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Friday, July 12, 2013 2:52 PM

Problems in Italy Go On (and On and On); Coalition on Verge of Collapse, Every Economic Statistic Heads Wrong Way

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With a fragile coalition that is barely hanging on by a thread, a new battle over tax hikes and a stick it to the rich mentality is about to set in.

Needing revenue to meet its budget deficit targets, Italy's Finance Undersecretary Says Budget Crunch May Require More From Rich.

Italian Finance Undersecretary Pier Paolo Baretta said the government is considering shifting the tax burden to the wealthy in order to satisfy demands for broad-based fiscal easing and meet its 2013 deficit target.

“The truth is we’ve got a real bottleneck of issues to deal with” this year, Baretta said yesterday in an interview in his office in Rome. In order to raise funds, Italy is seeking spending cuts and may limit the tax deductions higher-income households take on medical visits and other expenses, he said.

Prime Minister Enrico Letta is bracing for a tax-policy showdown that threatens to destabilize his two-month-old parliamentary coalition. Lawmakers in Letta’s alliance have demanded tax cuts and spending measures that, taken together, total more than 7 billion euros ($9 billion). That’s more than Italy can afford as its recession deepens, Baretta said.

Letta, 46, is squeezed between his allies’ calls for stimulus and his commitment to European Union allies to bring the budget deficit below 3 percent of gross domestic product. Baretta, a member of Letta’s Democratic Party who serves under Finance Minister Fabrizio Saccomanni, is helping identify options for savings and additional revenue. The final decisions will be made by Letta’s Cabinet in September or October.

Silvio Berlusconi, the three-time premier and a partner in Letta’s coalition, has pushed for the abolition of property taxes on primary residences, which would cost the state about 4 billion euros annually. Other members of the coalition have called for the cancellation of an increase to the value-added tax planned for Oct. 1. Postponing the VAT increase by three months would cost the government about 1 billion euros.

Italy's Parliament Shut Down By Berlusconi Over Court Ruling

The Huffington Post reports Italy's Parliament Shut Down By Berlusconi's People Of Freedom Party Over Court Ruling
Silvio Berlusconi's party boycotted a summit of Italy's fragile coalition government and blocked parliamentary activity on Wednesday in protest against a supreme court decision to fast track a ruling that could ban him from public office.

Legislative activity in both chambers of parliament was suspended for a day because of the protest by Berlusconi's People of Freedom (PDL) party, one of the two main partners in Enrico Letta's left-right coalition government.

The court decision has aggravated tension in the squabbling coalition which was already under fire for the slow pace of reforms desperately needed to boost recovery from the worst recession since World War Two.

Beppe Grillo, leader of the populist 5-Star Movement which stunned Italy by winning an unprecedented quarter of the vote in a February election, said Italy was heading for catastrophe because of the government's failure to take extraordinary measures to tackle the economy.

He said Italy was like a pressure cooker "on the verge of blowing up" and called on President Giorgio Napolitano to call an election as soon as possible.

The supreme court was forced to issue an unusual statement defending its decision on Tuesday to hear Berlusconi's final appeal on July 30 against a tax fraud conviction. The 76-year-old media magnate's lawyers had not expected a ruling until late in the year.

The court will rule on whether to uphold a four-year jail term and five-year ban on holding public office for complicity in tax fraud at Berlusconi's Mediaset television empire.

Every Economic Statistic Heads Wrong Way

The Globe and Mail reports In Italy, desperation as every statistic heads the wrong way.
In the past two quarters, for instance, hirings in Greece have exceeded firings, even though the economy remains in recession. French manufacturing has apparently stopped contracting and Spanish unemployment, the highest in the Western World, has fallen a bit.

The exception is Italy. Almost every number is going in the wrong direction and a sense of desperation is hitting everyone from retailers and cabinet ministers, who have gone begging to the European Union for job-creation funds, to consumers and manufacturers, whose factory output has fallen by a quarter since the European crisis started in 2008.

Italy matters because it is the euro zone’s third-biggest economy, with a gross domestic product about 20 per cent bigger than Canada’s. Its national debt load, at €2-trillion ($2.7-trillion), is Europe’s biggest. Jobs are vanishing by the minute. Youth unemployment is 40 per cent; it’s 50 per cent in southern Italy, to the delight of crime syndicate recruiters. Confederscenti, the Italian retailers’ association, says that three shops close for every one opening. Parts of some of Italy’s normally vibrant cities are becoming retail deserts.

On May 31, Bank of Italy Governor Ignazio Visco said the recession “threatens to erode social cohesion.” He is evidently worried that Rome could burn like Athens did in the infamous riots of 2012.

According to a recent report by economics professor Paolo Manasse of the University of Bologna published on the economists’ Voxeu.org site, unit labour costs in Italy rose by 35 percentage points between 2000 and 2012. In Germany, the equivalent figure was three percentage points. Over the same period, Italian labour productivity gains were 14 points lower than Germany’s. No wonder Italian industrial production is collapsing, to Germany’s benefit.

Mr. Manasse’s conclusion: “It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, the euro and austerity measures for the current recession. … [But its persistence] is the legacy of more than a decade of a lack of reforms in credit, product and labour markets, which suffocated innovation and productivity growth and resulted in wage dynamics that were completely decoupled from labour productivity.”

Italy Services PMI

Wrapping up this report on Italy let's take a look at the latest Markit/ADACI Italy Services PMI®.
June sees sharpest decrease in business activity for three months

Services PMI


June PMI data signalled accelerated declines in both business activity and employment at Italy’s service providers, while the level of incoming new work in the sector again fell markedly.

Business activity in Italy’s service sector decreased at a faster pace in June, as highlighted by the seasonally adjusted Markit/ADACI Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – falling further below the 50.0 nochange mark, from 46.5 in May to 45.8. This was its lowest reading since March, and one that was indicative of a substantial rate of contraction.

Firms sometimes linked lower output to a lack of incoming new business, which in June fell for the twenty-sixth consecutive month. Although less sharp than in the preceding survey period, the rate of decline in new business was nevertheless still marked relative to the historical standards of the survey.
Mike "Mish" Shedlock

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