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Thursday, 30 June 2011

Why is Italy into trouble anyway? And will it come out?

This last week, when the story on the Greek austerity vote was unfolding on Twitter, some experts who I highly respect, were also talking about the growing default risk for Italy.

Although I couldn’t imagine that a so strong and powerful country like Italy could default, this message was for me a trigger to investigate it anyway.

Italy is the most prominent and economically powerful member of the group of countries, called the PIIGS and a long-term member of the G8. But the country is going through a tough time currently. And that could be a very dangerous development for the Euro-zone.

When the results of a Greek default would be substantial (although there is no common opinion on the magnitude of such an event), friend or foe will not deny that an Italian default would be like an economic hydrogen bomb, thrown on the euro-zone. While you can argue if such an event would be the end of the Euro as we know it, it is certain that it would be impossible for the other Euro-zone countries to pony up sufficient financial aid to rescue Italy.

The country is just too big for this kind of rescue action: Italy, with its GDP of €1.437 trn ($2.055 trn) in 2010, is still ranked number 8 in the world of strongest industrial countries. But the country took a severe blow from the aftermath of the credit crisis in 2008, as it is a large producer of luxury goods, like expensive furniture, fashion, luxury accessories and automobiles.

First let us look at some key figures and details on Italy (all key figures are courtesy of the European bureau of statistics Eurostat and the CIA World Factbook data):

·         The estimated GDP over 2011 is €1.424 trn ($2.037 tln), compared to €1.618 ($2.314 tln) in 2009. A drop in GDP of almost 12% in two years.

·         National debt is a staggering 118,1% of GDP in 2010 = € 1.697 trn ($2.426 trn)

·         Although the unemployment is relatively low with 8.2% in average in 2011, the youth unemployment was 26.2% in april of this year. This can be considered very high and it forms a hazard for the not-too-distant future, as these youngsters will lack working experience when the labour market makes a turnaround.

·         Although the GDP per capita is not very high, compared to most West-European countries (see the following table), the 60.6 mln inhabitants make that the GDP of Italy is still one of the highest in the world (rank 8):

GDP per Capita
The Netherlands
United Kingdom

·         Surprising to me was that the difference in GDP per capita between the six poorest and six wealthiest regions of Italy is not extreme (see following) table, compared to the same West-European countries. In Germany and especially the UK, those differences are bigger.

Average GDP of the 6 Wealthiest Regions

Average GDP of the 6 Poorest Regions

Difference as a percentage
United Kingdom
The Netherlands

In contrary to f.i. Greece, Spain and Portugal, there is no structural imbalance between imports and exports. The country could even be considered a textbook example of balanced imports and exports:

Except for the extreme height of its debt, which is a serious problem and the drop in GDP that is substantial, but not extremely worrisome, the situation for Italy doesn’t look very bad at all. Compared to Spain, Portugal and Greece with their massive trade deficits, their lack of industry, their massive unemployment and massive bubbles on the CRE + RRE market, the situation in Italy looks quite normal.

But there is a ‘but’: the economic growth of Italy over the last decade has already been disappointing with an average 0.6% per annum.

And if you look on the industrial growth, the figures are even more worrisome: The growth of industrial production has been negative in 5 of the last 9 years, with a disappointing -13.5% in 2009 and -2.8% in 2002 and 2008 as negative highlights. Positive industrial growth during this time span has been at maximum +1.5%. And the manufacturing industry is still extremely important for Italy. The country is an industrial giant with large and very strong companies in the following industries:

·         car making
·         chemical industry,
·         dairy and foodstuffs production
·         metal and metal working industry
·         High-end furniture
·         textile, fashion and luxury goods

Although the Chinese market can be a very promising market for the products that are currently manufactured in Italy, it is no surprise that the Chinese manufacturing industry is fierce competition for Italy. This diminishes the chances on serious industrial growth in Italy in the coming decade.

And there is more reason for worries. Italy can roughly be divided in two zones: the highly industrialized and prosperous northern-zone that stretches from the Swiss and Austrian border to the capital Rome and the troublesome southern-zone that stretches from the area south of Rome to Calabria and the islands of Sicily and Sardegna. 

Although the southern zone of Italy, in comparison with the strongest regions of the country, has less arrears than former East-Germany and the poor parts of the UK (see table 2), this part of the country has had a worrisome history over the last 200 years.

The largest problem of the southern part of Italy has been the organized crime that stretches its tentacles all over Italy: the Mafia (Sicily), the Camorra (Naples) and the Ndrangheta (Calabria) are the extremely strong, violent and dangerous representatives of this organized crime. The war against these organizations has been relatively unsuccessful: some battles are won, but in general the war is at an enduring stalemate situation. And don’t be mistaken: Organized crime organizations are multi-billion dollar organizations that would be considered extremely successful, when normal businesses.

The organized crime organizations have not only influence in the underworld, but also in official businesses, industries and in the government, where they gained access via bribery, deception, violent crime and extortion. Dutch company TNT Post Group is one of the recent victims of organized crime in Italy, as local couriers of the company had ties with an organized crime organization.

In general North-Italy is ‘towing’ South-Italy via subsidies, relocation of industries, building projects and other ways of financial/economic aid, but the amount of money that gets in the hands of organized crime from these efforts, is staggering. North-Italians state jokingly: ‘under Rome starts Africa’. This describes their mixed feelings on the southern part of their country.

But in the north not all is well too:

·         the widespread, enormous corruption is spread all over the country and goes from the lowest to the highest levels, all over society.
·         the wobbly political situation with literally dozens of different governments since WWII and with sometimes radical leftwing and rightwing parties in power, worries the other members of the Euro-zone;
·         the enormous influence that long-term President Silvio Berlusconi has in the banking and insurance industry, the media landscape and other parts of business life goes far beyond what is considered ‘desirable’ in a democracy. This and the large number of scandals that this president is connected to, are also troubling the other euro-zone members.

Still, I am optimistic on Italy. The reason for this is the vividness of the country: almost everybody that visited Italy falls in love with it and with the people that live there.

And Italy is an industrial and technological giant that manufactures products that no other country can emulate. There is nothing in this world like a Ferrari,  like Italian luxury furniture or like a Brioni suit. Everybody that owned one of those products, knows this. And with the growing prosperity in the BRIC’s (Brazil, Russia, India and China), the market for Italian products might increase again.

Besides that, the trade balance looks quite healthy and might grow into a small surplus in a few years, when exports increase.

But at short notice, the dangerous debt position, the slow growth of GDP, the remaining difficult situation in the Southern part of the country and the infamous president with his deteriorating authority in the country are reasons to worry on Italy.

And the financial markets smell blood currently, as far as the PIIGS-countries are concerned. That makes a quick solution (a real solution, please) for the Greek, Spanish and Portuguese problems extremely important. 

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