Yesterday, there was sheer panic on the financial markets. Target of choice for the financial markets was Italy. Since the end of June, the country was increasingly under fire, due to its enormous debt of 120% of GDP and its lack of economic growth during the last years. In my article “Why is Italy into trouble anyway”?, I took a look at the problematic growth of the country:
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
Still, I was quite optimistic on Italy:
· the country still has a vivid industry;
· the exports and imports are almost totally balanced;
· the employment situation is not as desperate as in Spain or Portugal.
But the main reason for my optimism, is the fact that Italy has some unique products and goods to offer that nobody else in the world can make or copy. Goods and products that will be in higher demand when the world economy improves. But I also warned:
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 Prime-Minister 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.
And boy, did the financial markets smell blood yesterday: The interest on Italian 10Y-bonds rose to 5.76% from 4.90% last week and the spreads of Spain and Portugal against German ‘bunds’ went through the roof yesterday.
However, although the underlying cause for the panic on Italy was clear, the trigger (immediate cause) was not so clear. The extreme Italian debt has already been there for a long period. It was already there when everybody was talking about Greece, Spain and Portugal. And Silvio Berlusconi has already been Prime-Minister for almost ten years (in three different stints), so his erratic behavior and his ties to corruption and organized crimes could hardly be surprising.
Italy has been the elephant in the room for quite some time, but the ‘big animal’ didn’t move very much and everything seemed hunkydory with it. Until yesterday…
Were it the stories on Finance Minister Giulio Tremonti being put under pressure to remove some cutbacks from the €43 bln austerity measures? Or were it the rumours that the European Finance Ministers were organizing an emergency meeting on Italy, which was denied later by the same Finance Ministers?! I don’t know, but I do know that suddenly everybody was in a state of panic yesterday.
I am not a bond-investor and therefore I can look at the markets with some distance. What makes me feel uneasy, however, is the fact that the countries of the Euro-zone and the ECB still presents themselves like eighteen frogs in a barrow, all jumping to different sides.
I just take a grab out of the headlines of ‘Het Financieele dagblad” (http://www.fd.nl/;Dutch financial newspaper) from today (July 12th) :
· Merkel warns Rome to carry-through the €43 bln in austerity measures
· Chairman European Securities and Market Authority: ‘Limit the power of the rating agencies’
· Giulio Tremonti: “If I fall, so does Italy. And if Italy falls, so does the Euro”!
· Spain sees itself as a victim of distrust and suspicion.
After reading headlines like this and looking at the events of the last two years, I cannot help to have some questions for the European leaders:
· Why is the official leadership of Europe still in the hands of faceless apparatchiks, like Herman van Rompuy, Catherine Ashton and José Manuel Baroso?! Are they appointed for causing no threat to the sovereign leaders of the EU-countries?
· Why is none of the true European ‘leaders’ taking the helm in the Euro-crisis?!
· Why are all countries of the Euro-zone emanating discord and a mentality that can be described as: “everybody for themselves and God for us all” (Dutch phrase)?!
· Why does every European country think that the EU and the Euro-zone are only there to serve its own purposes, while everybody knows that a truly unified policy would make the EU so much stronger?!
· Why is Germany – in the person of Angela Merkel – responsible for so much disinformation, strange decisions and panic-mongering?!
· Why is the ECB still desperately trying to hold all Euro balls in the air like a juggler, when everybody and their sister knows that the ball, called “Greece”, will fall anyway?!
· And why do the ECB and the Euro-zone not understand that the risk of a massive contagion of all PIIGS-countries is growing bigger, when the problems around Greece remain longer on everybody’s retina.
I want to dig deeper in the last two bullets: there is nobody in politics and in the financial world that really believes that Greece can be saved from defaulting and that the Greek austerity measures will eventually work out for the country. Greece is doomed to default and the quicker this happens, the better. But if you listen to the representatives of the Euro-zone, you hear ten different stories.
And towards the last bullet: the problems that are threatening the Euro-zone are like a bacterial infection. It started to infect one limb (Greece) and it is now rapidly spreading over the other limbs, starting with the ones closest to the infected limb (Spain, Portugal, Italy, Ireland and Belgium). The Euro-zone is administering one antibiotic after another (the financial aid programmes), but all treatments seem to make the patient more ill, instead of curing him. When does the European doctor (the Euro-zone, speaking with one mouth(!)) conclude that the infected limb should be removed?!
The best what could happen, is that Greece (in conclave with Europe) decides what part of the debt it can afford to pay back in about 15 years, without making the domestic economic depression worse. The difference between the actual debt and the amount to be paid back is the haircut that all creditors of Greece (including the private creditors) should accept.
After defaulting, Greece should be put under supervision from the leading (read: the financially strongest) Euro-zone countries to reform:
- its national and local governments
- its civil services system;
- its pension system;
- its social security system;
- its fiscal and tax-collection system;
After this operation, the ‘refurbished’ Greece could eventually return to the financial markets. And as leaving the Euro-zone is not an option (see: Why Greece is not going to leave the Euro-zone), we should accept that the default of Greece takes place while the country will remain a full member of the Euro-zone.
It will be a violent blow for the Euro-zone and the European banks, when Greece defaults. And we don’t know at all, if the consequences of such a Greek default will be fewer or worse than those of the Lehman bankruptcy. And we don’t know if this default will blow the Euro skyhigh.
But I do know that the Euro-zone currently acts like a punch-drunk boxer, standing in a corner of the ring and blinded by his swollen eyes. The boxer is desperately lifting his hands in attempt to defend himself against the endless blows from his seemingly invincible opponent (the financial markets), but it all seems in vain.
He has no strategy anymore and he doesn’t have the control to defend himself properly; the only thing he wants is that the bell rings before he gets the knock-out blow. But the bell will not ring in time, this time.
The financial markets are not a homogeneous opponent with a fixed strategy, present only to knock the European Union down. And there is no conspiracy behind it. No evil governments or evil banks with evil plans.
But still everybody sees that the Euro-zone is almost knocked out and still refuses to defend itself consistently. And that is really, really worrisome…
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