Surveillance: Italy's Possible Eurozone Exit

of course, on the Bloomberg. It is always a good time to speak with David blanche Flower of Dartmouth College. He is someone we can talk to our austerity on the FED. We can talk to him about the mysteries of economic growth. What we can really talk to him about is the labor economics of Italy is classic. The wage curve from a good twenty years ago was controversial with us Ian Shepherdson as well. This morning from Pantheon macro Economics, Professor Blanche Flower, I would suggest the wage

curve for Italy is destroyed. Here's the chart we showed earlier under twenty five year old unemployment. His balloon from to thirty seven percent. Danny Blanche Flowers labor economics doesn't work in Italy, doesn't. No, not really in a sense that to put it technically, there are long flatbits. What we mean by that is when unemployments really high, labor markets kind of stopped working. So think about when the unemployment rates and it moves to a team doesn't change

things very much. So so this is a labor market that hasn't been working, isn't working um and obviously that has implications. I mean the big thing you see actually if you look at in Britain as an awful lot of Italian academics, they come out of the Italian labor market moved to the UK. Young Italians do the same. But this is clearly a labor market in crisis. Well, it's a labor market in crisis. What are the incentives

to the people that the Italian government must initiate. Not macroeconomic mumbo jumbo, but how do you incentivize these people under to go get a job? Well, obviously there's two

parts to it. You obviously want to make sure on the supply side that they have the skills, but the reality is on the demand side, you've actually got to offer adequate numbers of jobs and you said, talked to Blanche Flower about wages and growth and austerity, and blanch Flower would obviously come back and say, fiscal policies overly tight as it's been throughout the European Union, um, and we have very little incentive on the part of Italian

employers to hire young Italians. And so that's the problem. Firms are not moving to Italy. But that's exactly where I wanted to go. Tom bring up your chart right, when you look at youth unemployment in Italy, it's huge. When you look at Spain, look after that forty two percent. Let's just think about this. Forty people between twenty five

and thirty five are unemployed in Spain. Danny, My question to you is, how do you do Do you do reforms that actually make employers want to hire but also fire a lot of the people in it They are holding back from hiring because then you're stuck with someone for twenty years. Right, So the obvious thing, you've got to raise the level of aggregate demand. Give firms incentives to hire young people. You can do it through the

tax code. You give firms incentives. You say, if you hire a young person, will give you this this tax credit. We're not seeing any credible government in Italy focused on those kinds of issues. That one thing you would actually say, the surprise is actually these young people have been pretty compliant. You would have thought they'd have been on the streets. High levels of youth unemployment like that generally generates social disorder. They haven't, and so that's obviously a big puzzle. But

you need to break this youth unemployment problem. What we know that the famous line is a youth unemployment actually generates a permanent scar rather than a temporary blemish on people. So it's not just an individual problem. It's down the road. The society is going to be heard by the fact that these people haven't got into the label. Fritz, you don't want to jump in. This is so critical. This is the history recess that Olivier Blanchard and wren Somers

talks about. This is like, absolutely it is. But you know what, talking to your point, let's start talking mumbo jumbo, Danny, what needs to happen, because actually Materrancy was empowered. He's forty one years old and he's in and the focus was meant to get people back into jobs, and he's been unable to do that. Well, I don't know about mumbo jumbo. I mean there's a reality is that this labor market has been in trouble for two or three decades.

The government doesn't seem to have any kind of ability to do that. The fiscal framework is too tight. You need to give firms incentives to hire, You need to give incentives for mobility. You need to get the labor market working, the capital market working, the housing market working, and you need to loosen the levels of aggregate demaut and give incentives for employers to hire the young. And

that's not what's been happening. Okay, we got Ian Shepherdson and David Blanchelire where this this is what surveillance is all about. Bring up the chart. This is from fokars Landau, which is the idea here of they need a Lira. And I'm not speaking for David fokars land off Deutsche Bank, but Beppy Greenlow France been clearly says he wants an

