The Strange Case of Mr Tremonti

The crisis, we know, is a global one. The recession is hitting the US, Europe and Latin America hard, and is not sparring Asia, with China now heading towards a recession. It is not surprising therefore that governments around the world, having bailed out banks and insurance companies, are now implementing fiscal “anti-crisis” packages to help firms and consumers endure the storm. These packages range from1-2% in France and UK, 3-3.5% of GDP in Spain, Germany and Switzerland, 7% in the US, up to 16-18 point of GDP in Japan and China, and… 0.2% in Italy and 0.01% Greece! (Source: Morgan Stanley, except Greece (web)) The standard justification for this Italian (and Greek) “anomaly” is, of course, the huge Italian public debt, above 106% of GDP and rising. Italy, it is argued, would not stand a further increase in spreads: a roll-over crisis would trigger a disastrous default. But how far does the debt burden go in explaining the “XXs” size of the Italian package? Not too far. In graph 1 I plot the magnitudes of the rescue package against the debt-GDP ratio in 2008 (source Weo, IMF). With the exception of Japan, the plan tends to be smaller, the larger the debt burden. On average, if one excludes the Asian countries and draws a regression line (Graph 2), a 1 percentage increase in the debt burden is associated to a 1/3 percentage fall in the size of the rescue plan (sorry, only 10 observations).  Taken literally, this implies that a “representative” country with the same debt burden of Italy would be expected to implement a 0.8% GDP package, about 4 times the one put in place by the Economy Minister, Mr Tremonti. There are three possible explanations to this puzzle (or a combination of them). 1) The economic recession in Italy is about four times less serious than in most countries (false); 2) The economic package of Mr Tremonti is about four times more effective than the ones of other countries (false); 3) Mr Tremonti himself, previously known as the inventor of “creative accounting” in public finances, has turned into a fiscal conservative devotee (meaning about 4 times more conservative than his peers)!

(for more on this topic see my blog (in Italian):


2 Responses to "The Strange Case of Mr Tremonti"

  1. Daniele   January 27, 2009 at 6:34 am

    Dear Sir,I suggest you to verify your sources before writing something wrong.The MASTERS of “creative accounting” are the well-known CARLO AZEGLIO CIAMPI and ROMANO PRODI (together with his relatives, well connected with University of Bologna).This “tag” was created at the end of the ’90s in order to explain the inexplicable entry of Italy in the Euro-Club.At that time, TREMONTI was a “Lira” defender (sic!!!) and against Euro-Club.He was wrong but not a “creative” one.I suggest Roubini to verify better its partners before letting them to shoot inaccuracies.However, let me suggest you some other explanations why Tremonti doesn’t respect the regression line:1) without a “revolution” on the Global Finance System, he thinks that stimulus plans are inefective (or short-live).TRUEA regression line is not a policy but just another math system. Are you sure France is right in what it is doing?2) Italian Banks are in better shape. They could give more credit than other European fellows. NEARLY TRUE.3) Italian citizens have a very low debt burden. Furthermore are nearly all owners of their home. On average, if you discount public debt, Italians are probably the “richest” people of Europe (for sure if you take Northen Italy only). That all said, consumers are more resilient than in other European country. NEARLY TRUE.4) Due to the lack of flexibility and the burden of its bureaucracy, an Italian stimulus would be less “efficient” than in the other countries (i.e. give money to Universities for R&D is very much less effective than the same action in USA). So, unless you give a very high amount of stimulus, why should you waste public money? STRONGLY TRUE.Regardsazimut72web:

  2. Anonymous   January 30, 2009 at 2:39 am

    The strange case is the abuse of econometrics in this article (basically regression line and independent variables) and the inferred conclusion that Italy could afford a four times higher fiscal stimulus…On these read comments here