Italy is Falling Behind, Kapoor Says

very much for being with us. Um. Your most recent note has to do with, as you describe it, the Italian job, and you counsel that everyone needs to take a deep breath and calm down. All right, So now that we've calmed down, what should we know? Well, I think what we should know first and foremost is that no one is suggesting that this ely should leave the Euro. Neither of the anti establishment parties are suggesting it, and

certainly none of the establishment parties are suggesting it. So any thought that that there's going to be some kind of existential crisis for the Euro, I think needs to be dismissed. While we have got here is a good old fashioned Italian political crisis. And you know what, they're not that rare. We've had seventy years of this. What we have is unstable government and lots of internal politics

going on in Rome. Well, what's so wrong about having a country that's in the European Union that doesn't use the euro. There's nothing wrong with having somebody in the EU which doesn't use the Euro. The UK occupied that position and will continue to occupy that position until next March. But joining a monetary union and then leaving that's different. Monitory unions are like hotel call or you you can

check out, but you can never leave. Um, because if you break up a month for union, the prospects of of what that does to the economy is extraordinarily destructive. Um, you are defaulting on your debt, you are creating bank runs, instability and the financial system. You're wiping out the value

of people's savings. And there's no coincidence that in almost every single monetary union breakup of the twentieth century we either ended up with extreme civil disturbance or civil war, or we ended up with authoritarian governments in some parts of the untary Union. So we're just not going to see this happen. UM. You know, once you're in, you're in. You can't mess around with the value of people's savings, the value of your debt, the value of your obligations

and so forth. So there's no way that you could maintain the current status quo of having your savings in euros and debts denominated in euros. You couldn't have a dual currency situation as they have in other economies of the world, like Panama for example. No, absolutely not, because you're starting from a position here where you know it. It's all very well saying okay, well we'll keep Italy's

debt denominated in euros, but we'll tax in lira. Well, where do you think the value with the new lira is going to be against the euro if if you Italy were to leave the the Eurozone. The other point to bear in mind, if you don't just leave the euro. If you leave the Euro you automatically leave the EU. You're breaking the Treaty of Rome, which is the founding institution and the constitution of the European Union. You know, if you're out, you're out um and that then becomes

extraordinarily problematic. Pass So much of this comes back to economic growth. I mentioned earlier, folks on television. The Guardian Overnight has a wonderful article and the austerity of the United Kingdom, and within that, Paul is maybe the austerity of Europe, or certainly just the stri having for economic growth. And yet things are better in Europe. That's been one of our themes this morning. Is Europe free and clear

from the eurosclerosis of another time in place. I think that by and large, yes, Europe has emerged from the recession that came in really from two thousand and ten onwards in the case of the Eurozone, UM, but there are some problems with that. So we've got two essential problems.

Problem number one is Italy. Unfortunately, whilst Italy has done better, it's still legged behind the rest of Europe, and its banking system is a big part of that problem as well, where bank lending has persisted UM as a negative force in the in the Italian economy. And then the second issue is that whilst cyclically I think Europe has recovered, structually,

there are still challenges. The Europe doesn't work properly. We know that, but to be honest, I in the U S. Dollars and work properly either, and the pound sterling has one or two issues. But we're not making enough structural effort to make the euro work better. There are other impediments to growth across the Eurozone, which also needs structural adjustment.

So I think in a technical sense, absolutely Europe is on a better track, and there are some structural improvements as well, but it's not necessarily on a very very strong projection for growth over the medium term. I mean within this in you know, the projection and growth in Italy is a distraction. Is how it redounds over to the US markets. I mean, we're gonna open up today. I think pim things are going to be better. I mean, that's the basic idea in the market tone right now.

Part down, I'm and explain to our US audience why they should care about Italy. Well, I think you should care about Italy a bit. I don't think you need to get over excited about it, although that may be a little bit late to be saying now, but I think you need to care about it a bit because it is an important part of what is still the world's largest economy. The world's argist economy is not, I'm afraid to say, the United States. The world's largest economy

is the European Union. Um at least until the British leave it. And so it's an important part of an important market. Europe is very important to the US as an export destination. And remember the the S and P is not a US equity index, not at all. The SMP is a global equity index where companies are earning money through manufacturing, through providing services, and through trading globally.

