Showing posts with label Italy. Show all posts
Showing posts with label Italy. Show all posts

Monday, 12 December 2016

How austerity is crippling schools in southern Europe

While reforms are helping, budget cuts are sabotaging students’ performance
Fifteen-year-olds in southern European countries are struggling to catch up with their peers in international tests in maths, reading and science.
For years, southern European countries have failed to climb up the OECD’s Pisa rankings which assess the performance of 15-year-old students in mathematics, literacy and science.
Greece ranks 43rd out of 72 countries in science, the lowest score among advanced countries, and similar to the levels reported in Chile and Bulgaria. And while Spain and Italy do significantly better then Greece, both scored below the OECD average ranking 29th and 34th in the science assessment.
Two-in-10 Greek students fail to reach the baseline level of proficiency in maths, science or literacy, meaning they are unable to work out the price of an item in a different currency and struggle when reading text to pinpoint its main ideas. Worryingly, the situation has been worsening consistently in the past decade.
Conversely, in Spain, Italy and Portugal, one-in-10 students fail to reach these levels, slightly below the OECD average.
This rift was not always there. In 2006 Greece, Portugal and Italy reported very similar scores, now they differ by more than 40 points — equivalent to more than a year of schooling. Portugal dodged the group of low-performing countries altogether.
What happened to schools in Greece?
The European Commission’s education monitor says the Greek education and training sector was “strongly affected by very low and decreasing public spending, due to strict fiscal consolidation”. Indeed, funding has dropped more than one-third since 2009 and public spending on education is the lowest in the EU.
But funding is not the only problem. Teaching time in Greece is the lowest in OECD countries, about 40 per cent lower than the OECD average. The same EU report also points to “a lack of a culture of performance evaluation” as well as the need for “implementing new decentralisation measures to increase the financial and organisational autonomy of primary and secondary schools across the country”.
Contrary to most European countries, Greek schools are not able to select, pay or fire their schoolteachers, while teachers cannot pick courses, determine the content of the classes they teach or pick their text books. In terms of school autonomy, Greece ranks at the very bottom among 35 OECD countries.
So how did other peripheral countries improve their school systems?
Portugal, Italy and Spain have all introduced reforms aimed at improving the quality of teaching.
In Portugal these included a new funding formula linked to new performance criteria. Italy introduced new school and teacher evaluation systems while Spain’s school reforms — known as LOMCE — introduced a newly designed curriculum, assessments to detect difficulties at an earlier stage and a different approach to the promotion of skills-based teaching and learning.
The European Commission’s education monitor expects school outcomes in all these countries to improve further in the next few years.
Will these reforms suffice?
At this stage it is probably too early to tell, but despite the improvements Spain and Italy still have a wide gap to close and a few issues to tackle.
Both countries are marked by vast regional disparities. The poor regions of Italy and Spain are among the worst performers in the education league. Calabria, in the south of Italy, has a similar proportion of students lacking basic skills as Latin America, while students in Trento, in the wealthy north, perform similarly to their Singaporean peers, the league’s top performers.
Similarly, school outcomes in Madrid or the Extremadura region differ by 54 points in maths, a variation as wide as that between the first and the 23rd best performing countries.
While Portugal’s reformist efforts were coupled with a sizeable chunk of government spending reorientated towards education, Spain, Greece and Italy report some of the lowest shares of education spending in the EU.
Italy’s education system faced some of the most severe cuts — in some cases as high as 20 per cent — despite already being the OECD state with the lowest share of education spending.
To escape what the OECD calls the low-growth trap, peripheral countries need high human capital which can be delivered through efficient and high-quality education systems. Yet education has so far been “a net loser from austerity policies” in these countries”, according to a paper on “The asymmetrical educational consequences of economic recession in Southern Europe”.
The OECD students assessment results released this week gave further proof that peripheral countries must combine reforms with more spending, regardless of their budgetary constrains.

