Italien Italy EMU

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Italien - Italy

Italy could fall into a so-called 'debt trap.'
We think that it might take a decade or more of stagnant or falling wages to restore full competitiveness
Roger Bootle and his team over at Capital Economics
CNBC 6 Jul 2010

The only chance of Italy getting its debt-to-GDP ratio below 100 percent would be for it to run a budget surplus of 5 percent over 15 years.

“If doubts grow over whether the Government is willing or able to do this, Italy could fall into a so-called 'debt trap.'

Under this scenario, rising borrowing costs lead the debt-to-GDP ratio to increase at an accelerating rate, leaving the Government with no choice but to default.”

“If the Government were to default on its debts and investors were forced to take a large haircut of say 50 percent, this would wipe out around 80 percent of Italian banks’ tier one capital at a stroke, causing domestic financial market meltdown,"

Italy's outstanding public debt is €1.7 trillion, seven times the size of Greece's.
Italy "is a big systemic piece," said François Chauchat, an economist with GaveKal, a Stockholm-based economic advisory firm.
"If Italy cannot refinance its debt than it's the end of the euro."
WSJ 14 May 2010

So far, markets have deemed Italy less risky than other Southern European nations despite a public debt equivalent to 115% of gross domestic product—about the same as Greece

"If the interest you're paying on debt is higher than the rate of growth, you end up in a death trap, where you're adding to the debt all the time," says Gabriel Stein, an economist with Lombard Street Research, a London-based economic advisory firm. "I don't know if Italy is in a death trap right now."

Italy, saddled with the euro region’s second-largest debt, is the “biggest threat” to the economy of the 16-member bloc, according to Nobel Prize-winning economist Robert Mundell.
Bloomberg Feb. 17 2010

Being a member of the eurozone doesn’t immunize countries against crisis.
In Spain’s case (and Italy’s, and Ireland’s, and Greece’s) the euro may well be making things worse.
Paul Krugman, New York Times January 19, 2009

The PIIGS
The euro zone faces tough times as the PIIGS — Portugal, Ireland, Italy, Greece and Spain —
will need a flexible exchange rate to compensate for the economic slowdown
so some of them may decide to break free from the single currency's straightjacket
Hugh Hendry, Chief Investment Officer and Partner at Eclectica, CNBC 12/1 2009

Millions of migrants have arrived in Greece, Italy and Spain over the past decade.
To avoid serious social problems, those countries need to do a better job of making them feel welcome
Time Magazine March 1st 2010

Grekland skyller krisen på nazismen
"Man lägger helt enkelt vissa penningbelopp på nästa år. Så gjorde alla och Grekland gjorde det i mindre omfattning än exempelvis Italien", sade Pangalos.
DI/TT 2010-02-24

The crushing defeat of the centre-left government and the complete ousting from parliament of its Communist wing, for the first time in 60 years,
was matched by a dramatic revival in the fortunes of the Northern League and Umberto Bossi, its leader.
Financial Times 18/4 2008

Silvio Berlusconi, the billionaire businessman, back in power at the age of 71, becomes prime minister for a third time but his newly named People of Freedom party maintains its majority only as long as Mr Bossi, 66, remains loyal to their coalition.

"Some thougths about the future of the euro"
The real threat to the cohesion of the monetary union is not Italy, or even a post-property-crash Spain.
The real issue is the political gulf between France and Germany.
Susanne Mundschenk and Wolfgang Münchau, Eurointelligence 18/10 2007

One serious open question if whether the countries – Italy, Portugal, Spain, Greece - that have experienced a significant loss of competitiveness and real exchange rate misalignment will be able implement reforms that will increase productivity growth, reduce relative unit labor costs and allow them to regain their lost competitiveness.
Nouriel Roubini, New York University and RGE Monitor, 28/6 2007

Faktum är att de flesta av EU:s stora projekt ligger i ruiner.
Stabilitetspakten som skulle garantera budgetdisciplin hos EMU-medlemmarna har ingen legitimitet sedan både Tyskland och Frankrike bryter mot den, för att inte tala om Italien.
PM Nilsson, Expressen 25/3 2007

Do current account deficits matter inside a monetary union?
Inside a monetary union, currency risk turns into credit risk
Martin Wolf, FT 28/3 2007

Italy’s debt was downgraded on Thursday by two of the world’s leading credit ratings agencies
in a damaging blow to the centre-left coalition government of Romano Prodi, prime minister.
Financial Times 19/10 2006 ..... full text here

The agreements that established the euro contain no provisions to allow exit. However, if some government – let us suppose the Italian one – decided to leave, there is nothing Europe could or would do to stop it.
But what exactly would a government set on such a course – or forced into it – do?
John Kay, FT, 12/9 2006

Some people will conclude that these problems make a break-up of the euro impossible. This would be a profound error. History – not least the establishment of European monetary union itself – shows that, given political determination, practical problems will be overcome. Civil servants, lawyers and bankers are there to ensure that a client’s wishes are met even if misconceived and if the Bank of Italy does not have a plan in its safe, its officers have been failing in their plain duty.

