, have suggested that Trump might resign or be impeached within a year. No serious person has ever before suggested that about a president-elect.

Trump may embrace a big part of the traditional GOP, but he will not be a “traditional president” – and I don’t mean that positively in terms of market stability – volatility is likely to be the name of the game for some time.

So, struggling a bit to put it all together, let me return to how the world of art often proves visionary. My beloved Leonard Cohen died on Monday, the day before we experienced what he might have had in mind when he – in 1988 – published the following on his “I’m Your Man” album:

Everybody knows that the dice are loaded

Everybody rolls with their fingers crossed

Everybody knows that the war is over

Everybody knows the good guys lost

Everybody knows the fight was fixed

The poor stay poor, the rich get rich

That’s how it goes

Everybody knows

But don’t despair and certainly don’t give up. Just four years later (which happens to be the length of a normal presidential term!) in 1992, Leonard Cohen enriched us with this wonderful encouragement and observation (from Anthem on The Future album):

Ring the bells that still can ring

Forget your perfect offering

There is a crack in everything

That’s how the light gets in.

So, on that note, I’ll walk out and enjoy the lovely autumn weather here in Chiswick, thinking about the many affected by the terror a year ago – and waiting for the cracks in today’s set-up to show, because they will. Light will get in…



Thank you Erik for another stimulating and thought provoking piece.
Tommaso Arenare


On Brexit, the UK and what would happen if…

When it comes to the prospect of the UK voting to leave the European Union, it’s hard to keep a balanced view.

I am privileged to trust Erik F. Nielsen highly. As this Open Thinking did on another occasion (that time we were debating rating agencies and a little bias they might have against Italy), we love to let Erik’s “Sunday Wrap” of 24 April 2016 speak clearly, about why the so-called Brexit would be a much worse prospect for the UK than it would be for the EU.



“The number one topic – by a mile – among investors, policymakers and anyone else I come across these days, in London and across the Continent, is the issue of Brexit. The key questions I hear are: Will they or won’t they? And what happens if they leave?  Let me summarise:


(i)       I still think the UK will vote to remain in the EU.

While I worry about the impact of the Panama Papers on Cameron’s ability to persuade people on the issue of Europe and prevent the vote becoming about him, on balance, I continue to think that the Brits will vote to stay in the EU. This past week, the “Remain” campaign received what ought to be a big boost from Obama. 
Opinion polls continue to suggest a close race, but with a large number of undecided voters. Interestingly, when the undecided voters are asked which way they are leaning, they tilt quite heavily towards staying, they say. 
But we have seen several referenda on European issues turn into a de facto vote on the sitting political leadership (in Denmark it has happened virtually every time, as it did in the Netherlands and France), so if Cameron has been more severely damaged by the Panama Papers, we may have a problem. Comfortingly, the UK bookmakers keep making odds with an implied probability of staying in the EU of about 70%.
More fundamentally, while the Brits still struggle with their perception of their own place in today’s world, I just cannot believe that a majority is so deluded that they think they would be better off outside the EU, thus ignoring the opinions of practically all the UK’s foreign allies as well as the vast majority of UK business leaders and UK and international economists.
Latest, this week President Obama killed any claim by the “Leave” campaign that there would be an easy way for the UK outside the EU to a trade agreement with the US. As he said, the US would want to negotiate with the bigger economies, like the EU, while the UK would be “at the end of the queue” (note his use of the British version of what they call “the end of the line” in the US – either because he wanted to be sure the Brits understood him, or maybe because he used a line suggested by Cameron?) He later suggested that it might take about 10 years to get to such a trade agreement. That seems a reasonable (if not even optimistic) estimate when you recall that it took seven years for the EU to get a trade agreement with Canada – and no free trade agreement in the world comes close to the Single Market for services, which is crucial to UK trade and the City of London.
Obama’s clarification of trade, as well as his elegant response to Boris Johnson’s claim in a newspaper column on Friday that the placement in the White House of a bust of Winston Churchill somehow reflects Obama’s anti-British bias, left the London mayor, and leading Brexit campaigner, on the back foot as poorly informed – and that’s to put it politely. If you are interested in a more robust rebuttal of Boris Johnson’s attack on Obama, Nick Cohen’s piece in The Spectator (which Johnson used to be the editor of) is worth reading: http://blogs.spectator.co.uk/2016/04/barack-obama-wants-boris-johnson-prefer-gutter/
That said, a YouGov poll after Obama’s and Cameron’s press conference (curiously asking what people thought of Obama’s “intervention in the EU referendum campaign”, rather than e.g. “how the US thinks of the issue” or “how the US would react to Brexit”) suggested that 41% of Brits were “angered” or “annoyed” by Obama’s “intervention”, while 28% were “pleased” or “inspired” (22% didn’t care and just 3% hadn’t noticed.) However, I suspect the 41% “angered” or “annoyed” are those who anyway had decided to vote to leave.
After having had a nice cup of tea with the Queen and the royal family to celebrate her 90th birthday, Obama continued today to Hannover, Germany, where he’ll join Merkel tonight when they open the 2016 Hannover Messe – the world’s biggest industrial technology fair. I suspect the conversation on Airforce One on the short flight today will have been along the lines of “now we have helped pull Cameron’s political chestnuts out of the fire, let’s get down to the more important, forward looking, business in Germany.”
(ii)      But what if it all does go wrong, and the UK votes to leave the EU?


