Italy's A Nice Place, But The Neighborhood's Going Downhill : Planet Money "It's tough to be the Italian house in the deteriorating European neighborhood," PIMCO's head of European portfolio management tells us.
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Italy's A Nice Place, But The Neighborhood's Going Downhill

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Italy's A Nice Place, But The Neighborhood's Going Downhill

Italy's A Nice Place, But The Neighborhood's Going Downhill

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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DONATELLO OSTI: (Speaking Italian) PLANET MONEY (speaking Italian).


FABRI FIBRA: (Rapping in Italian).


Hello and welcome to PLANET MONEY. I'm Caitlin Kenney.


And I'm Zoe Chace. Today is Friday, August 5. That was Donatello Osti you heard at the top. Today on the show, you know when you live next door to someone who doesn't really clean their yard or has a bunch of junked up cars out front? It's harder to sell your house. Turns out, same is true for countries.

KENNEY: This is basically what's happening to Italy right now. Their neighbors - Greece, Ireland and Spain - they've got a bunch of bad mortgages and failed banks in their yards, and that's making things really hard for Italy. But before we get to that, we have our PLANET MONEY indicator with our own Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator - 117,000. The U.S. economy added 117,000 jobs last month. That's according to today's big jobs report. This, of course, is the big headline number from the report. You may have heard it already. And, you know, usually for the indicator, I like to dig around in the jobs report, find some maybe - somewhat more obscure number, something that's interesting for one reason or another. But today - in today's report, I actually feel like that big headline number - 117,000 new jobs - that's actually the most interesting number in there.

KENNEY: Jacob, I have to say when I saw this number this morning, I was surprised because I was expecting something so much worse. We've been talking about this number for a while now. And economists were expecting it to be a lot lower. If you look at, you know, the number last month, was way below a hundred thousand. And then this past week, we just keep getting more and more bad news. We've got those low GDP numbers and low manufacturing numbers. And I don't know. I was surprised by this.

GOLDSTEIN: Yeah. It's been so gloomy this week. And, you know, if you just stop and step back and look at this jobs number today, 117,000 jobs added in July, this is actually a really bad number. It's just about enough to keep up with population growth. It's about half of what you'd see if we were really in a strong economic recovery. And I think the fact that this jobs number is actually better than what you and I and everybody else was expecting, the fact that such a bad number is actually kind of a relief, I think this is really a sign of just how low expectations have fallen for the U.S. economy.

KENNEY: Yeah. It's pretty pathetic when we're like, woo, 117,000.

GOLDSTEIN: Yeah. Great. We're keeping up with population growth.

KENNEY: Yeah. All right. Thanks so much, Jacob.


CHACE: OK. On to Italy. So just like people and businesses have banks that lend them money, countries have the same thing. And the bankers, the people who lend money to Italy, they're worried.

KENNEY: You can boil this worry down to one number, 6 percent. That's the interest rate that people who lend money to Italy are demanding for a 10-year loan. It's the interest rate on a 10-year Italian government bond. That's high. The interest rate that Germany has to pay to borrow money, it's 2.2 percent. Italy, 6 percent. Germany, 2.2. So why is Italy's interest rate so high? It's because people are worried that Italy is not going to be able to pay them back.

CHACE: The problem is Italy's debt. Italy has the highest debt-to-GDP ratio in Europe behind Greece. And here's a simple way to think about that. A country's debt-to-GDP ratio is like how much you owe versus how much you make in a year. So if you owe 120,000 on your credit card but you make a hundred grand a year, you're in trouble. And that is actually exactly Italy's situation. Its debt is 120 percent of its GDP.

KENNEY: When a country's in that much of a hole, you'd think something has to be majorly wrong with its economy. But for Italy, the third-largest economy in Europe, that's just not the case.

BEPPE SEVERGNINI: Italy is not a failed economy at all. We don't pay enough taxes, so simply the state, whoever is in charge, has got problem to balance a budget. Italians hate paying taxes.

CHACE: This is Beppe Severgnini, a well-known Italian journalist. Beppe writes a column for Italy's leading newspaper, Corriere Della Sera. And he's written several books, including "La Bella Figura: A Field Guide To The Italian Mind."

KENNEY: Italians take pride in not paying their taxes, Beppe says. There's a story, almost like a founding national legend, like our Boston Tea Party, that illustrates how long Italians have been avoiding paying taxes.

