G7 and the economy: Italy from queen to pawn

(To Luca Pacioli)

In the studio at money of human behavior, since it is spanometrically of economics, more or less consciously motivated and competing behaviors stand out; the first consists of acknowledging the context and goes to solve the problems having perhaps already identified the lightning rod on which to discharge the electricity to ground (see Jones's law1); the second is theavoidance, or the defensive mechanism in which, in anxiety disorders, one avoids coming into contact with feared situations; the third consists of lack of understanding of the problem itself; second and third hypotheses facilitate the lamentable consequences of the super applied Jones's law.

After the pandemic and a 2020 spent climbing very smooth mirrors, 2021 presented itself as a year animated by a budding but promising economic recovery, put at risk, together with an unlikely political multilateralism, by the turbulence caused by the Russian invasion in Ukraine. After the 2021/2022 inflationary boom, determined by Western expansionist policies with the EU and the USA which tried to contain the economic damage from the pandemic, central banks used the tool of raising interest according to theeconomic policy delay, i.e. the lagging behind economic policy.

With the problem of long-term economic challenges, attention to more immediate priorities is of little value, which leads to acknowledging the dominance exercised by uncertainty e instability especially if referring to the lines taken within the framework of assemblies, the various "Gs", which can only be affected by the political inconsistencies that have matured over the last 80 years, i.e. those which are bringing the UN closer to the romantic and inconclusive League of Nations, with a country aggressor who, supported by another political entity co-opted post-1945 at the expense of an island that never sees an existential threat growing as now, sits permanently on the Council which should prevent events similar to those in Ukraine from happening or triggering multiple crises feared by the World Economic Forum.

It is a fact that, while supply chain, you switch to the Japanese philosophy of just in time2, and social cohesion are collapsing, while inflation is at an all-time high with sky-high interest rates3, while deglobalization finds too weak hints in the arguments presented by the six-monthly conference Brookings Papers on Economic Activity, economic warfare is leading to a new militarization.

For completeness: excess demand is only one of the possible causes of inflation, which is why it would be advisable not to limit oneself to raising interest rates or developing fiscal austerity programmes; already in '58 Abba Lerner had identified the inflation of sellerfound in economies where large firms set prices. The real estate sector, as in China and the USA, raises concerns about the risks attributable to banks and the macroeconomy, also in the light of the warnings launched by the IMF which called for clear communications on political decisions, on the commitment to price stability, on the need for further tightening needed to preserve credibility.

The value chains have been redefined, instability has redefined business strategies suffocated by mounting inflation: uncertainty and unpredictability are the new normal, just look at the American diplomatic disaster in the Saudi Kingdom, never so close to Beijing.

While demography puts the estate of the empires present and future, one cannot fail to consider Henry Kissinger who sees in the Russo-Ukrainian war a possible restructuring of a global order on a Sino-American basis which, however, whether it comes or not, will have to deal with a recession4 which in Europe will hit harder than in America, as the OECD and S&P Global Ratings have also predicted5 for which the ECB could only follow the Federal Reserve for the depreciation of the euro against the US dollar.

Result: GDP contraction of 1,3% in 2023 with Germany, a poised power long tied to Russian gas, exposed to the greatest impact with growth lower than 1,2 percentage points in 2023 and 90 basis points in 2024. Even the International Monetary Fund does not welcome global economic growth estimates, as reported by the managing director Kristalina Georgieva; if all goes well, one day we will be able to academically speak of fragile instability.

A loss of world income equivalent to the French economy is therefore expected, while a new scenario is opening up in the policy of the ECB, given that future increases in interest rates to quench inflation will no longer be neutral, but will tend to to shrink the economy6.

Worrying note for Rome: the ECB will not be able to intervene only on rates7, but also on how to start putting trillions of bonds into liquidation; it is almost certain that the adjective quantity combined with tightening8 will awaken some fear object of avoidance. The hope is that expectation of a recession does not itself turn into a recession, but which may manifest itself in a less serious phenomenon. Let me be clear, we are talking about hope which, in economics, is equivalent to the cuckoo's nest psychic phenomena mentioned above.

According to the IMF, even the return of growth will resemble a recession due to the contraction of incomes and the increase in prices, to which the trend of the oil market is not unrelated, amid OPEC+ production cuts and diplomatic gaffes wobbly wasps who are no longer satisfied with color revolutions; it is not so far from reality to imagine that producers of crude oil are also preparing for a recession that would bring down demand and the value of the product; the anticipated rise in prices will ensure revenues before the worsening of the general economic outlook, but will the mining activity thus reduced be sufficient to cover the needs for 2023/2024?