To be sure, nobody knows for sure what exactly will happen following a vote to leave, but here is our best guess:
Cameron will announce his resignation, which will trigger a Conservative leadership election, which will take 3-6 months to complete. (Cameron will remain during this period as caretaker PM.) The next leader could be Boris Johnson, who’ll claim he won (after having switched from being generally pro-Europe to lead the Brexit campaign), or it could be Theresa May (who used to be quite anti-European, but switched to the “Remain” side, after a similar considerations as Boris Johnson’s – but with the opposite outcome.) Or it could be someone else, less well known.
The new government will face a dilemma on how to start the exit negotiations. 
On the one hand, they may be keen to get down to business and would therefore probably invoke Article 50 of the Lisbon Treaty very quickly after taking office; i.e. formally notify the EU that they want to leave, which starts a clock allowing two years to negotiate what will surely be very complex withdrawal agreement with the remaining (now probably not very friendly) 27 EU member states. If they don’t manage to complete negotiations within the two years, it’ll require a unanimous agreement by all 27 EU states to extend the talks. This would put the UK in a very difficult – and indeed commercially and economically dangerous – position because without an agreement it would well leave the UK on their own with no arrangements for trade and other commercial interactions with anyone. (EU legislation will continue to apply to the UK during the time it takes to negotiate a new agreement, or for two years after Article 50 has been invoked, whatever comes first.) 


Alternatively, the new UK government could delay Article 50, while trying to start exit negotiations on a technical level, and only invoke Article 50 when they are confident that an agreement is in sight. But then again, the rest of the EU would know this game just as well, and might very well refuse such “theoretical” negotiations until Article 50 has been invoked. My point is this: Whichever way the UK plays it post-Brexit vote, they’ll be in a very uncomfortable spot, and de facto at the mercy of every single other 27 EU member state.
Our UK Lead Economist – and laser-beam focused Brexit Watcher – Daniel Vernazza argues that the outcome of exit negotiations will likely leave the UK trading under World Trade Organization (WTO) rules; that is, outside the European Single Market where goods and services trade freely. As he notes, access to the Single Market is incompatible with the “Leave” campaign’s desire to end the free movement of people, contributions to the EU budget, and EU regulation. The only two large non-EU countries with access to the Single Market, Norway and Switzerland, both have free movement and both pay into the EU budget.
So there you have it: Huge uncertainty for years – my guess would be a massively weaker pound (20% down in trade-weighed terms – probably less against the euro?), massively weaker UK equities (10%-20% down?), lower house prices in London – and a big sell-off of gilt, which would be countered to some extent by a new dose of QE, which, with the inevitably larger budget deficit, would come about as close to helicopter money as you’ll ever see. The wealth destruction would almost certainly send the UK back into recession (which means that the fear of Brexit leading to other countries wanting to follow the UK out seems widely off the mark to me.)


The long-term economic impact for the UK of leaving the EU is surely negative. We estimate it would be a net cost to the UK economy equivalent to around 6% of GDP over the next 10-15 years, a similar magnitude to that of the UK Treasury’s estimate.  If you don’t think that’s a lot, then I encourage you to suggest realistic policy measures, which would lift GDP by that amount in perpetuity.


I hear a lot of suggestions that the rest of Europe would suffer significantly as well, and maybe even as much as the UK – although this is an argument more often heard in the UK than on the Continent. I don’t buy it. Europe would be hit by volatility for sure, but the longer-term negative effects would disappear in noise. After all, the EU would maintain all its external trade agreements (apart from with the UK), and possibly trade at a weaker euro. The UK would left for maybe 7-10 years with no trade agreements with anyone, which is not easily compensated for by a weaker pound.”

Thank you Erik.

Tommaso Arenare


Ambassadors of merit (reloaded)

In July 2012 Valore D, the Italian association of businesses to support the talent of women, launched “In the Boardroom”, a programme to select and train the best Non-Executive Directors.