CHACE: Donatello, who welcomed you to the show, he told us this story. We also called him to talk about life in Italy. Back in the 17th century, in the south of Italy, there were these houses called the Trulli - white houses, they almost look like toadstools. They're made of limestone.

OSTI: If you take one brick off, they all crumble on top of each other. And apparently the story goes that, you know, back in the days, the peasants used to pay - they have to pay tax on the housing property. So when they knew the people were coming to ask for tax money, they would kind of, you know, take one brick off and the house would crumble. And then they would say oh, I don't live here. This is just, you know, a pile of stones.

CHACE: Not paying your taxes, it's a tradition.

KENNEY: All the taxes that should be paid that aren't, that's called the shadow economy. The journalist Beppe calls it Italy's gray economy.

SEVERGNINI: Gray economy means an economy which is unaccounted for. And normally when I have - when I talk to my foreign friends or colleagues, they send me how big it is? And I say how can I tell you officially how big is something which is unofficial by definition?

CHACE: Almost everyone we talked to in Italy had a story to tell about people trying to get away with not paying taxes. One businessman who has a house in Italy said a cab driver just told him your ride will cost 20 percent more if you want a receipt because printing out a receipt would mean the driver would have to pay taxes on how much he was making off the fare.

KENNEY: And the shadow economy isn't just made up of small transactions. Donatello Osti, who told us the story about the Trulli, has been looking for a job in Italy for more than a year now. And he stumbled into the shadow economy more than once. A couple of years ago, he got a job at a private school teaching English. It's a well-known school in Bellona that caters to rich kids with busy parents.

OSTI: I mean, I can give you my own experience as an English teacher, you know. I was hired for a whole year. And we kind of agreed, you know, on a hourly rate. Yeah. I was supposed to do a number of lessons a week, and that was it. And (unintelligible) the first month, I just got a - cash in hand.

KENNEY: What was your reaction when that happened?

CHACE: (Laughter).

OSTI: I mean, I was surprised, I have to say. And...

KENNEY: Was a little part of you maybe excited 'cause you were like, oh, hey, guess I'm not going to have to pay taxes on this?

OSTI: No, not really. I was just frustrated, you know, because on the one side, you want to kind of, you know, condemn this. At the same time, you know that if you are - if you're going to go and tell somebody, you're going to lose your job.

KENNEY: And Donatello's rent right now? It's part of the shadow economy, too. He pays his landlord in cash so his landlord won't have to pay taxes. And then his landlord passes that savings back on to him.

CHACE: Even the man in charge of collecting taxes for the government, Italy's finance minister, Giulio Tremonti, he does the exact same thing Donatello is doing. He got in trouble for paying for an apartment he rented in cash.

KENNEY: This tax collection issue is a problem we've talked about before on the podcast - in Greece and in Jamaica. And it partly explains why Italy has such a massive debt. They're not bringing in as much money as they should in taxes. They're a big economy. They should be generating a lot of revenue through taxes.

CHACE: Especially when you consider how high the country's tax rate actually is. Here's Beppe Severgnini, the journalist, again.

SEVERGNINI: Let's say I would feel awkward not paying taxes. But sometimes, in Italy, I have this sort of temptation of enrolling into a sort of crash course - intensive course how to avoid paying taxes because the people who pay taxes neatly pay far too much. I and many other people in Italy pay over 50 percent of our salaries, which is crazy.

KENNEY: Fifty percent does sound high, and we wanted to know why - why the taxes are so high. There're a couple of theories. One is that because so few people are paying taxes, the government basically has to squeeze the people who do. Although this is a little self-defeating because the higher you make taxes, the more people are going to try to avoid them.

CHACE: But economist Andrea Bubula has another theory. The current tax rate is making up for lost ground. In previous decades, the government was even worse at collecting taxes than they are right now. And Italy borrowed a lot of money assuming the country's economy would grow in the future.

ANDREA BUBULA: At the time, these costs were put off to the future with the idea that in the future, things will be better, that in the future, GDP would've been greater. And so future generations would not be affected by the greater government borrowing.

KENNEY: And by future generations, he means now - today - this current generation of Italian taxpayers who now have to pay back all the money that was borrowed in previous decades because the economy didn't grow like everyone expected it to.