While Christine Lagarde quotes hawks, doves and owls, with the FED hawks in the lead, potentially the most critical decade in economic terms since the 70s is approaching: extending the number of G7 seats by co-opting South Korea, Australia and New Zealand may not be enough. It is inevitable that attention will be polarized by the BRICS and SCO groups headed by Beijing, or by the American-led QUAD and AUKUS, to which I2U2 will be added9.

Let's clarify the concept: here there are few first-class students, many imprudent and reckless; the obtuse old communist Chinese measures to contain Covid, so similar to those adopted for the war against the sparrows in 1956, or to those adopted to restore the initiative of entrepreneurs à la Jack Ma to the bureaucratic order of the party, it is not that they pushed the Swedish Academy to award the Nobel Prize in economics to President Xi. In short, there is no peace even among the tamarinds.

And the Americans? They raised rates, what else could they have done to contain inflation while the FED, under the sword of Damocles of more than likely recessionary contagion, was forced to watch the negotiations political for raising the debt ceiling as investors shifted funds into US bonds? It should be considered that the transit towards American bonds generates devastating capital outflows from countries with a fragile financial system; technically the rate level is just standing normalizing with the background noise of broken bones, a typical phenomenon of monetary policies which, however, is proceeding with different and poorly coordinated strategies. In short, how are you wrong. According to Beige Book of the Federal Reserve the economy in the next recession, as depicted globally also by the World Bank10, will lead to the interruption of interest rate increases, not being able however to forget the weakening induced by the bankruptcy of several banks and the humiliating quarrel of the negotiation of the raising of the stars and stripes public debt limit11, which if not approved would have downgraded the dollar.

Let's play risk: what should reasonably be expected, given that analysts, for the recession, no longer wonder about se but on as and on the impact on GDP, although they agree that it will be nothing like the crash of 2008, characterized by six consecutive semesters of negative growth? Here you are: inflation, possible new wave of Covid in China, worsening of the Ukrainian war, collapse of emerging markets, stellar mortgages impossible to repay to already asphyxiated banks, public debt higher than GDP, need for structural reforms and a fiscal consolidation achievable as the Atlantic motorway Milan - Rio de Janeiro. Keynesianly Covid has perhaps convinced liberals of the need for state interventions without leaving the free market to find its equilibrium; the problem is to understand what to do and especially like, given that the opposition, from right to left, have kept a more conservative posture than the conservatives. Here too, fortunately, no call from the Swedish Academy.

Let's go back to the various G's, of course Honi soit qui mal y fale

The invasion of Ukraine has given the G7 a new reason to exist after a long period of uncertainty about its role in global affairs. Despite the demonstrations of political unity towards Russia and China, the Group does not always seem to agree on how to deal with international security issues; economic vulnerability has paralleled political tensions, and the G7 has been responsible for tightening liquidity leading to an international credit crunch topped off with a series of upcoming sovereign defaults.

In Italy there are two risk factors for stability; it is not a mystery, given that they appear on Bank of Italy reports; in the face of an improvement in finances, households have seen their vulnerability increase, given that income has decreased due to inflation, while the manufacturing and construction sectors are beginning to show signs of criticality, linked to the instability generated by the conflict Ukrainian.

And the spread? It fluctuates, sensitive to debt, to overseas technological banking crises and to high-precision Swiss ones, to the differences between German bunds and tricolor BTPs.

Problem: How do you attract investors? While the G7 leaders aimed to reduce the risks of Beijing's assertive policy, net of the usual dissonant French declarations, China hosted a summit with the countries of Central Asia according to an alternative model of governance alternative to the dominant de-risking, i.e. a reduction of risks, as opposed to the clearer and more politically harsh de-coupling, to decoupling. In short, many uncertainties and, to get on board, the invitation to China to temper its positions also considering the presence of Indians and Brazilians in the assembly, witnesses of a practical foresight which as always transcends the ideological aspects: from the series, few, dirty and immediately.

So what will happen next year in Italy? Good question, also because the G7 has lost its original strength12 to the advantage of the G20, which also brings together the emerging economies.