Why Italy’s referendum is not the same as Brexit or Trump results

Why Italy’s referendum is not the same as Brexit or Trump results

Political, economic and demographic factors played out differently in reform vote
“Nobody ever loses in Italian politics; I have lost,” said Matteo Renzi, the outgoing prime minister, in reference to the habit of Italian politicians to stay in power regardless of their failures. His concession came an hour after exit polls that all but confirmed his defeat in the constitutional reform referendum.
But who voted against reform?
Opposition was strongest in areas where economic dissatisfaction is rife and where political antagonism is strong.
Political reasons
A statistical analysis of the results shows political loyalties played a large role in the defeat. In provinces where more people voted for Mr Renzi’s rivals in the Five Star Movement and for Silvio Berlusconi’s party — both supported a No vote — in the 2013 general election, there was a stronger rejection of the referendum. In contrast, a vote for the prime minister’s centre-left Democratic party (PD) in 2013 is associated with a larger share of votes in favour of reform.
However, in the charts above all the points are located towards the top, showing that reform was largely rejected across the board, even in centre-left strongholds. In provinces such as Livorno and Ferrara, where more than a third of the population voted for the Democratic party in 2013, the majority of the population rejected constitutional reform. Only in 11 of the 48 provinces where the Democratic party reached over 25 per cent of votes three years ago did votes in favour of constitutional reform outweigh those against.
Economic reasons
Economic discontent also played a role in the premature ending of Mr Renzi’s mandate. Analysis reveals that higher unemployment rates and lower levels of per capita income were associated with more emphatic votes to reject constitutional reform.
While it is true that economic discontent was associated with greater support for the Five Star Movement and for Mr Berlusconi’s party in the general election of 2013, its correlation with the outcome of the referendum was even stronger, suggesting a deeper protest motivation behind the referendum vote.
However, even in provinces where unemployment is below six per cent — comparable with that of Germany — reform was still rejected. That is the case, for example, in the rich northern provinces of Belluno, Cuneo, Bergamo and Verbano.
Immigration
A recent increase in the share of the population born overseas was not associated with larger No votes in the Italian referendum, in contrast with the UK’s EU referendum vote in June.
In short, anti-immigrant sentiments may have had very little impact on the outcome of the Italian referendum.
Education
Another difference with the UK’s EU referendum and Donald Trump’s victory in the US election is the relatively minor role played by levels of education in determining the outcome of the vote.
While it is true that a higher proportion of the population with a university degree corresponded to a higher share of the Yes vote — and vice versa for areas with larger proportions of people with only a lower secondary level of education — the correlation is relatively mild, and higher educational attainment is also positively associated with support for the Democratic party and with per capita incomes. That means, overall, educational attainment played a smaller role than economic factors in the referendum vote.
Bottom line?
Unlike the demographically stratified votes in the UK and the US, support for the No vote in Italy crossed economic and social divides. Political opposition and economic protest are associated with larger No votes, but it was their combination that truly led to the scale of the defeat for Mr Renzi. While the outcome of the Italian referendum is seen as another example of the rise of populism — and it certainly is, in the sense that populist opposition parties played active roles in the campaign — it differs in the weaker role played by education levels and the smaller impact of rising immigration.

Friday, 25 November 2016

Six charts that are key to understanding Italy’s referendum- Dissatisfaction hampers support for reform of odd parliamentary system