So that's why Italy doesn't matter. But Paul, let me just challenge you here when you talk about the European Union is one economy. You don't have consistent banking laws, you don't have consistent immigration laws, and you know as well as anyone you talk to people from Italy, they're not even interested in the Italian dead crisis, the amount

of money that their government owes. And most Italians that you talk to will tell you that unless you have either a family business or you have some sinecure, you're living at home waiting for someone to hire you, or you're going abroad because that's where the opportunity is. Well, yes, I mean Europe has differences, um in between you know the national states. Of course it does, although those differences

have lessons over time, um. But then Frankly, there are a lot of differences between say, Texas and New York. The polarization of the United States, and indeed the declining led mobility in the United States is a different economic challenge. So I don't think we should be too concerned about this. Um. And Northern Italy, at least, cell has a very dynamic economy. Um. You know, the southern Italy is a is a somewhat different issue. But Northern Italy remains a very dynamic place

in which to do business. And and I think this is an important point to remember. We should bear in mind that Italy is one of the wealthiest countries on the planet, far wealthier than Germany is, say, and this is an important saving growth because Italians own a lot of their own debt and that reduces the damage over time. Paul One come in and this comes folks as Mr Soros's team sends me the transcript of his important speech yesterday.

Very cautious and the European Experiment, Pod Donovan, some how you would push against George Soros's gloom and your Europe. I think that there is still a degree of optimism about Europe. I think Europe has a number of advantages which are likely to become more important as we go through the changes of the Fourth Industrial Revolution and and

so on and so forth. An aging population, which Europe has, becomes less of an economic problem as we get in robotics and automation, because you know what, you can operate a robot at the age of eighty just as well as you can operate it at the age of eighteen. So an aging population becomes of an issue. The skills and talents that Europe has, the education system which had its laws, but you know it provides good caliber education.

That's the plus as well. So I think there are reasons to be optimistic over the medium term, not to downplay the challenges, but there you know, we don't need to be in a doomed spiral. It's not that bad to inspiral. Paul Dunavan, thank you so much with you BS greatly appreciate the effort from their zeroch offices on

this morning. We're gonna do it now, folks with Italy on the brain, and of course a huge market moves yesterday to talk to a gentleman who can synthesize Italy for what it means for Europe, what it means for the United Kingdom and what it means for America. That's sunny comp actually hugely qualified to synthesize international relations and political economics. He's with redefined, but that barely disguise describes his portfolio of knowledge on his Europe. Sonny, wonderful day

have you with this this morning? The Cynic, not that that would be moi, but the Cynic would say, this is just normal Italy. They've gone through like forty seven million governments since World War Two. What's different now, Sonny? What is different in Italy now versus all the other previous collapses? Well, for one, we had got used to an unusual period in Italy's recent history. And for all that we criticized Silvio Belusconi, the one thing he gave

Italy was stable government. I think him alone brought down the brought up the average tenure of Italian prime ministers significantly, and him and Matteo Renzy and and the next prime minister. And now it seems that the old days are back, and I think that seems to be the single biggest problem. Before Italy had sort of the pulling effect of the membership of the Eurodic convergence, et cetera. And now that positive influence has gone, the fear is that they may

continue to diverge from Germany and France. As a task for the postible year, my colleagues, Sonny pim Fox observed today that the Italian government of Rome is essentially removed from the Italian people. Describe the linkage emotionally the Italian

people to their Italian federal system. Well, Italy is I mean, before you go down to the to the region level, I mean it is essentially two separate economic zones cobbled into one, which explains the rise of the League which used to be called the Northern League, and it's primarily from the far more sort of Germanic northern part of Italy, which has been growing where gdpeoper capita has actually been growing, which has where unemployment is low and sort of work

culture institutions a sort of much better developed, it's quite Germanic in nature, whereas the southern half of fy Uh is lagging behind economically, and a lot of what you see at the macro level outside and the political divisions, etcetera, are the fact that there are these two economically fairly distinct entities cobbled together into one country and they just

can't get their act together. There in lies the big contradiction, and that is why the political instipidity we are seeing now is not likely to go away any time soon. This is going to be with us for for a while to come a stain. It does. Does Italy embody the contradictions that bedeviled the European Union as a whole. At one level, Um, it's both sort of the best and the worst of Europe. If you look at the quality of life, if you look at the cultural richness,

life expectancy, most things actually worked pretty well, um. And the quality of life for most people is still pretty fantastic compared to most other places in the world. But it is falling behind. And you know, from Roman times it's been a story of study decline, which has accelerated in the last century. And that is I think also one of the reasons why it is highly unlikely that Italians will ever choose to leave the euro or the