Consequences? Many, many between the lines, but still consistent. Trying to include China in the context of the G7 could help Rome negotiate the exit from the MoU on the BRI thanks to the support of the Gs. But be careful, it will not be easy, as it is childish to attribute good economic performance to the atmosphere created by vaccination management , forgetting the incentives for improving energy efficiency and for the purchase of machinery and equipment. Nor should we forget that, before the pandemic, production had not equaled the levels of the previous decade, with public debt still exceeding 150% of GDP. Italy's fragmented political system, coupled with the risk of a protracted crisis, will reduce the pace of recovery, with real GDP slowing to 1,2% in 2023 and 1,1% in 2024, with a stop to the reduction of the public debt.

There is a but. According to Bloomberg, the comparison with debt is starting to be unequal, and the anti-pandemic economic measures have brought the debt/GDP ratio close to 1915 levels; without growth there is no way out. Inflation in Italy is sticky, since it impoverishes the social base tractor driver on which a large part of the national system rests: increases in interest rates push up the cost of public loans, an alarm signal for an indebted country.

Let's leave aside declining demographics and the persistent economic gap between North and South: a mission impossible, since also for the Financial Times Italy remains the weak link in the eurozone, weakened by the rise in interest rates and their announced persistence; the balance sheet reduction of the ECB, which will no longer reinvest maturing government bonds, will weaken the stability of Italian accounts, further jeopardized by possible unrelated sell-offs. Practically a crack.

It's time to give some guidance: Italy risks leaving the G7 simply because it no longer meets the requirements which, at the moment, fall within the baskets of China and Brazil, which has already overtaken Canada. This means certifying the economic status, but also the loss of political and industrial weight on a global scale.

The next alarm bell for Italy will sound from 2028 when, according to forecasts, our economy will occupy the 15th place in the world, also surpassed by South Korea. Paradoxically the Chinese intent to stay behind the scenes to have a free hand, he could guarantee a further Italian stay in the club, but at what price and for how much?

The IMF sees Italy with growth at -0,2%, which suggests that the perfect storm has yet to strike, and that Italy continues to pay a structural delay which causes it to sink more with each recession remaining below pre-crisis levels for much longer periods than in Germany or America13.

Stoning the latest arrivals makes no sense: they inherited a high-sounding but ruined property, impoverished by deranged economic and internal policies that have more than one paternity.

Economic policy cannot be improvised: Guido Carli taught angular realities like his character, but imbued with unique preparation, roughness, uncomfortable coherence; rhetorically one wonders whether he would have ever handed over the country to new and not very accommodating oriental hegemons, albeit with acts which, although defined as non-binding, however do not let one sleep peacefully. Who thinks that foreign countries that have adopted it yuan which intermediate currency did it without constraint is dead wrong; populism in the economy has no citizenship. The choice of the three positions shown at the beginning is yours: it could be an interesting game.

If Ennio Flaiano has suggested the circle-bottom position for which situations can be serious but not serious, now it would take Guareschi, who in the Sandbostel concentration camp outlined the figure ofachiquestiere who distributes what arrives; if it were the revived Carli, many would trust only in severe looks because, if Carli were to speak, no one would come out whole.

1 The one who smiles when things go wrong has found someone to blame.

2 Its essence is to eliminate waste with low or no inventories. The system worked as long as there were no interruptions.

3 Vulnerabilities are high for indebted governments, for non-bank financial institutions such as insurance companies, pension funds, hedge funds, for mutual funds. 

4 Determined by at least two consecutive quarters of contraction

5 Standard & Poor's has confirmed the read recessionary forecasts in the euro area, with total and core inflation not falling within the ECB limits before 2025; the basic scenario for monetary union remains one of stagnation.

6 First consequences: higher mortgage payments, fewer loans for investments, weak demand, the euro hurting exports.

7 Christine Lagarde reiterated that rates are only normalizing for now, because they have been very low for a long time. 

8 With quantitative tightening, central banks reduce the financial assets held on their balance sheets by selling them on the markets, thereby reducing asset prices and raising interest rates.

9 Israel, India, UAE and USA

10 According to David Malpass, chairman of the WB, the recession will be broad and earnings growth will be slower than it was during the pre-Covid decade.

11 To remedy this Congress could abolish the debt limit by replacing it with the automatic authorization of any loan necessary for any tax legislation affecting the federal deficit (Gephardt rule)

12 In 1980 the G7 accounted for 50% of world GDP, today just under 30%

13 In 2011 Germany and the USA had already exceeded pre-2008 GDP levels while Italy remained at -3%; in 2014, after the debt crisis, the USA stood at +7% and Germany at (+3%) while Italy remained unchanged at -5%.

Photo: Presidency of the Council of Ministers