Italy’s referendum on proposed constitutional changes on December 4 is unnerving markets and could prematurely end the premiership of Matteo Renzi, who has staked his term in office on the outcome.
Following the UK’s Brexit vote in June and the election of Donald Trump in the US, the Italian referendum has gained significance as the next potential opportunity for an anti-establishment vote. So what is it all about?
How the parliament could change
Currently two chambers, the Senate and the chamber of deputies, are both elected in the same way and in effect hold the same powers: both must approve a law in identical form. More often than not this leads to protracted negotiations, numerous amendments, and overly complicated legislation. 
If Yes wins the referendum, the Lower House will become the primary legislative body, while the Senate will become a “House of Regions and Municipalities” with no veto and limited and specific legislative powers. If Yes wins, the number of senators will be cut from 315 to 100. 
The Italian parliamentary system is currently one of the most burdensome in the world. Across both chambers, Italy has 952 members of parliament, the third-largest number in the world after China and the UK and one of the only four countries globally to have more than 900 MPs. 
Although members of the UK’s House of Lords can claim expenses of up to £300 for each sitting day, they do not receive a salary. Italian senators are currently salaried but if the reform passes that will no longer be the case. 
The cut in Senator numbers is even more critical in light of how much they get paid 
According to the UK’s Independent Parliamentary Standards Authority, the gross salary of an Italian parliamentarian is the second-highest of major advanced countries after the US. It is higher than any other major European country, and nearly double what UK MPs receive. And this is without accounting for expenses and allowances. 
Another core element of the reform: re-centralising power
If the reform goes through, regions would lose oversight of energy, strategic infrastructure and civil protection. The responsibility would instead go to the central government. 
“Italy has become a quite decentralised country,” the OECD noted in its 2013 country report. Indeed, regional government accounts for over three-fourths of national procurement. That is around double the share in the UK and above most European countries. 
According to the same report “for some policy areas the decentralisation to regions does not make much sense”. It highlights energy policy, where “current arrangements require every region to have its own strategic energy plan”.
Many economists support the redesign
“Once in place, the reform should permit more efficient policymaking, reduce ambiguity about who is responsible for what, avoid implementation delays due to subnational government not following through on national legislation,” writes the OECD. 
The reform “would allow the government to regain certain key responsibilities, which would make the public administration more effective, while allowing simultaneous devolution and control on other areas”, Lorenzo Codogno, a former chief economist at the country’s Treasury department, has said. 
Critics claim democracy will be impoverished 
The main argument of critics is that the Senate’s limited legislative powers would undermine the checks and balances of the Italian constitutional system, especially in light of the new electoral reform. The eligibility of some of the regional representatives and how they can function in their double roles of functionaries and Senators also raised concerns. 
They also point out there are many uncertainties over how the new system would actually work. 
Anti-reform or anti-Renzi?
It is difficult to say whether the Italian public shares these views or whether a No vote would mostly indicate lack of support for Mr Renzi. A recent survey, for example, showed that only about one-in-10 Italians know the details of the reform, meaning anti-Renzi protest votes are playing an important role. 
It is not difficult to understand why Italians are dissatisfied. This, after all, is a country where nearly one-third of the population is at risk of poverty or social exclusion and where youth unemployment is still at 37 per cent, and as high as 50 per cent in the south of the country. Polls appear to show those who live in the south and younger people are more likely to be against the reform.
Low levels of trust in Mr Renzi also do not help build a consensus. The prime minister is currently trusted by 32 per cent of the population, higher than any other party leader but 20 percentage points below the president, Sergio Mattarella. 
But votes are harder to predict
It is illegal to publish polls for two weeks before elections in Italy, but the last available figures appeared to show No in the lead. This will not please many top Italian chief executives who almost unanimously expressed support for the reform. 
Yet recent electoral results showed that we should treat voting intentions polls with a pinch of salt. The gap between support for Yes and No is fairly narrow and a large proportion of the population has not expressed a view on the vote.
Support is particularly difficult to gauge in Italy because a significant part of the electorate is not surveyed. More than 1m Italian expatriates took part in the 2013 general election, more than half living in European countries. 
One million expat votes are not a game changer in a country where around 35m people will vote domestically, but they could make a difference in a tight race. In previous elections, Italians abroad have given little support to the Five Star Movement and Silvio Berlusconi’s party Forza Italia. Both support the No campaign. 
Whatever the outcome, the market reaction to the No lead and the uncertainty has been decidedly negative. 
The Italian government bond yield, a measure of market-perceived risk, has been rising, while the spread with the German and Spanish bonds has been hitting a new record high nearly every day.