In the Boardroom was designed by Valore D, with the support of GE Capital, at the initiative of Linklaters and Egon Zehnder, our Firm. Together with Linklaters, we selected and provided all key faculty members.

In The Boardroom was meant to select and promote “Ambassadors of Merit“, ready to change Italy’s corporate governance for the better, as a result of the huge opportunity represented by a super modern law (that came into effect in 2012) fostering gender diversity in the boardroom (read here for the beneficial effects of this law).


Italy is today a positive example of an improving corporate governance in Europe and beyond. Women as a crucial factor of positive change have given such a strong contribution to this that we are well beyond the turning point.

On 20 and 21 November 2015, we celebrated the conclusion of In the Boardroom, which was launched in July 2012. Ever since, it has helped well over 500 talented women prepare for the role of Non Executive Director.

Of those, a significant number are now Non-Executive Directors.

I feel humbled by the exceptional contribution of so many talented women. They have set the example for everyone in terms of dedication, willingness to prepare for roles where now merit and competencies have replaced “word of mouth” as a key to rigorous selection. Women mean merit, competence and better corporate governance. In summary, more women in leadership means huge change for the better.

The next step is now to continue to work to foster the benefits of gender diversity, and diversity at large, also when it comes to executive positions. “In The Boardroom” has been an exceptional factor and its effects will be felt for many years to come.

Tommaso Arenare


Identify, Involve, Inspire: How Successful Leaders Build an Effective Relationship with Stakeholders

In my profession, I have been privileged to see many great business leaders succeed in their role.


Many traits mark a great business leader. This one I want to explore now:

How can successful leaders establish a fruitful relationship with all key stakeholders, which will in turn determine their own success in a new role?

We have already written that, in many ways, the week before a new job starts is crucial for its long-term success. Preparing our own analysis of the role and the company’s situation and mapping the stakeholders is the basis of a pre-work that anyone appointed in a position of leadership will need to do before the new job even starts.

Doing this effectively and with purpose requires, in essence, the ability to build effective relationships with the relevant stakeholders through identifying, involving and inspiring them. Let’s see how.

1. Identify

Let us ask ourselves first of all this question:

Who are the people that have a clear say in determining whether I am successful in the new role?

Part of them will be shareholders, part of them will be team members, part of them will be peers in and outside the company. In most cases, a significant group of those will include external stakeholders like influential journalists or industry experts.

When it comes to identifying stakeholders, a typical mistake would be to focus exclusively on colleagues or people that may have a sort of guidance or leadership role towards us. So, for example, a Chief Executive would only focus on the Chair of the board or on other fellow board members, as well as stakeholders, but without paying attention to their own team members. Instead, including our own direct reports is crucial. So many CEOs have lost their job as a result of not identifying crucial stakeholders amongst their own reports.

We want to map them carefully, thoroughly and prioritise them so that we get to a list of no less than ten and no more than about twenty of them. I often recommend a very simple spreadsheet, listing all of them by name, role, with one line of comments and “next actions” just next to their name. Most importantly, I recommend one column with a priority number next to each of them. This is a very simple tool which will help us keep our list fresh, change it, re-prioritise it, always making sure that we can add new stakeholders, remove some old ones and manage their expectations effectively and timely.

2. Involve

Once we have identified and prioritised them, we want to involve them, by doing the following:

  • Listen to them carefully. We want to learn from them and to make them feel involved in our own success. This implies, before we start in the new role, that we take the time for a personal interaction with each of them. We need to sit with them and ask such questions as:

If you were to consider me very successful in my role, what would you expect to happen within the next 12 months?

  • Inform & involve them regularly: as all of us, stakeholders want to feel involved and do not like surprises, ever less so if negative. Keeping them involved will require regular “check-ins” with each of them separately. This can happen by a conversation in person as well as by phone or other form. Yet, it will all depend on what type of relationship we’ve been able to build with each of them. Hence, the more we invest in building trust and relationships upfront, the better and the easier it will become to keep our stakeholders involved. Also, the type and form of involvement will depend on the level of priority that we will have been able to attribute to each of them.

3. Inspire

Great leaders become such also as they are able to inspire their own stakeholders. A very prerequisite for accepting a new leadership role is that the overall group of stakeholders who’ve engaged us needs to consist of people we like and we can inspire. Otherwise, we would have rather not taken the job in the first place.

Hence, building a relationship of trust and substance with them will need to be something we aspire to do as well as something we like to do. Inspiring our own key stakeholders will take our greatest ability to build bridges of trust with them, as well as nurturing our relationship with a regular dialogue of substance.

