Corruption in Italy Threatens the Efficacy of Fiscal Stimulus

Sources:

The Telegraph (U.K.):  Making a killing on contracts: how Italy's Mafia has plundered EU building funds

NYT:  Corruption Is Seen as a Drain on Italy’s South 

BBC: Italy sacks Reggio Calabria council over 'mafia ties'

US DOS: 2012 INCSR: Country Reports - Honduras through Mexico: Italy

Mafia led corruption continues to plague Southern Italy, leading to government inefficiency and a reduction in the efficacy of domestic and international infrastructural spending. 

The A3 highway has been at the epicenter of Italian corruption scandals. The highway, which spans an area from Salerno to Reggio Calabria, lies in one of the poorest regions in Italy. Located at the tip of the Southern peninsula, the area lacks high-speed rails, many other infrastructural amenities found elsewhere in the country, and has close to a 20 percent unemployment rate. The Italian government embarked on a plan to renovate the A3, along with other infrastructural projects, in 2001 after receiving funding from the European Union (EU). Since the inception of the project, construction has been completed on 169 miles of the 309-mile highway, and hundreds of people have been arrested in association with their involvement on the highway, mostly on charges of corruption and extortion. Sergio Rizzo, an author who focuses on political corruption, says that European money “did tremendous damage because the funds were used badly and, as some magistrates say, they also fed organized crime.”

             

Calabria, the region located in Italy’s Southern peninsula is dominated by the ‘Ndrangheta, an international crime syndicate. The ‘Ndrangheta has an annual income of €44 billion from a combination of drug smuggling, extortion, and public-sector graft, and while lesser know than its peers in Sicily or Naples, the ‘Ndrangheta’s reputation has increased greatly over the past decade.

            

 The ‘Ndrangheta plays a major role in public sector life in Calabria. On October 9, the provincial capital of Calabria, Reggio Calabria, dismissed all 30 members of the City Council and the mayor for suspected ties to the ‘Ndrangheta.  The move, which Italian Interior Minister Annamaria Cancelleri said was designed to prevent “mafia contagion,” came after months of criminal investigation.

             

Since 2007, over €3 billion has gone from the EU to Calabria, much of that for infrastructure projects, much of that to the ‘Ndrangheta.  While the EU has been able to recover €383 million appropriated to the A3, the potential for future fraud and mismanagement remains high. “The ‘Ndrangheta is like an octopus,” said anti-mafia magistrate Roberto di Palma, “whenever there is money, you will find its tentacles.”

             

The revelations into the corruption scandals come as the European Commission pushes for a 6.8 percent increase in its annual budget, much of that money going towards funding infrastructural projects in Southern and Eastern Europe. The A3 highways symbolizes a fear for many northern European countries that the Eurozone will develop into a welfare state where fiscal stimulus is misspent or lost to graft at taxpayers expense. While infrastructure spending can have enormous benefit, a challenge for the EU will be increasing oversight and accountability as they continue to fund infrastructural projects.

Lithuania Seeks Alternative Natural Gas Sources to Reduce its Energy Dependence on Russia

Business Recorder: Lithuania Sues Russian Gas Giant Gazprom
FT: CEE Nuclear Power: Deeper in Doubt
NYT: Chevron, Intent on European Shale Gas, Buys Lithuanian Stake
Reuters: Chevron to Prospect for Shale Gas in Lithuania
Reuters: Lithuania Gets 16 Proposals to Supply LNG
Reuters: Lithuania Terminal Calls LNG Supply Tender
SF Chronicle: Lithuanians Deal Blow to Austerity, Nuclear Plans
WSJ: Chevron Enters Lithuanian Oil and Gas Exploration 

To reduce its energy dependence on Russia, Lithuania is encouraging private companies to explore for shale gas (a type of natural gas) and actively seeking new liquefied natural gas (LNG) suppliers. Lithuania imports over 60% of its total electricity needs, more than any other European Union (EU) country. In 2009, Lithuania shut down its only atomic power plant, which was built when the country was part of the Soviet Union, due to safety concerns. To make up for this loss of energy, Lithuania began importing more natural gas from Gazprom, a Russian gas company. These imports totaled 3.4 billion cubic meters (bcm) in 2011, or 100% of Lithuania’s natural gas consumption. Countries completely dependent on Gazprom for natural gas have experienced problems in the past. For example, in the winter of 2009, the Ukrainian government entered into a pricing dispute with Gazprom. As a result, Gazprom cut off the country’s gas supply for three weeks leaving hundreds of thousands of Ukrainians without heat. This is why the Lithuanian government recently made energy independence a priority for the country.
   
According to Lithuania’s Prime Minister, Andrius Kubilius, Lithuania has 120 bcm of underground shale gas reserves that could be recovered through specialized extraction methods. In order to access the reserves and reduce its dependence on Gazprom, the Lithuanian government has been auctioning off shale gas exploration licenses to private companies. In May 2012, Minijos Nafta, a Lithuanian oil exploration company, began drilling wells in its license area around Gargzdai. In October 2012, Chevron, the second largest U.S. oil company, announced it was purchasing a 50% stake in LL Investicijos, a privately owned Lithuanian oil and gas exploration company. Investicijos holds a license to prospect for gas on a 2,400 square kilometer field near the town of Rietavas. According to Derek Magness, Chevron’s Director General of onshore European operations, the company believes Lithuania’s government will welcome Chevron’s involvement due to its desire to break free from Gazprom. Prime Minister Kubilius described Chevron’s investment as a “good sign,” and the Ministry of the Environment announced plans to auction off two more licenses to shale gas areas in 2012.
   