Five charts show why earthquakes in Italy are so destructive

There are have been nearly 200 earthquakes of magnitude 4.5 or greater since July. The greatest number were in New Zealand, Indonesia and Japan, but only three of these were classified by the US Geological Survey as having the maximum risk of fatalities and economic losses. All were in Italy. 
Italy often hits the headlines for destructive earthquakes, but “in an international perspective, Italian earthquakes are small”, explains Gianluca Valensise, director of research at the Italian Institute of Seismology. 
In the past century Japan, Chile and the Philippines were shaken by more than 10 earthquakes of magnitudes of 7 or greater, compared with two that struck Italy, in 1908 and 1915. Italy has not experienced any earthquake of 8+ compared to seven in Chile and 20 in the world. 

The number of casualties from earthquakes in southern Europe show that these events tend to be much more destructive on the peninsula. Italy had fewer earthquakes rated 5+ than Turkey and Greece in the last century, but they caused at least double the number of fatalities. 
So why do they cause so much damage? 
More densely populated
Italy’s population density is more than double that of in Turkey and Greece and about 12 times that of New Zealand. 
Moreover, in Italy a larger proportion of the population lives in rural areas, while the Greek and Turkish populations are more concentrated in urban centres.
This means that when an earthquake hits Italy, it is much more likely to affect a populated area than in Greece and Turkey. 
A different type of quake — and right under Italians’ feet
Subduction earthquakes, caused by plate convergence, are much stronger, like the one in Japan in 2011 or in Chile in 1960, but their epicentre is usually in the oceans, far away from urban centres. These types of earthquakes are particularly dangerous for tall buildings, but not so much for one or two storey constructions. 
On the other hand, most Italian earthquakes are of relatively small magnitude and these affect small buildings the most. They also happen right under the feet of the population. The riskier area is along the Apennines, a mountain range at the centre of the country. 
Smaller magnitudes does not equate to smaller risk.
“Over a certain level of magnitude, usually between 5-5.6, the shaking itself does not increase, but a higher magnitude will spread to a wider area and will last for longer,” Dr Valensise told the FT.
Ageing architecture
When an earthquake does hit an Italian town or a city, it is likely to cause more damage because its buildings are old. 
In Italy a significant proportion of houses — about one in 10 — is more than a century old and half of the housing stock was built before 1971, the year in which the first anti-seismic building regulation came into place for new residential properties and radical renovations. 
However, that figure is the national average. In Amatrice, the town that was destroyed by the earthquake of August 24, 76 per cent of the housing stock was built before 1971. That number was even higher — 86 per cent — in the town of Accumoli, which is in ruins after the same quake. 
Weak government oversight
Italy has an anti-seismic building regulation that assesses risk levels and provides technical guidance on how to build safer dwellings. But it is relatively new. The 1970s regulation excluded half of the country from the risk map. It was only in 2003 when a more accurate seismic map was adopted and only in 2009 when it was coupled with a comprehensive and up-to-date building regulation for new buildings and structural renovation. 
To this day, there is no single regulation on existing buildings, largely because of the huge costs involved. 
Despite that Norcia, a town near Perugia in the region of Umbria, went through a process of anti-seismic improvements on all its buildings because of its seismic history. During the earthquakes of August, the town registered very limited damage. Because Amatrice had been lucky in the past, its residents did not improve their dwellings in a similar way resulting in the disastrous outcome of the summer. 
In comparison, in Japan there is a comprehensive anti-seismic regulation dating back to the 1920s, making the vast majority of housing stock in line with the regulation. “Regardless, when an earthquake does hit the land, it causes damages also in Japan,” adds Dr Valensise.
Bottom line? The government pays
In Italy, earthquake insurance is almost non-existent. Attempts to introduce it failed both because of the costs involved and because of the difficulties in assessing the risk. 
“In order to insure a building against earthquakes we should know how houses are built. At the moment the risk premium would need to be assessed dwelling by dwelling, which is simply not feasible,” adds Dr Valensise. 
This means the government is left with the responsibility of paying for the rebuilding costs. The Significant Earthquake database from the National Oceanic and Atmospheric Administration has not yet disclosed how much the reparations from this year’s earthquakes will cost, but estimates vary from $2.5bn to $16bn which is how much the l’Aquila earthquake of 2009 and the 2012 earthquake in Emilia Romagna ended up costing respectively. 
This is certainly not good news for a country struggling to improve its fiscal balance and reduce its debt.