independent Lira. Ian Shepherdson, what would happen two days or two weeks after an independent Lira other than wealth destruction for the elites of Italy that there would be gigantic wealth destruction and extended period of total chaos at the breakup. You couldn't have Italy leaving the Eurozone without the rest of the Eurozone falling apart. So it's kind of the end of the world event where things would lie six months,

one to three years down the line. That's a different question, and it may well be that after a period of extraordinary extended pain that actually a much weaker sovereign Italian currency would would be would put it really into into a better position. But I've got to say the transition from where we are now to that would be horrendous and it would be short term things would be much worse without a doubt, right And Danny, so Tom keeps sudden,

you know, talking about the switch to Lira. I mean this is extremely unlikely, right to Danny blanch when you when you look at even Beppy Grille, I mean he doesn't really have the best craft of economic so you don't see how this would work. Do we just need to have a prime minister with more power that has a much more aggressive mandating reforms? Well, what what you want? A credible market driven reforms where firms feel that there's some certainty going forward that they can invest and higher.

I mean, what you and Tom have been talking about is a country in chaos. I mean, we've seen similar problems in the UK with Brexit. Has calm um. If you can't form a government, you can't get a policy. You you know, we don't know where this country is going. Why would firms go in and hire young Italians? So you've got to break that first. There's this great chicken an egg, and if you're an employer, you'd say, well, I think I'll go to Germany. Actually, but David, I

want to get this on the record. Professor Blanche or Is, you're one of our true international authorities. What would be the pain of an individual separate Lira? I mean, bring up the chart here, Jose and the idea here. Ian Shepherdson says there would be massive instability. Is lira depreciated? Do you agree? Well, I mean he's completely right that if suddenly you say we're going to go to the lira,

that would cause the collapse of the euro Zone. That would have huge cataclysts, make effects for for quite some time. But he's also right in that what you have here is a currency that is overvalued for the Italian The point of saying you would go to a lira would be at least that would make the country competitive, and so that is that is in some way attractive. So it is completely right, um that a lower valued currency

could help. It's hard to see how you get to the benefits of that lower currency without the cut this terrible collapse that he's talked about. It's hard to know where you go from here. But this does threaten us the whole being of the euro Zone, right and tom there are people out there saying that the market is just a little bit too complacent ahead of that referendum to do the leap from the referendum to actually getting the lira bag is you know, it's humongous a lot.

You know, very few people are doing that leap at the moment. Also, compared to Brexit, you can't constitution that you can't put a referendum on whether to leave the Eurozone or not to the at in So absolutely, December four is a referendum in Italy, one that will be closely watched in Italy, in Europe, indeed around the world. Swatter Thing is a senior economist at T. S. Lombard,

a research and she joins us now by phone. We've been told here that there's a continuum between the Brexit referendum, the presidential election here in the US, and now this referendum in Italy. And what you urge some caution there? You say this is likely just to be a side show. Um. Yes, absolutely, Hi, good morning there. So we think the you know, investors are excessively focused on the referendum of thember of the vote. UM. But I guess it's just it will just be a

side show in the largest game of things. Things will not dramatically change after the referendum. In fact, they will the trigger points for this sort of political days in in, in, in, in Europe, last summer else. UM. Italy nonetheless remains a key threat to a key medium term threat to UH your area stability. But a no vote in the referendum, while it will intensify near term volatility, it does not spell doom. UM. And in the same way, yes vote

does not guarantee a recovery or reforms or recapitalization. UM. I guess what I'm trying to say is that the Italian problems are are very much supply side related, UH, and they're deeply ingrained. UM. Vote on the referendum does not change the story. Um. In fact, where the twelve month horizon ECB policies and trumponomics, so to speak, a strong dollar truth trumponomics I will actually provide a temporary tailwind to two Italians. For me? Is it is Italy

an emerging market? Um? Well, if you look at the performance of the the spreads every time there was a political tremor, you might be tempted to believe it. I believe so, UM, But I guess it depends how you define emoting market. Um. The one of the ways I try to define the MS is the the you know, the correlation between stocks and heels that does not hold so well in Italian In Italian case, well, you may argue it's because of e c D policies. Um. But