European Union. This is the sort of last vestige of greatness, pretensions to greatness, of being part of this core European Union as a founding member. Otherwise, if you look at what happened, you know, in the World Wars. What happened since then? France, Germany and the UK have defined the destiny of where Europe has gone. Italy has only had a marginal role, whereas historically it used to be the

exact opposite. And Italy sort of his desperately sticking to be part of the Euro which is the core of the European Union, because it still sees itself as a great European power um and it's unlikely that that will change. Italy being thrown out or choosing to leave the EU would be the end of that pretension. And I don't think it's Ouian. The ready for that is the is the Euro or proxy for the former deutsch Mark. Sadly yes, uh be. Given the weight of the German economy. And

there's old thing you've heard before. Germany is too small for the world and too large for Europe. Are too many of Euro related policies are driven by Germany's economic weight, And the problem is that the older, larger economies, and that includes Germany and Transtant to some extent Italy, what they need in monetary policy is very different from what some younger, more dynamic economies need which need to catch up, and the Euro will always never be able to provide

the right monetary policy for any of the country. Sonny, let me ask you an unfair question for your remit of international relations. But let's pretend you're a market effect strategist right now to Pims, good question. If we're at one sixteen, which is right where we were well at the advent of the euro. If Italy was to leave, where would the euros for Germany like a one forty

one thirty one? Probably not all that hype, but it would definitely the direction of the move will be very care it will be significantly higher than where it is now. Let's leave it there, Sonny, thank you so much. Great brief, Sonny Kopor with this is redefined and filtering in international

relations in a lot of the market. You know, I just want to underscore what you just described, what would happen in the value of the EU, because I don't think most people recognize the value of the Euro would actually increase. We are speaking with Megan Green, managing director, chief economist MANU Life Investments, and Megan, I'm wondering whether officials in Berlin and in Brussels, they've been rather silent

about what's going on in Italy. Do you think that there are somehow rushed meetings behind closed doors asking themselves what do we do with Greece? Part two? Yeah, so I think they're definitely talking about it, but what can they do? Right? So, back in two eleven, if you recall, the e c B sent a letter to Rome saying

get your fiscal house in order, um. Berlsconi had to leave a few days later, and off the back of that, actually Berlin gave the e c B permission essentially to to give the whatever it takes speech and eventually unleash QUI only because Italy had proven it was going to

be fiscally responsible this time around. You know, Frankfurt and Berlin and Brussels can't really pull that because if they do, if they end up pushing out any government that is eventually formed, um, that will just symbol in the Populace, that will play out in the populace hands, and so in the next election then you can only expect more support for Populace. So they're kind of hamstrung in that sense.

The ECB has come out and said, you know, Italy would be wise to remember the rules and to reread them um, which is a bit of a kind of warning. But that's all they've said. I think that suggests the ECP is just going to sit by and watch what happens. As long as there isn't significant contagion outside of Italy, they're going to try to let the market impost some discipline on Italian politicians. Let us turn to America and within all the data, Megan, I saw four point two

percent nominal GDP. I guess that's a little dampened inflation combined with okay, real g d P. Is that politically acceptable in America to have a run rate of four point whatever nominal um? So fundamentally, when you're looking at GDP and recoveries, especially in the US, you have to ask whose recovery it really is and whose growth is this? And there's you know, huge and increasing inequality. So is

that an acceptable run rate? It is for some, it's certainly not for all, And I think it's the lower classes that won't be lifted by that kind of growth. Does have fed adapt to that to your good observation of two America's or three America's. So no, not really, I don't think. Um. The FED sort of fed that in part with quantitative easing, so lifting up asset prices so that only those who actually hold those assets really benefit from it. Um. You know they're keen to They've

they've stopped buying up assets. They're reinvesting them still, but they're shrinking their balance sheet. UM. They're not really keen to fire up KUWI in the next down turn if they can avoid it. For this exact reason, the FED doesn't want to be in the headlines being told that they're responsible for rising inequality in the US. So I think that they would like to shrink away from that. I've got a headline here, Pim and Megan would be

perfect to talk to. Maybe you already did this, uh, Wilburt Ross says, US trade process already bearing good results. Mr Ross, our Secretary of Commerce, says, quote U US in a situation of asymmetrical tariffs, Megan, what are asymmetrical terroriffts? That's a great question. UM. I think it just suggests that we're imposing more tariffs than UM other countries and they're imposing on us. Of course that that doesn't actually