The scale of the European investment crisis and why it matters

Investment in Europe, both public and private, dropped dramatically following the international financial crisis, and in its aftermath growth has been weak in some countries and non-existent in others. The lack of investment growth is particularly worrying in peripheral countries where it hampers the chances of future economic and productivity growth, as well as limiting employment expansion.
Just how steep was the drop?
It’s pretty serious. The Eurozone economy is now about six per cent larger than it was ten years ago, but the real value of investments is still six per cent below its 2006 levels. When compared to the pre-crisis peak in the first quarter of 2008 the drop is even larger, about twelve per cent.
The investment crisis hit the peripheral countries — Greece, Italy, Portugal and Spain — particularly hard. The real value of investments in Portugal, Spain and Italy is about 30 per cent smaller than ten years ago, while that of Greece shrank by 70 per cent.
Were it not for the contraction of investment, the Portuguese economy would have expanded by five per cent in the last ten years instead of contracting; the Italian output would have been flat rather than six per cent smaller and the Greek economy would be 8 per cent, rather than 24 per cent, smaller than ten years ago. And this is without taking into account the multiplying effect of investment on consumption and productivity.
Most peripheral countries are now showing signs of recovery. In Spain, gross fixed capital formation rose by 17 per cent since its lowest point in 2013. In Italy the sector started expanding again in 2014, but only marginally, while in Portugal investment started declining again after a couple of years of recovery. All of them have a long way to go to return to ‘normality’.
The drop is partly due to the collapse of the housing bubble in some of those countries, particularly Spain. And “a swift return to those investment levels would not to be expected or desired” writes a McKinsey report aptly titled “Investing in growth”.
In Greece, investment in dwelling dropped in real terms from €5.3bn ten years ago to just €300m now, a staggering 94 per cent drop. Investment levels in dwellings were halved in Portugal and Spain.
But the drop was not confined to dwellings. Investment in other buildings including factories and schools also fell, as did spending in buying and updating machinery and equipment.
Experts are growing concerned
Economists agree that it matters a great deal, and say it could actually be instrumental to European stability.
The lack of investment growth “is a big concern in terms of demand but also in terms of productivity and potential growth” explains Sebastian Barnes, a senior economist at the OECD and head of its EU desk.
“Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock” writeMarco Buti and Philipp Mohl from the Economic and Financial Arm of the European Commission.
“The EU investment crisis means obsolescence of capital, losses in terms of technological advances and potential constraints affecting an effective reallocation of resources” warned a report from the European Investment Bank.
So why is investment not growing?
There is little appetite to invest when demand – both domestic and international — is sluggish, banks are burdened with a heaping pile of bad debts, alternative forms of lending are limited, and uncertainty about the future is high as is the case in peripheral Europe, to varying degrees.
It’s a vicious circle. Until investment growth doesn’t pick up, demand is likely to remain sluggish and the proportion of non-performing loans has little chances of declining. As a result, confidence is unlikely to pick up: “a low growth trap”, as the OECD put it.
The way out? Reforms
In order to escape the low-growth trap and foster investment, governments should work on making their countries more attractive to investors and make investments easier by introducing labour and product-market reforms. This has been repeatedly advocated by both the IMF and the OECD.
These countries did start a process of reforms to improve their competitiveness, including major labour market reforms in Italy and Spain, albeit with little uplift in investments so far. Mr. Barnes encourages governments to do more, particularly in terms of product reforms.
Another major challenge is the financing glut
Stacked with mountainous bad debts, banks can hardly focus on financing new investments. The Capital Market Union, the European project aimed at developing alternative sources of finance firms across the member states, would come in handy at this time. But after the UK voted to leave the EU the project slowed down, to say the least.
Shaking up the status quo
European countries, particularly in the periphery, cut public investment following the financial crisis. As conditions improved, many governments began adopting looser policies, but this barely affected spending in investment. Instead, taxes were cut and administrations focused on encouraging consumption. But, says Barnes, these initiatives won’t do much to promote longer-term growth.
One way public investment could be bolstered is by rethinking the European Union’s fiscal rules and exclude net investment from the spending limit of three per cent of GDP. This is a controversial suggestion, but as they say sometimes stirring the boat is the only way to keep it from sinking.