The Italian election result was a disaster for Italy and is a threat to the future of the euro.
Italy is now in the economic condition that normally preceded devaluation of the lira in the years before the single currency. So long as Italy remains in the euro system it will be impossible to devalue, yet it would be equally impossible for a weak left-of-centre coalition, with no real majority, to take the tough economic decisions that might, or might not, restabilise the economy.
William Rees-Mogg, The Times, 17/4 2006

When the euro was first planned many critics argued that a single currency could survive only if it was backed by a single European government. Inside the euro system different national economies would develop separately and would diverge over time. Each economy would have to adjust to unforeseen external shocks, such as the increase in the oil price or in Asian export competition, but the shocks would have different impacts on different countries.

With no recourse to devaluation, countries would have to take painful economic decisions that might prove to be politically impossible; we have recently seen that in France

The structural weakness of the euro is that it is a single currency that has 12 different economies, 12 different electorates, 12 different governments, 12 different budgets and 12 different systems of sovereign debt. In the debt market itself there are 12 different values for the euro.

The euro itself would be expected to survive, but confidence would have been damaged. If Italy had to leave, who else might go in the future? One can expect every effort to prevent Italy leaving, both in Italy and in the rest of Europe. Even the US Federal Reserve would be worried. All uncertainty is bad for financial markets. If Italy leaves, it will be only after a lot more pain.

The narrow election victory by Romano Prodi’s centre-left alliance was the worst imaginable outcome in terms of Italy’s chances to remain in the eurozone beyond 2015.
Wolfgang Munchau, Financial Times 17/4 2006

These are not bets on Mr Prodi’s political commitment to the euro. It would be difficult to find a more pro-European politician than the former president of the European Commission.

These are bets on economic circumstances that might force a government to take decisions that are unthinkable until the moment they become inevitable.

If Italy continues to lose macroeconomic competitiveness, a populist political movement could well emerge with an agenda for euro withdrawal. Let us think the unthinkable and assume some future Italian government brings back the lira. What would then happen to the country’s mostly euro-denominated debt, which now stands at 106.5 per cent of gross domestic product? Italy would almost certainly be unable to service its obligations to investors in full. It would either convert those debts back into lira at an exchange rate unfavourable to investors or it would default outright.

Three factors may explain the markets’ optimism. First is the view that Italy may be effectively trapped inside the eurozone; leaving it would not solve any economic problems. This argument ignores the fact that default is usually not a consequence of rational choice but of panic. Second is the belief that the European Central Bank would ultimately bail out a defaulting member state. This view may underestimate the ECB’s resolve to observe its no-bail-out rule.

Third, even if one accepts the worst-case scenario, it is still highly unlikely that default would occur within the lifetime of a 10-year bond. This argument offers the most plausible explanation for why the markets have not placed a higher risk premium on Italian bonds. It is also explains why bond markets are notoriously poor early indicators of default risk. Bond investors are complacent until they start to panic.

Financial markets cannot force a country out of a monetary union through currency speculation – as they forced Britain out of Europe’s exchange rate mechanism in 1992. But there are other ways for investors to exploit a country’s difficulties in a monetary union. This is why there are parallels between Italy today and the UK in 1992.

Britain’s political commitment to the ERM appeared as unshakable then as Mr Prodi’s support for the euro looks now. But Britain was neither politically nor economically ready to live under a regime of semi-fixed exchange rates. Italy’s membership of the euro is based on similarly shaky foundations. Fourteen years ago, it took investors a few days to expose a political lie.

Ten years on and sterling's ejection from the European exchange rate mechanism on Black Wednesday still has a surreal quality about it.
Financial Times 2002-09-13

Spricker EMU?
Det mardrömsscenario ekonomerna varnade för tycks nu inträffa i Italien
Expressen-ledare 24/3 2006

Italy’s seven years within the eurozone seem consistent with Dante’s famous inscription at the entrance of hell: “Abandon all hope, ye that enter”.
The economic consequences of monetary union have been so serious for the country that they require urgent political action by the next Italian government. Without it there will be no escape from the inferno.
Wolfgang Munchau,Financial Times 20/3 2006

A 16 per cent appreciation of the real exchange rate over the last seven years has led to a loss of competitiveness and falling economic growth. If the trend of the last seven years were to persist for the next seven, the consequences for Italian industry and the solvency of the state would be near-catastrophic.