The Lithuanian government has also attempted to find new suppliers of LNG to reduce its dependence on Russia. Klaipedos Nafta, a state-owned operator of oil terminals (facilities for storing natural gas), is opening a new LNG storage unit in 2014 that it expects will distribute up to 4 bcm of natural gas to Lithuania each year. In October 2012, Klaipedos Nafta received bids from 16 companies offering to supply LNG to the new storage facility. Rokas Masiulis, Klaipedos Nafta’s Chief Executive, said the number of bids received was “unexpectedly high” and would help put an end to Lithuania’s dependence on a single gas supply source. The bids came from companies all over the world, including the U.S., Qatar, and Norway. Klaipedos Nafta hopes to sign one of these non-Russian companies to a ten year supply contract for 0.75 bcm of natural gas per year. In addition, Klaipedos Nafta entered negotiations with Cheniere Energy, an energy company based in the U.S., to purchase LNG in the spot markets (purchase of gas for immediate delivery at current market prices) beginning in late 2015.
   
The Lithuanian government’s efforts to reduce dependence on Russian natural gas are coming at a critical time for the country. In October 2012, Lithuania filed an international lawsuit against Gazprom seeking approximately $1.9 billion in damages. Lithuania alleged that Gazprom abused its market clout to increase Lithuanian gas prices almost 500% from $84 per cubic meter of gas in 2004 to $497 in 2012. Lithuania’s Prime Minister hopes Gazprom will ultimately agree to a settlement involving more favorable gas prices, but warned the lawsuit could drag on for several years if no settlement is reached. Although Gazprom angrily contested the lawsuit’s allegations, the Lithuanian government’s continued efforts at energy independence may provide a powerful economic incentive for the company to reach a settlement.

Despite a Recent Rise in Inflation, Mexico’s Central Bank Keeps Its Interest Rate Unchanged

Bloomberg: Carstens Says Mexico Bank Sent Stronger Message on Inflation

Bloomberg: Mexico Keeps Key Rate Unchanged as Inflation Halts 4-Month Rise

FoxNews: Mexico’s Economy Will Grow 3.3 pct in 2013, OECD Says

GulfNews: Mexico to Hike Rates if Inflation Persists

MNI: Bank of Mexico: May Need to Tighten Soon to Anchor Infl Expect

Reuters: Mexico Central Bank Seen Holding Rates on Easing Inflation

Inflation—a general rise in the price levels of goods and services, which causes a decrease in the purchasing power of money—has become a concern for Mexico. One of the main tools to stop rising inflation is to increase the country’s interest rate. A higher interest rate increases the cost of borrowing, which decreases the amount of money in the economy. When there is less money, consumers tend to spend less and demand less goods and services, which lowers the price level of those goods and services, and, thus, lowers inflation. However, Mexico currently does not want to increase interest rates because the country wants to stimulate growth in its economy—a low interest rate stimulates investment, which helps boost the economy. Mexico’s central bank must balance the concern of controlling inflation with its attempts to stimulate the economy.

According to the central bank, the targeted range for inflation in Mexico is between 2% and 4%. The inflation rate has been outside this range since May 2012, when the rate began to rise (3.41% in April 2012 to 3.85% in May 2012). The inflation rate continued to rise until October 2012, when the rate fell from 4.77% in September 2012 to 4.64% in October 2012. Due to this recent inflation shock, the central bank considered increasing the interest rate. However, on October 26, 2012, the central bank’s Governor Augustin Carstens announced that the interest rate would remain at 4.5%.

The central bank’s decision to keep the interest rate unchanged reflects its view that the inflation shock is temporary, as the pressures causing the inflation rate to rise are short-term. The recent drought and outbreak of bird flu decreased the food supply, which caused price levels to increase, especially for eggs and chicken. Mexico also has a low unemployment rate, which recently hit pre-recession levels—4.68% in September 2012. Since more people are employed, they have more money to spend, which increases demand and, thus, price levels. But, this drop is potentially short-term because the rate quickly began to increase in October 2012 (4.83%). Moreover, these inflationary pressures are counter-balanced by the recent quantitative easing policies of the United States (injecting new money into the economy), which will cause the peso to appreciate versus the dollar and result in cheaper imports. Economists also predict slower growth in the Mexican economy: between 3.5% and 4% in the second half of 2012, compared to the 4.3% growth in the first half of 2012. Slower growth leads to decreased demand, which keeps prices down.

The Mexican central bank kept the interest rate unchanged because the need to boost the slowing economy outweighed the need to control the temporary rise in inflation. Economists predict that the decrease in economic growth in the second half of 2012 will continue in 2013, as growth will drop to 3.3%. Economic growth is important because it generally improves the population’s standard of living and reduces poverty. Despite the need to stimulate economic growth, Governor Carstens reaffirmed the central bank’s commitment to lowering inflation into its targeted range and warned that the central bank would increase the interest rate if the inflation shock persists.