Why Europe’s banks will never be the same again

European banks have been shrinking since the financial crisis, dwindling both in terms of their market value, number of branches and staff. Their fortunes have suffered and profits fallen as a result of stricter regulations, general economic weakness and low interest rates.
It’s unlikely that they will ever be the same again. All the more so as the decline in Europe’s over-reliance on banks could present new opportunities for the region to develop much-needed alternative financing channels.
Financial companies lost one trillion euros in market value
Since August 2007 the 471 financial companies that form Datastream’s financials equities sector lost over one trillion euros in market value. That’s the equivalent of Spain’s yearly GDP wiped out.
No other EU sector suffered a comparable loss, not even Oil & Gas contending with low oil prices.
Back in 2007, financial service companies were by far the largest EU Datastream sector by market value, roughly 64 per cent larger than the consumer goods sector. Now they are about the same and the latter was even briefly bigger in the aftermath of Britain’s EU’s referendum.
The worst performing sector in the EU since 2007? Banks
Datastream’s EU financials index has halved since its pre-crisis peak. By comparison, healthcare and consumer goods stocks indices are 70 per cent higher.
This is truly a pan-European story. Bank stocks are traded at less than 40 per cent of their August 2007 prices across all major European countries. German and Italian banks are traded at about 15 per cent their 2007 levels, while the Portuguese banks index is at an incredibly low 2 per cent of its pre-crisis price.
Back in 2007, there were 15 banks among the largest companies by market value of the European Stoxx 600. Today they are down to five.
Thousands of job cuts and axed branches
In 2015 there were more than 27,000 fewer bank branches in the Eurozone than in 2007, a drop of 13 per cent. There were 212,000 fewer people employed in banking, a 10 per cent drop since before the crisis according to the ECB.
The downsizing was particularly dramatic in France – where the number of banks halved to 360 – and Spain where it was exacerbated by a poor recovery in overall employment.
The largely fragmented German banking sector was not left unscathed. In July this year it counted 1,745 credit institutions, 14 per cent less than in the same month in 2007.
The European banking sector needed to downsize
Up until the 1990s the EU banking sector was comparable in size to other advanced countries. But soon after it “became extraordinarily large” and now “Europe is home to the world’s largest banking system” according to Sam Langfield and Marco Pagano, authors of ‘Is Europe overbanked?’.
Behind this disproportionate growth were government policies:
“Eurozone banks (..) benefited from a greater reduction in funding costs owing to government support than US banks” they write.
This meant that alternative forms of funding were hard to come by and to this day they are notoriously weak. The EU’s equity market is about half the size of that of the US, its securitisation market is less than a quarter – this is despite their economy being roughly the same size.
Time for change
According to Langfield and Pagano, the downsizing of the banks has created a slack which “security markets have partly taken up”.
It’s about time. Mario Draghi, president of the ECB, has said that “it’s better to have a plurality of channels financing the real economy than to rely on just one”. And indeed, the point of a Capital Market Union is to “diversify and amplify sources of finance”.
But there is change in the horizon. Langfield and Parano believe the shift from the old bank-based model to market-based finance “is likely to prove structural”.