mean anything. UM. In a global economy of countries that are really good at making some things and not good at making other things, so they specialize. UM, And so everybody's not making the same goods and services, So you shouldn't have symmetric tariffs. Anyhow, that doesn't make any sense. UM. This argument that we're you know, our trade policy is

already paying off. I think UM is probably economically illiterate. UM. Tariffs only introduced rigidities into an economy and create dead weight losses, and so nobody really wins in the end from that kind of trade war. UM imposing tariffs someone another. Can I just say I thought you were going to and I appreciate the answer, but I thought that where you were going with, as you said, a headline was a tweet from the President of the United States. No, well,

he's just about five minutes ago. UM, he's speaking on Twitter and writing, UM, sort of channeling Representative Trey Goudy talking about Senator Sessions. Uh. Well yes, but in the tweet is referred to as Senator Sessions, UM, and the quote is, oh, by the way, I'm not going to be able to participate in the most important case in the office, meaning Attorney General Sessions. I would be frustrated too, And that's how I read that, Senator Sessions, why didn't

you tell me before I picked you? And that is followed by a tweet that says, there are lots of really good lawyers in the country. He could have picked somebody else end quote, and then Donald Trump, President Trump writes, and I wish I did exclamation point. So I just thought I would you know. I'm glad you shared that because that's important within the moment by moment tick of Washington. Kevin Curlier thought was really quite good today on the

broad set of issues. Has the president's attention? I don't I don't want to derailed up. Well, we're talking economics here, and Megan, you've been so good at explaining basic stuff. Paul Krugman has written whatever anybody thinks of the laureates politics, brilliant macroeconomics of trade and this dreaded phrase deadweight loss. What is a deadweight loss to America when we when we impose tariffs? Yeah, So the ideas every time you introduce a rigidity like a tariff or a subsidy in

an economy, um, some parts of your economy benefits. UM. So the government, for example, will be able to collect more taxes um. If tariffs are imposed um and you know, the other producers of that good will benefit because they have less competition, But then a whole bunch of actors will lose out. So consumers are the obvious case here because they'll end up having to pay more for these goods um. And so it did we loss is kind of the balance of that there are more losers than

there are winners. And within that, in within the modern economy, if we do tariffs on a certain products, say it's automobiles, and China adjust, they adjust for all the other countries as well when they adjust their terrorists. It's not just about American auto manufacturers, is it. No, that's right, Um, that's absolutely right. And in the same way, when you know China agrees to buy more of our goods, it's not like we're going to produce more as a result.

We're just going to sell more to them and sell less to others as well, So it all ends up being kind of a a zero weight. These are the complexities of certitude of simplicity. Certitude of simplicity. Wow, people that don't know what they're talking about, who we won't mention, but maybe that would include me say stupid simple things, where Megan is working in a more complex and dynamic range.

I just want to bring up one topic that is perhaps more prosaic, and this has to do with the cost of energy, specifically the cost of gasoline, because if you've been driving around the United States, you know that the cost of gasoline has increased now, albeit it is very inexpensive compared to what most of the world ends up paying. Having said that, do you believe that the increase in the cost of gasoline is going to create any kind of economic dread. Yeah, so that's a great question.

I think to answer it, we should look at what happened when oil prices fell significantly UM a couple of years ago, and we thought that would be a huge stimulus for the economy, and in the end, people just drove a bit more and households repaired their balance sheets so it went into savings and they pay down some of their debt, which was a good medium to long

term dynamic, but didn't boost growth. UM. I think now that oil prices are going up, we're probably seeing the inverse of that, So I think households are having to leverage up a bit and they're just driving less. I don't think it's a huge headwind. Part of it depends on how along this last, and I think it could last for quite a while. UM, so far, I don't think it's a huge head win on headwin on growth. I think it does mean that consumers are maybe just

leveraging up more and so might be tapped out sooner. Megan, Thank you so much. Megan Green with Manuel Life in which John Hancock greatly appreciate your attendance today. Megan Green writing worldwide. You can see her work writing world bode as well. Right now, Michael Faroli, we continue with Dr

Feroli of JP Morgan here on the American economy. Michael, I was looking at Atlanta Federaliser Bank of Atlanta wage growth, their wage tracker, and I took out inflation and I'm sorry, real wages, inflation adjusted wages have a tinge of the United Kingdom to us, are we gonna get real wage growth?