it shows a lot of characteristics. But well, not not yet animoting market. Not yet anyway, you know. I We've talked an awful lot here about the banking sector, and I wonder what you see is the path forward there through in a sixty billion euros in non performing loans there on the books, tremendously over banked country exclusive of this referendum, how does that begin to get fixed? Right? Um Um. Now, the Italian banking problem, UH, it's it's it's it's a lot more difficult to rectify it because

of three important critiquy reasons. The first is the the dominant share of these bad loans or sorry, the dominant share of bank debt is held by retail investors um as compared to in in other in other countries, So one third of senior debt is held by retail investors, while half of the junior debt is held by uh A retail investors. And it's junior debt that will be used if the banks have if if banks have to

be recapitalized. The second important reason is that the the government itself, policymakers themselves have been have played a role in in sort of selling this these bad potentially bad assets to to the household sector. And third, it's the the timing of the the eu Blian rules which came in affect earlier this year, which prohibit or make it very punitive to to for state aid uh to recap the banking sector. So it's the culmination of these three

problems that's really making matters worse. Um. There was a way out the advance uptil Solvent. Well, if you exclude monted Departe, that is, there was a way out. They can they can use the precautionary clause. They can uh compensate the retail investors for miss selling. Um. Well, but but but you have to you need political will to go through that. That's lacking in Italy's case, and there's always a reason before their friends they did not want

to disappoint policymakers or a retail investors. After the referendum, attention will shift to the elections. Sing with us with the definitive report and Italy from her Lombard Street Research. Your report Shadow which I need to recover the cover all twenty eight pages, shows that incentives are critical to Italy. When you and Charles Duma sit around a cup of coffee with Jonathan Fenby, what's the key incentive that big

ins to nudge Italy towards a modern economy? Um, the key incenter would probably have to be, you know, um, directing capital uh and and and labor, all the productive resources towards the right area. We've seen as a massive increase in this allocation in the manufacturing sector and it has continued to increase, of course dramatically since the you're

since that joined the Euro and after the global financial crisis. UM. I guess there are a lot of rigidities within the economy itself, whether you look at the product market, whether you look at the the label sector, labor segments, the the capital segments. And I guess one of the key problems, UH is is the there's a dominance of state of

small and medium enterprises. In Italy. Almost eighty five percent of employment comes from the small and medium medium uh small industries, and that sort of restricts the gains you could enjoy from economy of scale. UH. You know, when you speak to a various small businesses, they say they did they preferred turban small because the the tax code and it's so intense. UM. And then you you have various restrictions in terms of how many farms we can have within a certain area. And it also extends to

various other retail segments. Did the mark up on the the on the retail prices is significantly higher in Italy than in any any European economy. As you were saying earlier, it's it's an overbanked country. And I guess The reflection of all these weaknesses is the fact that the activity growth has been stagnant for almost a decade. And how sure you you in that very lucid report right about the small window of opportunity Italy has here to to

write its economic and financial malaise. How small a window were we talking about here? And I wonder if that is going to happen under Matteo Rensey's leadership. The window of opportunity is is getting smaller because uh, you know as all because at least for the next twelve months you have support from ECB, Dewy and UH and a strong dollar thanks to h tromponomics so to speak. Um. But you know, very gradually we will see uh, well

will see strengthening in the euro Uh. The ECB will have to start tapering its asset purchases and that means we will be even more exposed to a higher global youth and there will be increase in political uncertainty across Europe. We have elections in the Netherlands, um in in in France and in Germany. So it's it's a combination of all these factors. Not to forget it really might be

heading towards another towards its own general elections. So I guess the visitor really is narrowing, especially if you look at the banking sector. Um. Uh So at this point in time, what is helping the sector survive is whatever literally nominal GDP broad that they have and and and a chief actor driving back to the weaker Euro. So once these things take to roy it will it will be quite a nasty scenario. Okay, you just hit on the discussion point. They've got to get away from the

over value euro. Do they do that within the euro model or do you just presume some form of depreciation towards a renewed Italian lira. Um. I guess, but I think stands it will have to you know, the the need to suppose at this at least at this point

