Comparing Italy and Spain in the Eurozone Crisis

As it is well known, the austerity measures, imposed by Germany (and the Nordic satellites) everywhere in Europe, caused, in the seven years from 2007 to 2014, a drop of GDP in all euro-south countries, with Greece which had the most severe decline (about a quarter of GDP). After Greece Italy suffered the stronger fall (about 10%), while the two Iberian countries had a decrease of 5-6%.

While we wait to see how the standoff between Berlin and Athens will end, it may be interesting to compare the two largest economies in the euro-south, Italy and Spain. Italian GDP is the third euro-zone (over 1.6 trillion), the Spanish one is about two-thirds, but Spanish GDP per capita is 86% of the Italian one. The two countries, unlike Greece and Portugal, and also Ireland, have always remained into the market, in order to finance their debt, and their spreads relative to Germany ranged up and down with a high degree of correlation. In some periods the Italian spread was higher, in others lower, but the general movement was always synchronized; currently both spreads are located around one hundred basis points.

If we put aside the year 2009, where the recession involved virtually all over the world, and we consider the four years from 2010 to 2014, we can see that both countries have had an overall fall in GDP: Italy -4.3% and Spain -2,5%. The cumulative budget deficit in the four years amounted to 12.3 points for Italy but more that double (32.2) points for Spain. Spain has had an annual average deficit of more than eight points per year compared to slightly over three points of Italy. As a result the ratio of government debt to GDP has grown by nearly 44 points in Spain and by 16 points in Italy. Of course Italy has an higher debt (132%), but now Spain is passing  one hundred per cent; this means that while before the economic crisis Spanish debt (relative to GDP) was 36% of the Italian one, now the proportion rose to 74%.

On the other hand the larger public deficit, which Spain has enjoyed, was one of the reasons that explain why the decline in GDP was lower than that of Italy. The question that one may ask is why Brussels was very condescending towards the Spanish deficit. Perhaps the answer can be found in measures on the labour market that the Rajoy right-wing government of Spain has taken since winning the election. A figure can summarize the effects of the measures: the share of employees remuneration to GDP (including social security contributions) in Spain was 50.1% in 2010 and decreased to 46.9% in 2014; a remarkable decrease of 6.4%. In Italy the share fell very little: from 40% to 39.7%.

Hence this is the reason of the greater benevolence towards Spain, seen as the most diligent student of Germany, on the road to become export-led economy (but it’s a long way). Indeed Spanish exports have grown much (+22.8 in four years), but in truth the performance of the Italian was not so bad: + 17.6%. Anyway, the surplus of the Italian current account balance (last year) was of 31 billion against 9.4 of the Spanish one.

Two months ago the European Commission has shown the last forecast:

As we see the growth forecasts for this year and next are much better for Spain; it is possible, as stated in the Document of Economics and Finance (DEF) presented by the Italian Government, that growth will be imperceptibly higher (0.7), but the distance remains whole. On the other hand between the two countries deficits there is a difference of nearly two-point, and therefore higher expenditure (or less taxation) in Spain than in Italy.

The most interesting thing of the Italian DEF is that the differences between the growth trend of the economy (the one in absence of any new measure) and programmatic (taking into account the measures), are almost null. In 2016 the nominal GDP (real growth + inflation) is expected to grow programmatic by 2.59, slightly lower (-0.38) than the trend (2.97), plausibly because of the dropping of the increase in indirect taxes required by the budget plan of 2014 . This year there is a deficit of 2.6 instead of 2.5, which Matteo Renzi will use for electoral purposes (just over a month there are elections) talking about a "small treasure" of 1.6 billion. He could also add that in 2016 the difference between the two deficit (programmatic minus trend) will be 0.4 (1.8 instead of 1.4) and then the “treasure” rises to 6.5 billion.

But perhaps it is the Minister Padoan who advised caution; waits before the green light from Brussels, since the Italian governments, because in agreement with the fiscal compact, or because afraid of the spread, have adopted the rule of Ignatius of Loyola "perinde ac cadaver" towards the Vatican (in our case, Berlin). Looking hopefully to a benevolent attitude, and invoking the Juncker clause of the reforms, according to the European Commission communication 'Making the best use of the flexibility Within the existing rules of the Stability and Growth Pact' (13 January 2015). The DEF lists various "reforms" that should give important effects in the future, but the one that counts in the eyes of the Commission is the Jobs Act, which obviously should produce the same effects on wages that have occurred in Spain.

If one believes to the Commission’s forecasts (which were almost always too optimistic) Spain in two years will have almost recovered the level of 2007, but for Italy the times are set to be much longer. The unemployment rate will remain in double digits, and it must be remembered that in Italy young people between 15 and 29 who do not study and do not work, the so-called NEET (Not in Education, Employment or Training) account for 26% of the under30, and this, if it were not for Greece (28.9%), would be the record in Europe.