The deteriorating economic climate in Italy

When it comes to the euro zone, most eyes are fixed on Spain and Greece where a debt deflationary death spiral has begun. But the economic situation remains fragile in other countries of the so-called periphery. Italy is the largest peripheral country and deserves a lot more attention given its political and economic weight within the European Union.

According to the Wall Street Journal, the Italian government lowered its projections for the Italian economy saying GDP would shrink 2.4% this year and another 0.2% in 2013. The government had been projecting 0.5% growth for 2013. They also said this “slightly negative” figure shouldn’t overshadow the improving trend, because the government the Italian economy to expand on a quarterly basis starting in 2013. I’m not sure where these numbers are coming from, but the reality is that the economic forecasts are still being revised down. To me, that says the economy has downward momentum and that we should expect any forecast revisions to be t the downside.

I wanted to share a personal anecdote with you though. A loyal reader from Italy who manages money wrote me telling me about how severely the economic downturn is affecting credit for small and medium-sized business in Italy.

Businesses cannot get credit at all, because the banks apply very high spread to the very low base rate at  which they borrow. This is because firms are asking credit to be able to pay their employees, not for new investment. And banks won’t finance this. The firms ask money to pay employees because their customers are not paying. The local governments are covered in scandals because they waste money on prostitutes, parties, dinners, while cutting money for hospitals and schools.

Draghi says his OMT is to guarantee that monetary policy gets through to Italy and Spain. In Italy, which is much much more industrialized than Spain and has a stronger middle class (Spain got rid of Franco only a few decades ago), this is not happening. Banks get money at a lesser rate, and add a higher spread. Savers buy junk bonds from the banks without knowing it (they are offered lower tier bank bonds) but people buy them because they are sure that all Italian banks are too big too fail. Monti has done zero pro-business reforms to create growth , he has made lots of reforms which help the bank cartel. But not pro-market reforms. If Italy cut waste by a 100 billion, Italy would take off. People want to invest, but Monti is just taxing the middle class to the bone.

If you replaced those names with American ones the story would be identical. Try this:

Businesses cannot get credit at all, because the banks apply very high spread to the very low base rate at  which they borrow. This is because firms are asking credit to be able to pay their employees, not for new investment. And banks won’t finance this. The firms ask money to pay employees because their customers are not paying. The local governments are covered in scandals because they waste money  while cutting money for hospitals and schools.

Bernanke says his QE is to guarantee that monetary policy gets through to jobs. This is not happening. Banks get money at a lesser rate, and add a higher spread. Savers buy junk bonds from the banks without knowing it (they are offered lower tier bank bonds) but people buy them because they are sure that all Italian banks are too big too fail. Obama has done zero pro-business reforms to create growth, he has made lots of reforms which help the bank cartel. But not pro-market reforms. If the US cut waste by a 100 billion, the economy would take off. People want to invest, but Obama is just taxing the middle class to the bone.

I don’t know if the narrative matches word for word but I thought it was useful to show you that the macro conditions are actually similar.

Finally, I saw this video posted by Rai24 marking the student protest in Milan and I thought I would share it with you. I’m not in Italy, so I can’t say if this is anything remarkable. But, from a bigger picture view, civil unrest is rising across Europe and, unless we see growth soon, it will continue to rise.