in time, it's coming from the c D two. But gradually want the your stars to strength, and thanks to strength in the German economy for example, uh, improving corny concerts in your in your area, I guess the the burden of balancing will will fall back on on Themandi station Uh. And that's really quite a punitive way to address the problem. Uh. Notwithstanding the very very high non performing loan version of the banking sector. I would struck

in your report. Uh, the degree to which so much of of the Italian economy's troubles right now you attribute to what happened with the w t O and China signed onto the w t O. Why would that happen? Was Italy hit so profoundly hard? Um? Yeah, So we call it three strikes and you're out. So the first strike was the information and communications technology, which Italian of businesses quite well, we're quite a lagged in terms of

adopting those technologies. And again the reasons are, you know, this this sort of relationship based U based businesses where where people are not really and managerial incentives are not really inclined towards profit for example. The second time was was Italy joining the euro and that meant that ment the the policy tool that was that it's Italian authority is so frequently used that the devaluation was no longer

an option to them. And the third strike was was Italy joining sorry, was China joining the w and and the reason why this this hurt Italian economy a lot more than it did the other European economies is that Italian exports are very similar to Chinese exports. They're concentrated at the lower value added seconds um and and the d the rigidity on the product product labor, and there

is other institutional weaknesses. Thanked that really was more exposed to these three forces external forces than many other economy within the area. We continue to see that. Try to thank you so much, saying with Lombard Street Research this morning and Italy, who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see

their role is to serve, not sell. That's why Charles Schwab is committed to the success of over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com we go now at. Stephen Shork, editor of the eponymous Short Report out of Philadelphia, spoke with him yesterday. He expressed some skepticism that OPEC delegates would

be able to come to an agreement on a production freeze. Indeed, Bloomberg News reporting this morning according to two delegates they have agreed to a freeze here on this the first day of that OPEC meeting in Vienna at Stephen Shork. Great to have you with us here is that it all said and done. We haven't a great It's really this simple, right. So I was on bloomberg yest today

expressed my skepticism that we would get it. I'm on today and the premise of that my skepticism still holds that I based it on the fact that without a material concession by Iran, I couldn't see how Saudi Arabia could ever sign off on this deal, and hence why they've been at loggerheads now for the past two years. So with the preliminary data coming out, what I'm reading off of my Bloomberg here is that OPEC has agreed

and let's let's let's mind you this isn't official. It is coming from an anonymous source, but OPEC has agreed to cut production by one point two million barrels a day. Now. Interestingly enough, Iran is going to be able to up its production to three point nine million barrels a day, So at three point seven currently with Iran, that means i Ran adds two hundred thousand barrels to the market, which means now other OPEC members have to cut one

point four million arles a day. So of course that's going to be meaning that Saudi Arabia and Iraq are going to have to bury the brunt of this. And and once again, guys, I'm extremely skeptical of this report. I don't see how Saudi Arabia signs off on it. But in the here and the now, that's the headline and the markets rage respect. I don't know if you've seen it. I put it on Twitter, Stephen Short because

my good morning. There is a spectacular Bloomberg gad Fly article for Liam Dunning and right co writing and it focuses on demand. Gus what you see for oil demand? Gad Fly says it's gonna vapor away. China is at the margin. But what is oil demand in the United States? Steve that you own, I mean, what what does demand

like in Kansas or Florida or Washington State? Well, in the here, in the miror And this is the premise why I think OPEC should and would want to keep oil prices as low as possible because demand here in the United States, we just came out of last summer with the greatest demand for gasoline that we've ever seen. And why was that. It's because of a losticity of demand. Two dollars a gallon, you get a lot more people on the road, driving bigger, larger, longer distances. Uh. And

so demand was very strong. And this is what OPEC essentially needs to have to happen, because what I also spoke about on Bloomer yesterday is the Tesla effect. You remember ten years ago we're all talking about. Well, I wasn't because I always thought it was a fallacy. But peak oil supply today, because of alternative fuels, we are talking about peak oil demand. And so each dollar you raised the barrel of oil is a marginal decrease in

the entry barrier for alternative fuels. So even driving into the studio yesterday into Philadelphia on the school goal, I saw four teslas. This is Philadelphia, for crying out live driving Tesla's in Philadelphia. That means this is really a harding to take off. And so we're looking into we're talking about the long term relevancy of OPEC and if they succeed in driving oil prices to a level where