We will inform them, but we will also seek their advice when appropriate. In some cases, it will  be crucial to be able to show our own vulnerability, which can result into a sign of greater strength. As we dialogue with them, we will realise that we will also strongly contribute to influencing and defining the very same criteria they will use to define our own success. This will lay a much more solid foundation for our long term future in the role.

It is difficult to overemphasise how many great people have failed as Chief Executives (and even more so in different roles) for lack of thorough identification, involvement and inspiration of key stakeholders.

As we do the above, we lay the foundation for a much easier and more secure path to our own success as executives and leaders.

Tommaso Arenare


This post was also published on LinkedIn.

“Four reasons to quit your job” (& a fifth to find and keep a good one)

This is Jack & Suzy Welch’s “Four reasons to quit your job”.

It makes interesting reading.

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I would add a fifth, perhaps even simpler thought, by just reversing the point. We want to achieve, and keep, a job that helps us address the one fundamental question, which I call “the positioning question”:

“Who do we want to be, and, most importantly, for whom? Whose needs we want to address in what we do everyday?”

This, we know, will relate ever more to “people”. We want to keep a job where we address the needs of people we like, as this will, almost inevitably, turn out to make us happy.

Good luck with that.

Tommaso Arenare


On sovereign ratings of Italy, perhaps a little, unconscious bias & a rare economist I trust

…if you had paid any attention to the ratings these past few years you would have lost a lot of money…

Erik F. Nielsen’s “Sunday Wrap Up” tackles, today, Italy’s sovereign debt downgrading.


Once again, I love Erik’s clarity on the subject. I will let him speak, then:

S&P downgrades Italy

On Friday, Standard & Poors cut Italy’s sovereign credit rating from BBB to BBB-, citing weak growth and poor competitiveness, which are seen as undermining the sovereign debt sustainability. (Little appreciation for the fact that some of the growth problems should be temporary due to recent years’ ambitious fiscal policies.)

It is a peculiar decision, which does not reflect any new hard information, but rather the lack of visibility in that smoky room in which the rating agencies’ credit committees over-ride the analysts’ objective data input.

In a paper Daniel Vernazza, Vas Gkionakis and I published in March (“The Damaging Bias of Sovereign Ratings”; UniCredit Global Themes Series; 26 March 2014) we documented how systematically wrong the agencies’ “subjective component” (i.e. the committees’ over-riding of the “objective input”) has been over the years. (As you may recall, our paper received a lot of media attention, and has since been quoted by several academics. The three major rating agencies received plenty of invitations to respond, which they didn’t do beyond some brief statements to the FT that this couldn’t be right … well, it is.)

But here is the biggest picture: Having been badly burned during the Asian crisis, the three major agencies took no chance once the European crisis emerged, massively downgrading the periphery between 2009-11 – de facto running after markets, of course. Of course, if you had paid any attention to the ratings these past few years you would have lost a lot of money.

There were two key consequences of those massive downgrades: First the tragic one. Because regulations remain tied to ratings (that regulation indeed ties its policy to judgements by a for-profit oligopoly with terrible track records remains beyond me), a whopping USD 1.5 trillion was withdrawn from the periphery during this period, seriously worsening the crisis.

Second, having ignored their own data input during those three years, the ratings for the Eurozone periphery ended up 4-5 notches below what the three rating agencies’ own published data input for the ratings told them the ratings should have been. Since then, we have seen several upgrades of the periphery as the process of reparation of their past mistake got under way. Struggling to understand Italy keeps Italy 3-4 notches under-rated compared to its fundamentals, as defined by the rating agencies’ own manuals.

Italy surely has a lot of issues, but the rating agencies’ obsession with the public debt numbers is out of proportion. First, they ignore that the debt is owed primarily to domestic Italians (vastly reducing the amount of resources having to be transferred abroad, and vastly reducing any government’s incentive to restructure). Second, they ignore the fact that the Italian government’s contingent liabilities (including future pensions and healthcare) are among the lowest in the OECD. Indeed if you add explicit and implicit liabilities, the Italian government is about the least indebted government in the OECD (I am not arguing that a simple addition is appropriate, but ignoring contingent liabilities surely isn’t appropriate either.)

We economists all make mistakes, and when we meet at various conferences most of us usually have a good discussion of what went right and what went wrong – and we learn something from it. We all know it’s a probability game, but here is the point: The probability of getting it right improves when you stick to the data input. When you don’t, well then its “just an opinion” based on little facts – and, hey, that’s fine too, if anyone cares to listen. That our policymakers continue to tie regulation to “just opinions” by a few for-profit-agencies (with quite limited budgets for macro research), thereby impacting systemically important capital flows, is a travesty.

