The euro, sitting on the tinderbox of Italy

Italy gets little attention in the domestic financial press

This is certainly understandable.

Italy is not a blockbuster economy either in the world or in Europe. It’s GDP of $2.1 trillion in 2021 ranks eighth in the world, less than a tenth of that of the United States and behind Germany, the United Kingdom and France in Europe.

The last time Italy received widespread attention from domestic media was in early 2020 when the novel coronavirus outbreak broke out in Europe. At that time, Italy was once called “hell on earth” by domestic media due to the spread of the epidemic and the lack of medical resources.

For example, it is well known that the euro has plummeted, and the exchange rate with the US dollar has fallen below 1 to a new low in 20 years. It is true that the war between Russia and Ukraine has seriously weakened the economy of the euro zone, but Italy, as one of the three largest economies in the euro zone (second only to Germany and France), its inflation problem and debt crisis are also one of the reasons for the fall of the euro.

Over the past few decades, China has experienced year after year of high economic growth, regardless of whether it is denominated in dollars or Yuan.

Fifteen years ago, in 2007, Italy’s GDP in nominal dollars was 2.2 trillion. After 15 years of growth, by 2021, its GDP had “grown” to 2.1 trillion.

Note that this is all in nominal dollars at the time, without taking into account inflation, which means Italy’s GDP has not grown since its peak in 2008, but has shrunk by around a fifth.

Over the past 15 years, the U.S. economy, six times the size of Italy’s, has grown to 11 times the size by 2021.

According to the data of Italy’s National Statistics Agency, Italy’s GDP in 2021 is 1.78 trillion euros. With the collapse of the euro against the US dollar, the size of Italy’s GDP in 2022 is almost bound to fall below 2 trillion dollars, and the size of the US economy is likely to be more than 13 times that of Italy…

In recent years, Italy was the only one of the 10 leading western developed countries (America, Japan, Germany, Britain, France, Australia, Italy, Spain and the Netherlands) to have a bond yield of more than 4%. As we all know, the higher the bond yield, the higher the financing cost and the greater the financial risk of a country in times of economic malaise.

While growth has stagnated, Italy’s CPI inflation rate is now at a 36-year high, driven up by energy prices caused by the Russia-Ukraine war.

After the playboy Silvio Berlusconi was elected prime minister, Mr. Draught went to Goldman Sachs, but when Mr. Berlusconi’s government nearly drove the Bank of Italy into bankruptcy in 2005, he returned and was appointed governor of the Bank of Italy, where he helped the bank survive by streamlining the government and pressuring the government to cut spending.

Mr. Draught was elected president of the European Central Bank in 2011 to great acclaim.

During his time as president of the European Central Bank, he experienced two European debt crises. In these two crises, he exerted reasonable mediation to pressure Germany to accept the expansion of the euro currency and lower the yield of heavily indebted countries’ government bonds, in order to support the fiscal bailouts of Greece, Spain and Italy, and twice let the euro survive the crisis.

Draught stepped down as ECB president in 2019.

In February 2021, Italian President Sergio Mattarella officially appointed Mario Draught as prime minister of the new government.

Given Italy’s debt, fiscal and inflation woes from 2021 onwards, Mr. Draught, who has dealt with multiple debt and currency crises, is surely the right man to be prime minister.

A month ago, however, Mr. Draught submitted his resignation to the president. Although Italy’s Senate passed a vote of confidence in his government, it did not help that Italy’s largest party, the Five Star Movement, opposes his government’s policies.

The Five Star Movement opposes the current system of Italy, the current system and status quo of the European Union, supports Italy’s exit from the euro zone, and opposes globalization. It also calls on the government to reduce and reduce the tax on enterprises, subsidize the green economy, enhance the medical insurance system, increase the welfare of the people, and resolutely opposes immigration…

The Five Star Movement insists that only those with a clean record should enter politics. It will not tolerate anyone with a broken record, and it has demanded that government officials cut their salaries to “serve the people”.

However, in Draught’s view, many of the Five Star Movement’s demands are actually contrary to Italy’s current extremely high government debt ratio (second only to Japan among major countries in the world). With tax revenues drying up, it is impossible to cut taxes on enterprises, increase insurance and increase welfare benefits, and it is absurd to quit the euro zone that we have so hard to join…

Going further, why has Italy’s economy collapsed so badly over the past two decades?

You are one of the G7 industrialized countries and you are almost as bad as Greece, which was about to go bankrupt in 2011?

The answer is: globalization.

This is why the Five Star Movement is so strongly opposed to globalization and even advocates leaving the euro.

As the fourth largest economy in Europe, Italy’s economy has long relied on small and medium-sized enterprises. Compared with Germany, France and Britain in the euro zone, Italy has no large enterprises or state-owned enterprises. Since the end of the Second World War, its economic growth has basically all relied on small and medium-sized enterprises developed from the original handmade workshops.

Sees account for 99.8 percent of all businesses in Italy. According to the European Commission’s SME Tracker report, 95 percent of Italian companies have fewer than 10 employees; the highest proportion of sees among G7 industrialized countries.

However, with China’s accession to the WTO in 2001, Italian sees immediately began to face global competition.

But Italians, by nature a bit like Latin Americans, have a social culture that shuns competition, and Italian companies and products are losing out internationally.

In Italy, it is common for young people not to study or work. According to the data of the European Court of Auditors, the number of Nits under the age of 30 in Italy (specifically refers to those who do not go to school, do not work, do not attend job training and do nothing all day) is as high as 2.2 million, accounting for 24.3% of the total number of young people, the highest proportion in Europe, while the EU average is 14.2% and Germany only 8.8%.

Alas, Italy’s entry into the euro in 2000, under Mr. Draught, was blocked from devaluing its currency to boost exports.

With high government debt, no way to achieve high economic growth and no way to devalue, Italy’s problems are essentially unsolvable if it stays in the euro — which is why Five Star is calling for an exit.

During Draught’s term as president of the European Central Bank, with the help of the ECB’s large-scale QE printing, Italy’s debt problem was only temporarily alleviated in the European debt crisis in 2011 and 2014, and the overall problem was never really solved.

When the pandemic hit in 2020, due to the sharp decline in GDP and the surge in government spending on health care, Italy’s already severe debt problem was not reduced, but greatly worsened, with its debt-to-GDP ratio soaring to more than 150%, second only to Japan and Greece in the world.

Mr. Draught’s resignation signals a new period of political upheaval in Italy.

With a debt /GDP ratio of over 150%, Italy has become a powder keg in the Eurozone, you never know when it will burst, the economy is stagnating, the currency cannot devalue on its own, let alone Draught resigns, and even if he doesn’t, I don’t think there is much he can do to save Italy.

To make matters worse, since the outbreak of the pandemic in 2020, Italy’s revenues have fallen far short of its spending, and the country is already burdened with debt. Then, the government’s revenues have fallen far short of its spending, and it cannot devalue its currency — as the United States or Japan can

Italy has thus entered an apocalyptic debt-inflation cycle.

Worst of all, Italy is not the only country in the euro zone. Spain, the zone’s fourth-largest economy, is in similar shape, and the euro zone is dragging it down.

In Italy and Spain, the same problem exists in the United States and Japan, but in the case of the United States, it is better because it can print money and collect the wool from all over the world.

I wrote about this in early 2022:

Us: Inflation or decline!


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