It's there, but come on, it's fractional. Well, this kind of brings us back to our other conversations productivity growth, which is in principle, Uh, if you know of corporate the labor share is going to be roughly constant, which it hasn't been. But if it is just for are you misake, then real wages should grow at the pace

of productivity growth. And productivity growth, you know, it's been averaging, you know, recently maybe a little closer to one percent, but on a longer term people below one percent, then it's going to be hard to sustainably get real wages up to two or three percent. Okay, but what's great here, folks, And this is out of the boost school of Chicago. We're feroughly dark in the door. Your idea of political

economics of Chicago is to take more micro economics. We get that, but but within the politics, what politician of whatever flavor and ever party can do politics in America with subpar real wage growth? The answers, that's a crisis

every day for a politician, isn't it. Yeah, us, I think, uh, this is you know, it's no. I don't think it's any coincidence that we've had rise of populous parties all over the place in the wake of the Great Recession, and that wage growth for ten years has been pretty close to stagnant, and that you see that kind of frustrations start to boil up and the choice of people make in the balance box. Um. You know, perhaps at some point expectations, uh, you know, reset themselves to what

is actually deliverable from the economy. But I think, you know, we're living in the shadow of the post war period when we had much stronger real wage growth and productivity growth. How long it takes to reset expectations, I think it's really hard to say, but it certainly seems to be one of the facts contributing to um the darker mood, and I think that's that affected some, uh, some of

the politics around the world. Michael Faroli. We also live in the shadow of huge treasury supply, and I'm wondering if you can explain what that increase in supply means when everyone is looking at a yield curve and wondering whether it will or won't be inverted. Yeah. So I think that's a really tough question. You know. We there's been a lot a lot of work done on the how much crowding out there is, which is to say, when we increase more treasuries to get people to buy

that you need some kind of price concession and higher yields. Um, we'd probably guess based on variety of econometric studies that the kind of increase in deficit projections based on the due to the fiscal actions over the past year may add about twenty or thirty basis points to treasury yields. Now, it's not clear that that should all show up in the long end of the curve, or which part of

the curves that should necessarily show up in at all. So, for instance, you know, a lot of people have been talking about the fact that earlier this year we had this big increase in bill supply, and that may be one of treasury buill spin and that may be one of the factors that has in fluenced libror uh library ois spreads the spread between effect if that fund and I. We are in all these rates in the short end

of the complex. So is that crowding out well, perhaps, but that's also possible that it's happening in the front end the curse. I'm not sure that necessarily crowding out due to treasury supply and inversion have to be linked or should be linked in the same conversation. I think inversion, in my simple way of looking at it, is more related to where we are in the business cycle rather

than the structural deficits. And I think the fact that we're you know, one, no one knows where we are in the business cycle, but I think it's safe, safe, not early right, so as it slightly gets more mature, natural expects some flattening of the curve. Now we haven't had an inversion yet, We've just had flattening. And I think flattening to me, doesn't look you know, uh weird, given that the fact that we're varied, you know, apparently late in the business cycle, all right, if relating the

business cycle, where are we in the credit cycle? Uh, you know, I think, well, to me, it doesn't look like uh, the credit cycle is showing that we're you know, getting overly froth the year exuber and at least in the quantity uh variable. So you know, we often hear concerns about the reappearance of household over leverage. I think if you look at the aggregate data, it's really hard to make that case. Debt to income ratios have been stable, very stable actually for about uh five years now, Um,

so I don't really see it their business sector. Maybe there's a little bit more of a case to be made, particularly in non corporate businesses, but the data there, I think it's it's a little tougher to say, but you know, I think perhaps we're we may be fighting the last war here, which is the last several wards, which is in the last three decades we've been accustomed to the credit cycle in the business study kind of moving together and those being um CO conspirators and how the recession

that ends the mansions arise. But if you go back, you know, further several decades, you don't necessarily need a credit cycle to have a business cycle. So you know, it could just be a um A cycle in which cost pressures are low and then over time, due to demand a head of supply, like we talked about earlier, that that just generates the cost pressures that eventually get

the FED to uh really put on the brakes. I don't think there's any sign of that, you know, happening anytime soon, but it's not hard to tell a story of one wanted about that happening a few years out. Michael Farley, thank you so much, particularly that update on potential GDP is shocking number below two for so many of our listeners. Dr Fraley, it's with JP Morgan. Thanks

for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio