Five charts show why earthquakes in Italy are so destructive

NOVEMBER 18, 2016 

by: Valentina Romei

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.

Greek economic set to expand, but it could be ‘statistical growth’

SEPTEMBER 26, 2016 

by: Valentina Romei

On Wednesday, Greek prime minister Alexis Tsipras told Reuters that the country could beat expectations and report an expansion in 2016.

The consensus among economists is that the Greek economy will expand in 2017, and in their latest Economic Outlook the OECD also stated that “growth is projected to turn positive in the second half of 2016”. Positive trends are already visible, yet it might be too soon to call this the beginning of a recovery.

One of the most promising measures is the strong tourism figures. In July this year, 4.7 million travellers reached Greece, nearly six per cent more than the already strong figures from last year. The number of tourists from the EU increased by a staggering 19 per cent, largely due to the perceived risks of travelling to Turkey and northern Africa. The number of nights spent in tourist accommodations reached record high in the 12-months to September.

This is particularly good news for Greece considering the country depends on tourism for about 20 per cent of its GDP, according to the association of Greek tourist enterprises.

Tourism is a driver behind the recovery in employment in the accommodation and food service sector. Employment in the sector is now above pre-crisis levels while total employment is still 20 per cent below 2008 levels, despite improvements in the latest months.

The Greek manufacturing sector is also improving. The Markit purchasing manager index showed that the sector was expanding in August, with new export orders showing the sharpest increase in over two years. This is in line with improvements in the actual industrial and manufacturing production indices.

Positive trends are visible also in the consumer sector. Car registrations, for example, increased by 45 per cent in the 12-months to May this year since their lowest level in March 2013. Back then, they were about 80 per cent below their peak in 2004.

Yet despite all these positive signs, the Greek economy has not quite reached a turning point.

Even the strong tourism figures hide that the fact that revenues from tourism actually fell in July compared to the same month last year, particularly among German tourists. This could indicate that tourists were attracted by discounted prices, or it could point to tax evasions practices.

Frank Gill – Senior Director EMEA Sovereign Ratings at S&P Global Ratings – expects the economy to stage a ‘statistical recovery’ next year, meaning that the economy will bounce back largely because of the very low base it reached after deep, prolonged and multiple recessions.

The Greek government had not been paying its suppliers because of the its serious problems of cash flow. But this year Greece’s Third Economic Adjustment Programme “includes plans to pay down an estimated three per cent of GDP of arrears to the private sector, where firms are likely to clear their own wage arrears to employees, who may then spend them”, explains Mr. Gill.

The cash inflow of the arrears payments are expected to be the main drivers of the recovery in the second half of the year, but they are only a transitory factor.

The real problem is the lack of investment, particularly in the private sector. Although investment grew in the second quarter of this year, the measure has been volatile in the last three years and there have been no signs of a coherent growth.

A strong recovery in investment is particularly difficult as the banking system has been stymied by its high share of non-perming loans which have nearly hit 40 per cent.

In response, the government has passed laws that could potentially enable some commercial banks to sell non-performing loans. But it would take years for this to be put into practice. As Mr Gill put it, “it’s very early days to identify some potential buyers for these NPL”.

According to the OECD the implementation of planned social policies – such as the Guaranteed Minimum income – would alleviate poverty, which rose dramatically during the crisis. Fighting tax evasion and rationalising the pension system is also – somewhat optimistically – expected to help pay for those policies. But the report also warns of ‘rising global risks’ which pose a threat to Greek exports growth, not to mention the high and rising price that Greece is having to pay due to the refugee crisis.

Given these indicators Mr. Gill says “it’s hard to identify anything that could drive sustained growth apart from a statistical recovery”.

The scale of the European investment crisis and why it matters

OCTOBER 6, 2016 

by: Valentina Romei

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.

Turkey’s lost momentum for economic reforms

JULY 29, 2016 

by: Valentina Romei

Turkey experienced a period of exceptional growth and institutional transformation in the run-up to the global financial crisis. The country invested in infrastructure, education and health in addition to adopting a number of market-oriented reforms. Data shows that in the years prior to 2008, Turkey grew at a pace similar to that of China.

After the crisis, its rebound was even stronger, but this pace is now difficult to sustain. Turkey’s poor export performance, low foreign investment stocks and unbalanced growth due to a reliance on domestic demand are among the culprits.

The boom decade

Turkey is now unrecognisable from how it was back in 2000. “At the turn of the millennium, there was a huge momentum for reforms and opening, and money coming in spurred among other factors by the negotiations for the country’s accession to the EU,” Vincent Koen, the OECD’s head of Country Studies division, told the Financial Times.

Since then employment in agriculture has more than halved from 40 per cent to less than 20 per cent; the infant mortality rate dropped from 32 per 1,000 live births to 11; male school enrollment in university jumped from less than 30 per cent to 85 per cent.

Turkey’s GDP per capita has converged with that of the EU and is now about one third of the regional average ‒ up from half that proportion.

Unfortunately, civil rights reform did not progress as well as other social measures.

But the future may not be as rosy

Turkey is now growing at a slower pace than a few years ago and it’s failing to meet its potential. In a phase of catching up and with a population that is much younger than other emerging markets in the region, Turkish growth could be much stronger than the 4 per cent of last year.

“The export sector should be considerably strengthened,” the OECD has warned. Turkey’s exports of goods and services account for 28 per cent of GDP, a small proportion compared to Romania’s 41 per cent and Poland’s 47 per cent.

Domestic companies that are largely oriented at the domestic market and low involvement of foreign companies are not helping the country’s trade performance. Indeed, Turkey has one of the lowest foreign direct investment (FDI) stocks as a share of GDP in the region.

“The level of FDI is rather modest due in large part to political uncertainties, but also to the way policy makers make discretionary decisions about what type of investors they are going to favour,” Dr Koen told the FT.

“This is an environment in which foreign investors feel insecure and at a disadvantage compared to well-connected domestic investors”, he added.

There are examples of successful integration in the global value chain. Take the case of Turkey’s car manufacturing industry which produces car components that are exported internationally. Foreign firms ‒ such as Japan’s Toyota and Honda, Germany’s Daimler and the US carmaker Ford ‒ invested in Turkey in order to create assembly facilities which are labour intensive and therefore cheaper to contract to Turkey than in their home country.

The automotive industry is the fourth largest sector of Greenfield foreign investment in the last decade, and indeed one of the most dynamic export sectors. Cars account for the largest export product: around 12 per cent of total export, up from 2 per cent at the beginning of 2000.

But a large proportion of Turkish firms are not part of the global production chain. They tend to be affected by low productivity, have a domestic market orientation and large levels of informality.

Unbalanced growth

“Economic growth remains disproportionately centred on domestic demand,” writesthe OECD in its country’s economic survey released in July. A huge increase in the minimum wage ‒ up 30 per cent from January 1 this year ‒ and strong job creation helped sustain domestic demand despite adverse economic and political conditions in the country and the region.

However Dr Koen warned that “this is not the type of growth that we would like to see, we would prefer economic growth driven more by investments and exports”.

Strong domestic demand and poor export performance result inevitably in a large current account deficit that has been worrying analysts for some time.

Turkey’s current account deficit reached its lowest point in 2011 when it accounted for about 10 per cent of GDP and has narrowed since 2014, largely helped by lower oil prices. But with the recovery of oil prices, the OECD has forecast Turkey’s current account deficit to hover around 5 per cent of GDP in 2017.

This makes the country “highly vulnerable to reversal of capital flows” which could be “highly disruptive because private consumption, investment, and government expenditure must be curtailed abruptly when foreign financing is no longer available”.

The impact of political turmoil

The failed coup and the following institutional fallout threaten economic sustainability in two main ways. The obvious one is a reversal of foreign capital, this was feared in the aftermath of the coup but has not yet been materialised. Secondly, longer term effects could be the lack of reforms and a slowing down in foreign investments.

In order to improve Turkey’s unbalanced growth the government should “work on labour market reforms to make the supply side more efficient and their exports more competitive and they have to make efforts on energy conservation to reduce the energy import bill”, explains Dr Koen.

Turkey took measures to contain domestic demand and as a result lending growth to consumers has slowed down. But with the latest political events and the country’s accession to the EU now in doubt, Dr Koen said there is a real “fear that the reforms momentum could be lost”.

How Italy got in (and out of) the debt trap

This week the European Commission let Italy off the hook, granting the country extra flexibility – to the tune of 14 billion euros – in its debt reduction targets for 2016.

The extra “flexibility” includes allowances for investments (0.25 per cent of GDP), for the refugees crisis (0.04 per cent of GDP) and for extra security measures (0.06 per cent of GDP). In return the Commission wants a ‘clear and credible commitment’ from Italy that the country will respect its budget targets in 2017.

How did Italy get to this point?

Italian public debt currently stands at 132.7 per cent of GDP – the second highest in Europe after Greece.

In the eighties Italian debt rose by 38 percentage points and by 1990 it had reached 92 per cent of GDP. It then experienced the largest drop in the post- World War II period and rose again after 2007, albeit for different reasons.

The legacy of the eighties

The debt explosion of the 80s is, at least in part, a story of bad management of public finances.

“The influence of political parties (..) has contributed to the widespread inefficiencies, to the proliferation of external technical bodies and to the fragmentation of public administration”, a 1997 OECD country survey explains.

Public expenditure was high also because of “inadequate controls, poor co-ordination among procurement agencies and collusion between suppliers and administration.” But this is just one part of the story.

In the eighties, the Bank of Italy introduced high policy rates- at 19 per cent compared to 7.5 per cent in Germany- as a way of reducing fluctuation in exchange rates ahead of the introduction of the single currency. But they also resulted in very high interest payments on the debt.

Despite the waste in the public finances, Italian government spending excluding interest payments increased less than other major European economies.

But, contrary to other European countries, in Italy the tax increases needed to finance this expenditure were delayed.

The result was a budget that for sixty years was never in surplus and that reached its worst levels -12 per cent of GDP – in the mid-eighties.

Italy finally reached a surplus in its fiscal balance (excluding interest payments) in 1992 thanks to a series of measures of fiscal consolidation. It has remained positive ever since, with the exception of 2009.

What now?

With around 4 per cent of GDP still being spent on paying interest on public debt – that’s double the OECD average and nearly four times what Germany pays – the overall budget is still in deficit.

A reduction in debt-to-GDP ratio is expected by 2017 – this should result in a further shrinking of interest payments, assuming interest rates remain low.

This would leave room for “some tax cuts or growth in non-interest expenditure” as the OECD wrote in its latest country survey, which could be crucial in fostering economic growth.

Economic growth is key

“Economic growth is the way out of the debt trap” explains Lorenzo Codogno, visiting professor at the LSE, chief economist at Micro Advisors and former director general at the Treasury of the Italian Ministry of Finance.

Indeed, the size of the economy is the denominator that inflates the debt-to-GDP ratio in times of falling economic output.

In the period which saw the fastest reduction of the debt-to-GDP ratio, real public debt actually increased more rapidly than after the global economic crisis.

But with sluggish economic growth, even milder increases in debt have resulted in a steep rise of the debt-to-GDP ratio.

But fostering growth is difficult

Measures of fiscal consolidation might reduce aggregate demand, and thus impinge on overall economic performance, although this is a controversial issue.

But Mr Codogno argues that “the issue of aggregate demand is much smaller now compared to 2011-2012. Economic growth should be promoted via structural reforms, rather than short term support to demand”.

Current and previous governments have already cut spending and “there are no low-hanging fruits left”. According to Mr Codogno the time has come to reduce public spending by “restructuring the way the government offers its services to citizens”. Reforms of public administration are underway, but “there are still plenty of inefficiencies that could be reduced”.

Italian debt is sustainable

“In the long term Italian public debt is one of the most sustainable in Europe”, argues Mauro Pisu, senior economist at OECD. Along with a series of measures intended to accelerate economic growth, he believes the cut in public spending, particularly on pensions, and a primary surplus among the highest in Europe have ensured this.

But Italy needs to get ready for when interest rates will go back to ‘normal levels’ resulting in higher interest payments and a budget which will be harder to balance.

Promising forecasts on the debt-to GDP ratio indicate that the country is on the right path out of its debt trap. Hopefully it’s also proceeding at the right speed.

France’s economic woes in charts

France’s economic woes in charts

Valentina Romei

• Daily emailImmediate email

 | Apr 28 08:41 | 102 comments | Share

As the world faces a slowdown in economic growth, we look at what is happening in France and it’s not looking good.