we start to see gasoline prices well above three dollars. Well, that is only going to eat into demand longer term out. So this is a long this is a long term existential threat to back in all oil producers in here and they now, uh right now because me in the future. Right now, what we have is this is great news

help for US producer. Yes, Steven, We've been talking a lot about the role that Moscow is playing here, the role of Russia here, and I wonder what that says about the the the medium term future, the future of OPEC that so much emphasis was placed on Russia. An opaque member. Yeah, and I trust, I mean, I trust the crimblin, don't you I'm putin seems like a pretty stand up guy. And and why why wouldn't we believe

anything that comes out of Russia nowadays? Uh So, that said, if we look about if we go back to April, this is when US production hit a modern day record. Since April two, US producers have taken off the market one point one million bars a day. At that same time, OPEC has added two point six million barrels a day. Russia has added in additional six barrels a day, So essentially, for everyone, barrel the U S producer took off Opec

in Russia added back three barrels. So now we're talking about trying to take some of that added oil back to the market. Um, to take that oil back off the market from Opec in Russia. Him again, highly skeptical. I don't believe a thing that comes out of if put put it this way. Putin's lips are moving. He's lying, So I don't know why. But again, markets up three

dollars and fifty cents. But this is great news to the Canadian producer and the US because they're gonna start to add out a lot barrel and one minute left, one minute left. What is the dynamics of price on the downside if we get a Steve short break, Yes, forty a big resistance or could we revisit twenty nine

dollars a barrel? Oh? I think we can. Yeah, if this all turns out to be smoking mirrors, and if they come out with their official statement and they and they punt and um, then this obviously this is going to um evaporate. So yes we can. Forty is nothing but a psychological moment. There's nothing magical about that. But certainly with stagnant demand growth. And that's not me, that's the I e. A. Saying stagnant demand growth through next year.

We could certainly see sub thirty dollars oil if if this deal turns out to be a far but in here and the now, stay away from it. We're headed back to over fifty dollars if this, if they do make good on the deal. Stephen Shark, thank you so much. A Shark report on oil and gas and valves and pipelines and all things energy. I mean, you know, Francy mentioned it brilliantly today. David Girl, We in America don't understand the frenzy of an opaqu com meeting. You're saying,

so you wish you could cover one with you. I've never been, but Francine says, it's bizarre. It's all these informal little chit chats with reporters and a handline will come out stopping doors stopping. Yeah, they're stopping exactly, and there's like a single headline comes out in granted, Bloomberg is the fastest and best, and headlines are heard and the oil price moves and then here's a new one. Just kneel hum out on Twitter and it's a Bloomberg headline.

OPEC ministers still debating details of oil. I'll put cut proposal for some countries. I have no idea what I'm reading, but there is there are more informal breakfast to be had. Any way to run a cartel exactly well said, I mean, how do you run the microeconomics of a cartel? By scrum Francine is a pro at this Yes, thanks to Javier bloss In our oil team, they are there. Stewart Wallace leading our we do. Stewart Wallace leads a coverage in London. Stewart Wallace was with John Rockefeller at the

first oil oil Derek east of Cleveland. I mean he goes Stuart Wallace goes back that far. Our next because David Girl is going to bring in our next guess. Anthony Scaramuchi. You may not know the name. Mr Trump knows his name because he was out early and often for Donald Trump when any and all doubted. Mr Scaramuchi is an interesting guy, toughs economics, Harvard Law School. And what is great, uh David about Mr Scaramucci is there is an there's like a Mike Piazza energy there like

day one let's like, let's go. And what's great about this is he bought Mike Piazza's jersey years ago, which one is wonderful. Game after September eleventh, David, why don't you help us? Uh? Maybe is can he make a Can he make an announcement right now? Can he transit? If? Following Anthony scar A, co founder of Skybridge Capital, executive comittee for the Trump transition team. And that's where I