Until they change this link, we’ll live in a world with unnecessary volatility and systemic risks – and “real money” guys struggling to make a return for their pensioners.

Thank you Erik.

Tommaso Arenare


“Il confronto”

This time a little exception. I wish to reblog a post, in Italian, I had the honour of writing for LeadingMyself, a blog on a number of topics very dear to me


Cosa ci piace della diversità di genere? Cosa porta beneficio a tutti e ci fa essere grati alle donne per il contributo che danno a una leadership migliore?

La mia risposta è semplice: dalla diversità di genere viene una spinta quasi inesorabile a uscire da quella che chiamiamo “zona di comfort” ovvero zona di comodità. Cos’è la zona di comfort? Cosa c’entra, poi, con le donne e la leadership?

Ho più volte avuto modo di dire che il cervello degli esseri umani, il nostro cervello, si è formato nel corso di molte migliaia di anni. È ancora lo stesso cervello che ci aiutava, quando vivevamo nelle savane e in piccoli gruppi familiari, a riconoscere il pericolo che ci veniva presentato negli incontri con altri esseri umani o con animali. In quelle circostanze, la nostra priorità era decidere, in una frazione di secondo, se accogliere l’essere vivente che avevamo di fronte…

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Italian reforms: The naysayers are at it again, but they are wrong.

This time, I will entirely borrow from a person I trust and consider highly. Erik F Nielsen is Unicredit’s Global Chief Economist, someone whose vision and insight has proven super valid in many different instances.


Here’s a short and punchy excerpt, from his most recent “Sunday Wrap”

 …the Italian growth story is different from – and considerably more complex than – the other big Eurozone countries. Italians who work (but too many don’t) put in plenty of hours, indeed broadly at par with the US and Japan, but they produce less per hour worked than the US, Germany and France – although considerably more than what’s produced per hour in the UK (and Japan), so its far from hopeless.

I am not going to write here the entire prescription for why that is so, but just note that to fix it and to transform Italy into a modern and globally competitive economy, a comprehensive reform agenda is needed – and that the Renzi government is on the case, rolling out an impressive set of reforms.

Part of the popular media and many of the commentariat continue to seem confused, or to demand unreasonably fast implementation. Let me just highlight two areas which receive a lot of attention right now, and where I think a lot of people don’t get it, namely labor market reforms and tax compliance:

First, on Thursday, the Italian government agreed to PD backbenchers’ demand that the change to the infamous Article 18 (that you cannot be fired for discriminatory or unjust disciplinary reason) will be formalized with an explicit amendment to the enabling laws for the incoming single Job Act. This “concession” led the usual gang of naysayers to suggest that Italian labor reforms have been watered down to a meaningless level. Never missing an interesting twist to the news, Euro-Intelligence claimed that “Renzi makes another important concession to the PD rebels in the debate on labor reforms”.

With all respect, I think this interpretation is nuts. If you disagree and see this change as a troublesome concession, I suggest that you remind yourself of the countries in the world that allow dismissal of workers based on discrimination or as an unjust disciplinary action – and maybe consider whether those are countries you’d like to live in – or invest in.

Second, with the Renzi government’s recent high-profile crackdown on tax cheaters, you hear a lot of nonsense about tax compliance and Italy’s supposed inability to collect revenues, which then – supposedly – is a cause of fiscal problems.

So, let’s set the record straight: On IMF data, the Italian (general) government collected 51.5% of GDP in revenues last year, which compares with, e.g. 44.7% in Germany, and 49.7% in Austria – and, not to put a too fine print on it, 33.7% in Ireland and 43.6% in Luxembourg, both presently under investigation for having agreed to competition-distorting tax cuts for companies, or 44.4% in the Netherlands, presently under investigation for allowing Starbucks strangely high write-offs for the risk associated with their coffee roasting operations (call me if you want to hear my view on the real issue with Starbucks roasting technique!)

My point is this: Italy has no problem collecting taxes; if anything, it collects too much, not too little, from the economy. The problem lies with the difference between what should be paid, according to the law (and by whom), and what actually is being paid – and by whom. In other words, it’s about fairness, and the possibility of lowering tax rates on the economy as a whole, if everyone pays what they are supposed to pay. Raising the tax compliance ratio without cutting other taxes would imply another fiscal tightening, which is hardly what Italy needs now.

Of course, making society comply with the law also requires a well functioning judiciary system, which is another Italian weakness – and another area where the Renzi government is making good progress.

Rome wasn’t built in one day – but once it was done, man, what a beautiful place it was…

Tommaso Arenare