"Kee" Points with Jim Kee, Ph.D.


  • Italy
  • Europe and China

Italy


Italy is fighting with European Union (EU) officials over its projected 2019 budget, which has deficits that exceed EU limits. Much of this is due to increased government spending to pay for policies including higher welfare payments to the poor and for reduced retirement ages (Financial Times). My thoughts on all of this were that Italy was just following budget tactics often used within large companies (and I could be wrong). That is, they put in everything but the kitchen sink at the outset and force “management” (the EU) to pare it down until the final budget falls within (or near) EU guidelines. However, so far both sides seem intransigent as they come up against a November 13th deadline under EU rules. If Italy doesn’t adjust its plans, the EU commission will likely launch an “excessive deficit” procedure against the country, which could lead to sanctions (e.g. fines, reduced access to EU funds, closer fiscal monitoring). My guess is that, whether the EU initiates proceedings against Italy or not, both sides will budge a little until an agreement is reached. There just seems to me to be too much to lose by both parties if an agreement is not reached. Other outcomes, like the rehashed talks of Italy issuing a parallel currency, or imposing capital controls to force Italian savers to keep their money at home, don’t seem very plausible to me. In the end, I agree with Financial Times writer Wolfgang Munchau, that the rise in Italian interest rates relative to Germany’s (300 basis points difference) is evidence that the Eurozone debt crisis never really ended but fell dormant for a while.


 

Europe and China


Debt is a big problem for Italy, and because Italian banks are “stuffed with Italian government bonds” (to quote Chicago economist John Cochrane), that makes it a potential problem for Europe as well (Italy is the third largest country in the European Union behind France and Germany). Combine that with ongoing uncertainty over the terms of Brexit, as well slowing global business investment spending attributed to President Trump’s trade policies (and a potential resurgence of refugees), and it makes sense that economic growth numbers from Europe are softening (e.g. manufacturing and non-manufacturing PMIs declining in 2018). China’s numbers are slowing as well, partially by design as China transitions to more of a consumer-based economy. A good question is which is more important to the U.S.: slower growth in Europe or slower growth in China? An interesting answer I think comes from Wharton economist Kent Smetters, who pointed out that we trade more with Europe than we do with China, and the margins (profitability) of what we sell to Europe are higher than the margins of what we sell to China. Therefore, Europe is more important. Moreover, I think China’s growth is more important to the rest of Asia, which would help to explain the dismal performance of emerging market stocks this year. Nothing falling off a cliff here, but these are some of the things we are watching globally.