France is one of the worst performing economies in Europe

As details of countries’ economic performances in the first quarter of 2016 are released, few will be surprised to find that France’s economic growth will turn out to have been weaker than most other European countries.

This is whether we look at countries that are re-bounding after a deep and prolonged economic crisis, such as Spain, or those that recovered much quicker, like the UK and Germany.

Slow growth has been the case for a while: economic growth in France has been sluggish in the past few years, and indeed if we look at how things have fared since the beginning of 2014 France become the worst performer among the major European economies, excluding Italy.

Since 2014 France has not been able to create jobs

Of course weak economic growth has shattered the labour market.

Stephane Carcillo, senior economist at the OECD’s Directorate of Employment, in an interview with the FT explains the effect slow economic growth can have on the labour market: “In France it takes a minimum GDP growth of 1.5 per cent to stabilize unemployment and around of 2 per cent to see a decline of unemployment”.

With economic growth far below an annual rate of 2 per cent, the unemployment rate rose above 10 per cent in the third quarter of 2014 and never quite recovered, in stark contrast with falling unemployment rates across the eurozone.

Since the start of 2014, France has not been able to create jobs. While in the UK the number of people in employment increased by 3 per cent and by nearly 2 per cent in the eurozone, in France it actually fell.

What happened here? It has to be noted, says Mr. Carcillo that during the crisis France did not endure the same “job destruction as other countries like the UK, Spain and Italy”, but structural problems play a role too.

Reforms are on the way

High labour costs and France’s ‘dual labour system’ whereby employees with permanent contracts enjoy very high protection while everyone else is in precarious work. These are among the factors hampering employment growth, according to the IMF.

A number of initiatives sought to help businesses and reduce labour costs. Among them a reduction in employer social security contributions under the Responsibility and Solidarity Pact (PRS), and a new tax incentive known as CICE.

Mr. Carcillo also recalled a recent initiative which removed social contribution for minimum wages, a promising move because it targets a segment very sensitive to cost reduction.

Another reform – currently discussed in parliament- is aimed at reducing uncertainty over layoffs and “could potentially increase the job potential of economic growth in France” says Mr Carcillo. France is one of the few countries in Western Europe where judges can rule over whether the decision of a company to cut staff numbers is justified, resulting in high uncertainties.

Everyone is feeling more insecure and they’re investing less

There’s more.

The Bank of France is concerned that a lack of investment is holding up the recovery. Investment hasn’t been growing in France since the start of 2013, while the UK and Spain have benefited from a 15 and 12 per cent rise, respectively. Among the major economies only Italy has a steeper contraction in investments than France.

Thankfully the Bank of France expects business investments to recover thanks to tax incentives introduced over the last few years. But household investment is a whole other story.

Because of the economic uncertainties and the feeble wage growth, explains Diego Iscaro, a senior economist at IHS in an interview with the Financial Times, households are saving more than in other European countries and investing less. And since low oil prices are no longer providing as much of a lift to household purchasing power, household investments are expected to remain weak.

Indeed French consumers are the most pessimistic among the major European economies, according to the survey of the European Commission.

Terrorist attacks and a wave of protests linked to labour market reforms are not helping recover optimism.

The battle to reinforce competitiveness

We have come to what is a familiar issue in France: longstanding bottlenecks, extensive regulation and barriers to competition in services hinder competitiveness.

According to the OECD France needs to enhance competition in the products market by reducing the web of norms and regulations, especially in retail trade and regulated professions.

Both in the labour market and in the product markets the OECD stresses that:

“regulations and institutions are too complex and in many respects ill-designed to maintain competitiveness and generate higher living standards”.

France has become less competitive since the crisis compared to Spain, Portugal or Germany. And this is what it has done to exports growth:

Yes, French export performance has improved in the second part of last year, but it still constitutes a drag in total economic growth.

French GDP growth for this year and for 2017 is expected to remain below that of the eurozone average and far below the growth expected in the UK or the US, according to Consensus Economics, a survey of over 250 prominent financial and economic forecasters.

And while the government is taking measures to stimulate the labour market and the country’s economic growth, “the problem is the pace of reforms” Mr. Iscaro concludes.