Italy faces a tough 2023 with real wages falling by 8% and soaring energy prices.


by Shaun Richards

Today is a bank holiday in Italy and in some ways ironically that directs straight to what has become its most famous bank. Yes the world’s oldest bank Monte dei Paschi.

This year, the Italian Treasury installed a new chief executive and attempted to revive it through yet another rights issue, its seventh in 14 years. The goal is to restructure the bank with a view to finally taking it private again. A first attempt last year was scuppered after Milan-based UniCredit and the Italian treasury failed to agree the terms of the takeover.

That is a summary of what ha led to here from the Financial Times and I note that they do also give us a strong hint as to how this has happened.

The foundation that once controlled the bank had close ties to Italy’s leftwing parties, with its board members appointed by local politicians.

That in Italy was especially dangerous because the banks were bit buyers of Italian government dent so there was a clear danger of you scratch my back and I will scratch yours. That has weakened in more recent times because the ECB has bought so many Italian government bonds. For instance its original QE buying programme has 446 billion Euros of them and the pandemic version or PEPP has 287 billion Euros of them. So Italy does not really need the banks to buy any more or rather it has switched to only one bank.

Finally a capital raise went through although as you can see below some of the methods were somewhat dubious.

Finally, a workaround was reached. The group of banks arranging the deal, together with Milan-based asset manager Algebris, agreed to underwrite the full private investors’ share in exchange for an extremely lucrative €125mn fee.

The Italian state exited its 20 billion Euros of losses by putting in an extra 1.6 billion. Anyway let us leave that there as we get the idea.

Economic Growth

As we have already had an example of bad Italy from our long-running Good Italy: Bad Italy let me now switch to an example of the good bit.

In the third quarter of 2022 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.5% to the previous quarter and by 2.6% in comparison with the third quarter of 2021.

Italy has seen some economic growth and by the standards of the credit crunch era some fast growth. The statistics office suggested this on Wednesday.

Italian GDP is expected to increase in 2022 (+3.9%) and then slowdown in 2023 (+0.4%),

So a good 2022 based on this.

Gross fixed capital formation will be the main driver of growth this year (+10.0%) and albeit to a lesser extent the next, (+2.0%).

At this point we have something of a dream scenario with economic growth being driven by investment. That fades somewhat when we note that trade will be a 1.1% drag on GDP this year. But Italy contrary to stereotype starts from a surplus trade position and the surge in energy prices will be the main change in 2022.

The one issue with all of this is how they get the inflation measure or GDP Deflator to only rise by 3.6%.


This area by contrast is rather grim.

In November 2022, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.6% on monthly basis and by 12.5% on annual basis (from +12.6% in the previous month).

As you can see inflation is raging although if you can avoid food and energy it is not quite so bad.

Therefore, core inflation (excluding energy and unprocessed food) was +5.7% (up from +5.3% in the previous month) and inflation excluding energy was +6.1% (up from +5.9% in October).

That is from a slightly different inflation measure but gives us an overall picture.

Real Wages

The going gets tougher when we note that wage growth is a lot below inflation. Regular readers may recall the Central Bank of Ireland wage tracker I looked at on the

For individual euro area countries, October wage growth was highest in Germany (7.1%), followed by France (5.0%), Ireland (4.7%), Italy (4.2%), Netherlands (4.0%) and Spain (3.5%).

I do not have a detailed breakdown but do know that the overall Euro area average fell from 5.2% in October to 4.8% last month so Italy probably fell from the previous 4.2%. Even assuming it did not we see an around 8% gap with inflation which is one of the highest real wage falls we have looked at. Since the collapse of the Greek economy anyway.

This is a particular issue for Italy because real wage growth has been poor anyway. The International Labor Organisation recently calculated that real wages in Italy were only 88% of what they were pre credit crunch and I am afraid that there is more to come.

Also speaking of real wages here is a case of the biter bit.

ECB staff in pay dispute to hold talks about potential strike


Italy has moved from the icy cold world of negative interest-rates ( -0.5%) to a gentle warming at 1.5% with a rise to 2% expected next week from the European Central Bank or ECB. Putting it another way the ECB measure of mortgage interest-rates has risen from 1.43% in October last year to 3.11% this time around. For businesses its measure of interest-rate costs has risen from 1.29% to 2.64% over the same time scale.

So the interest-rate noose has tightened somewhat and we also note that bond yields have done the same. The thirty-year yield has doubled over the past year to 3.5% meaning that as we head forwards debt costs will rise, although more recently in line with other bond markets things have improved as it reached 4.6%.

Italy also has index-linked and floating rate debt both of which will have got more expensive this year.

floating-rate securities from 11.94% to 11.56% and index-linked securities from 11.14% to 11.95% ( Italy Treasury)


It is nice for once to be able to look at some growth in the Italian economy. The problem is that as I look at this quarter and the prospects for 2023 we have real wage growth of around -8%. mortgage costs rising and in addition to the price rationing of power for industry the prospect of actual blackouts. Italy relied on gas from Russia and used France and its nuclear capacity as another boost via energy imports. We know the issue with Russia and on Monday we noted the problems with France’s nuclear output with it now being an importer rather than an exporter of electricity.

Italy has plans going forwards but is short of capacity right now.

Spain, for example, which consumes 30 billion cubic meters, has a regasification capacity of 60 billion cubic meters, Descalzi said. Italy, meanwhile has just 17 billion cubic meters of import capacity, which is expected to rise by 10 billion cubic meters with the terminals at Piombino and Ravenna.

“We will need another 4 billion cubic meters to have full energy security, Descalzi said. ( )

It has built up stores equivalent to 97 days supply of gas although I doubt that is usage at the rate of the current cold snap in Europe. But this issue remains.

Italy imported about 16% of its electric power supply in 2016. About half of Italy’s imports of electricity came from France. ( EIA)

It imported some 32 Terawatt hours in 2020.

On the other side of the coin it does have some storage capacity to smooth over short-term issues.

According to the TSO, the current storage capacity of 7.5 GW would need to more than double by 2030 if Italy is to meet its renewables targets, with significant contributions from both pumped hydro and distributed electrochemical storage. ( IEA)

As a final point is it rude to point out how much the ECB and Bank of Italy are losing on their holdings of Italian government bonds?


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