want to start. Anthony, you had a front row seat for the parade as it passed through Bedminster and along Fifth Avenue. Donald Trump looking at many people for this job of Treasury Secretary? Why did he settle on Stephen Nuchin? I first want to say, if I had Tom's height, anything could have been possible for me. Gave it. But on on on the topic of the of the transition and Treasury, Stephen Manuchin is a perfect pick for many

reasons that I'm gonna give you the top three. Number one twenty plus year relationship with Donald Trump and with Wilbur Ross, the new Income and Commerce Secretary. Number two. He is a phenomenal guy and a number of different businesses. He's worked in Hollywood, He's worked on Wall Street. And he also built from scratch the finance operation which power

us through to the presidency. And he was critical in the policy piece of our website UH and building the tax plan, in all the white papers around the economic and trade policy for the Trump campaign. So I know this is UH something that it will carry through with him into the administration. And I've had the opportunities know Steve now for a quarter century, Anthony. A lot of people here saying we know the background, we know about Goldman, Sachs,

we know about Hollywood. They want clarity about how Stephen Manutin is going to run the Treasury Department. Give us some sense of that. Well, listen, he's a very organized guy. He's super meticulous. My my, My guess is he's going to start with the first order of shop is the tax policy and the implementation of the tax policy. UH. He's already going through the U S. Trade representative list with our transition team this morning, Deputy and Under Secretaries

of Treasury. But the first order of action is going to be on taxes and getting the Trump tax plan into the Congress immediately within the first for days. The second big piece of this is working in coordination with the President, Secretary of Commerce, and the US trade representatives to focus on fair deals and right siding these trade deals.

As you guys both know, our economic history in the United States is that we've uneven these trade deals to benefit the emerging economies, as we believe that economic interdependence would lead to less violence around the world. That has been very, very successful. But the side product of the side that is that hurt the middle class families and

the working class families in the United States. And so these guys they understand the Trump trade philosophy better than anybody, and they're gonna go back through these deals and you saw what happened to Carrier last night, and go back through these deals and re fashion them for the American worker and for the American middle class. So that's how we're gonna run things. Anthony helped me understand Trump trade policy.

Every economist I talked to says, when he or she is forecasting for the next year, the biggest X factor here is what's going to happen with trade. They're worried about tariffs. They're worried what that could mean for the economy defined for us, what the trade policy is under Donald J. Trump. Really, I really feel that people that are worried about tariffs are not really understanding the trade policy. He talked about it, they talked about him on the

campaign trail. Well, well, no, we're taking a very superficial view. What do you what do you have said about tariffs on the view is that he had, I mean, you know on the campaign trail is that he would use them as a bargaining chip if people did not want to go through the formal review process and even up these trade deals. And so you know that we've had

back channel discussions with many many nations at this point. Uh. And my guess is is that we are in the United States, the largest economy, twenty three point six percent of the global GDP our trading partners are going to want to deal with us, and I think Mr Trump is sending them a message same way he did to Carrier over the weekend, Uh, that we want the things to be fair, and want the things to be fair

for the American worker. The tariffs are a last resort proposition if people are making a decision that they don't want to treat us fairly. And that's really all there is to it. And so This is a free fair trade proposition by the Trump administration. And I can't think of any two better people in the United States the prosecute this than Stephen Manuchin and Wilber Ross Anthon. We got about thirty seconds left here. Donald Trump tweeting this morning that he is going to give a press conference

on the fifte December talking about leaving his business. What does the Trump organization look like come December fift and is this in response to criticism of those back channel deals you're talking about with foreign governments, worries about conflicts of interest? Well, listen, you know we're working super hard on this. Someone that not not really mentioned it, Don McGann, the White Asse Council. You're going to see Mr Trump

completely removed from the Trump organization. He's leaving that to his children are going to stay in the organization, and it will be a very thick wall between the two. In fact that what do you mean to say a wall? They're not even gonna be talking to each other. As as it's a phenomenal trophy business. And my guests is the children are gonna do a really good job on that business without the dad, and he's going to be extremely focused on the American pief All right, Anthony Scaramuchi.

Remember if Donald Trump's transition team's executive committee, This is Bloomberg. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio. Who you put

your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why learn more and find your independent advisor dot com