BUBULA: Italy's doing good job in collecting revenues every year to fulfill its obligations. Italy's collecting a lot of taxes, which is necessary. But also, it has a very high tax burden that it's affecting everybody's life.

KENNEY: Other European countries are in the same sticky situation. To pay back your debt, you need to raise taxes. But you also need your economy to grow. When you raise your taxes, it can be harder for that to happen. It can make it harder for the economy to grow.

CHACE: Italy's economy isn't growing much at all. It's sort of stagnant. Right now, the unemployment rate for young people in Italy is around 30 percent. Remember Donatello Osti, the former English teacher who was paid in cash? He's one of those young people.

OSTI: I am quite worried, I have to say. I mean, if I kind of look back and five or six years ago - if I thought, you know, when I was 30, I was going to be kind of stuck in Italy without a job, it - I didn't expect it.

KENNEY: Donatello says he's applied for more than a hundred jobs in the past year. But so far, he hasn't found anything.

CHACE: Italy's in bad shape, but Italy has been in bad shape for a while. So why now? Why did everyone just freak out a few weeks ago? Why are the people who lend money to Italy suddenly calling them out, questioning whether the country will pay them back?

KENNEY: It's especially weird that they're so worried because although Italy has a high debt, it has a lot of things going for it. Its banks are in great shape. It didn't have a housing crisis. And if you don't count the interest that the country pays on its debt - which, granted, is a lot - if you don't count it, Italy is actually running a budget-surplus right now.

CHACE: The reason people are worried about Italy right now is as simple as there goes the neighborhood. We called up someone who lends money to Italy, PIMCO - one of the world's biggest bond holders. And we reached Andrew Balls. He's head of European portfolio management.

ANDREW BALLS: It's hard to be a better house in a bad neighborhood. That can have an impact on you. If the neighborhood is going downhill, it can have an impact on your house price. While Italy may be a better house in terms of the government issue than some of these other European countries, but it's - again, it's difficult to be a - the Italian house in this deteriorating European neighborhood. And what this means in this environment is that you can have pressure on a country like Italy - contagion to Italy - even though there hasn't been any significant change in the fundamentals.

KENNEY: You might've heard this term contagion. This is what it looks like. It's real. People are freaking out about all the problems in Greece and Ireland and Spain. And that's got them giving Italy a sideways glance too. Italy is part of the European Union. So if Italy gets into trouble, technically, the rest of Europe will have to come together and bail them out.

CHACE: But people like Andrew Balls and all the other people out there who lend countries money, they're becoming more and more worried that that won't happen because of what they just saw go down over Greece. It was so hard for the rest of the countries in Europe to agree on what needs to get done and then just do it.

BALLS: You had public arguments between Germany and the European Central Bank. You had huge disagreements with different countries over how to deal with this Greece situation. You had governments saying no more money. We've done all that we can do. Naturally, you look at this. You wonder if they have this much trouble dealing with Greece and the Greece situation, what happens if this spreads?

CHACE: After all, Greece is a small country of no particular importance. I'm sorry, but it's true. At least, that's how Andrew Ball sees it. But if Greece can rock the boat so dramatically, what happens with a big important country like Italy?

KENNEY: And what makes things even worse for Italy is that the solution to its problems is largely out of its hands. To a certain degree, whatever the Italian government tries to do to calm the nerves of people like Andrew Balls and other people who lend the money - what they do, it doesn't matter. Germany is the biggest European economy. They're the ones that are going to have to fund most of the bailouts in Europe. And the way Beppe Severgnini, the journalist, sees it, they're the ones in charge. Germany is the adult in the room.

SEVERGNINI: You never have to forget Italy's - is a bright, very lively but young girl. And she really needs a nanny. And we have a German nanny up in Frankfurt, thanks God, who sometime tell us what to do.

KENNEY: It's weird to think that Italy's destiny might be in the hands of Germans, but it's been a weird summer in Europe. And it's only going to get weirder.


FABRI FIBRA: (Rapping in Italian).

CHACE: As always, let us know what you thought of today's show. Email us at, or you can find us on Twitter and Facebook. I'm Zoe Chace.

KENNEY: And I'm Caitlin Kenney. Thanks for listening.


FABRI FIBRA: (Rapping in Italian).

GIANNA NANNINI: (Singing in Italian).

FABRI FIBRA: (Rapping in Italian).

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