A constellation that might deliver some of these reforms would be a German-style grand coalition. By this, I mean not the present grand coalition in Berlin but the one that governed between 1966 and 1969. The sole rationale of that coalition was to implement economic reforms that were inconceivable under any other political constellation. Italy faces a similar political situation today.

Italy follows Argentina down road to ruin
Desmond Lachman, American Enterprise Institute (Timbros storebror)
Financial Times 17/3 2006
Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the IMF's Policy and Review Department and was active in staff formulation of IMF policies toward emerging markets.

An irony of Italy’s unfolding political and economic drama is that many of the current holders of the country’s bloated and ever-increasing government debt were once proud holders of Argentina’s now-defaulted sovereign bonds. As Mario Draghi, Italy’s new central bank governor, warns that the Italian economy has “run aground”, and as prime minister Silvio Berlusconi vents about “the euro having been a disaster for Italy” in the run-up to next month’s election, one has to wonder at what stage Italy’s bondholders will get the feeling that they have been to this sad movie before.

For quite aside from Italy’s disturbing political and institutional weaknesses ... the country’s economic predicament is remarkably similar to that of Argentina in the late 1990s.

The most striking similarity between the two countries is the rigid currency arrangements in which they locked themselves. As a reaction to its mid-1980s experience with hyperinflation, Argentina in 1991 nailed its currency to the convertibility plan cross. It did so in the hope of forcing on the country the low inflation and fiscal policy discipline that it had never before enjoyed.

In a similar effort to impose macro-economic discipline, Italy abandoned the lira for the euro in 1999. It was hoped that high inflation and periodic lira devaluations would give way to fiscal discipline and structural reform. By abandoning its currency, Italy, like Argentina before it, gave up macroeconomic policy flexibility to stabilise its economy. Italy can no longer engage in periodic exchange rate devaluations to rectify losses in international competitiveness. And no longer having its own monetary policy, it has to accept the interest rates set by the European Central Bank even though these might not necessarily conform to Italy’s circumstances. When Jean-Claude Trichet, the ECB president, recently tightened European monetary policy because of high oil prices, did he give much weight to Italy’s cyclical weakness?

If this is not bad enough, under Europe’s fiscal stability pact, Italy is committed to strengthening its public finances at a time of cyclical weakness.

Italy is often mentioned as the country most likely to leave the euro. I disagree.
If any country ever decided to quit that country would be Spain.
Wolfgang Munchau, Financial Times
February 20 2006

On Friday I was in Davos in a panel on the "Ups and Downs of EMU" (European Monetary Union) where ECB head Trichet, Italian Economy Minister Tremont, a few other EU officials and myself were supposed to discuss the following questions:
Will EMU collapse in the future? Which country will exit first? What will be the consequences of a break-up of EMU? How to avoid that? And what are the prospects for the Growth and Stability Pact?
Nouriel Roubini, 28/1 2006

Will EMU survive 2010?
Global interest rates are likely to return to more normal levels. The ‘one size fits all’ policy of the ECB is then likely to become very difficult to bear for countries like Spain and Italy
Daniel Gros, Director CEPS, 17 January 2006
A most impressive list of Board of Directors....

Roberto Castelli, justice minister, said the league planned to present concrete proposals for restoring Italy's former currency at a party meeting on June 19.
"Are Swedes poor because they are the outside the euro?” Mr Castelli asked at a conference in Milan.
Financial Times 8/6 2005

“Does sterling have no economic foundation because it is outside the euro? Is Denmark living in absolute poverty because it is outside the euro?

The anger and embarrassment of other politicians at the league's campaign are tempered by the recognition that the party's purpose is to attract maximum attention as Italy prepares for a general election next year.
In particular, the league wants to discredit Romano Prodi, the centre-left opposition leader who, as Italy's premier from 1996 to 1998 and later as European Commission president, was responsible for taking Italy into the eurozone.

Silvio Berlusconi says Mr Prodi's government fixed the lira against the euro at too high an exchange rate, a problem compounded in Mr Berlusconi's view by the euro's subsequent strength against the dollar and by the European Central Bank's monetary policy.

Kommentar av Rolf Englund:
Dom i Schweiz verkar överleva dom också, ehuru dom inte är med i EMU.