Recent Updates

  • New Zealand: External Migration (Mar); Australia: CPI (Q1)
  • Japan: Service Producer Price Index (Mar)
  • China: FDI, Domestic Debt Securities, Stock Market (Mar)
  • Japan: Checks and Bills Clearing (Mar)
  • US: Existing Home Sales Detail (Mar)
  • UAE: CPI (Mar), Dubai GDP (Q4); Lebanon: CPI (Mar); Israel: PMI (Mar), Quantity of New Dwellings Demanded (Feb); Palestine: Public Debt (Mar-Prelim); Saudi Arabia: Real Estate
  • more updates...

Economy in Brief

Italy Continues to Crumble. Cyprus Down; Italy Next?
by Robert Brusca  March 25, 2013

Consumer Confidence in Italy sees handwriting on the wall - Italy's consumer confidence measure in March as measured by ISAE, the Italian statistical agency, shows a drop in the reading to 85.2 from 86.0 in February. January had posted a reading of 84.7. That was the worst reading since early 1996 from the start of the series. The reading this month is the third worst in the history of the series and, as the chart shows, represents a very weak reading that is simply bumping along the bottom of the all-time weakness range.

With Cyprus being bailed out Italy is likely to be the next biggest thing on the horizon for EMU. What has Cyprus showed us? What does it mean for Italy?

Cyprus: not likely to hold world poker championships - Over the weekend Cyprus and the European Union and the Troika came to an agreement on a bailout for the Cypriot banking system. While Cyprus held some cards that it could have used to get a better deal for itself, in the end the European Community seems to have called its bluff. Cyprus apparently decided that it would remain more European than Russian as Cyprus did not avail itself to a different end that might have been financed by Russia along with establishment of a cozier relationship with the Russians.

Cyprus: another untimely end where the bailout seems as painful as no bailout - In the end Cyprus agreed to a plan that will cause one of its largest banks to disappear and another one to be severely rearranged. Foreign depositors in these banks - in fact any large depositor in these banks - will suffer what could be huge losses. With that, the possibility that Cyprus would continue to act as an offshore banking center and continue the development of this phenomenon has come to an end. Like other countries where the European Union has come in to orchestrate bailouts Cyprus will suffer substantially.

Cyprus's undoing - While Cyprus may have overstepped its bounds with its banking ambitions Cyprus was undone by its banking sector's exposure to Greece and by the course that the European Union pursued to resolve the Greek banking system, an approach that inflicted losses on Cyprus. Unlike other countries, because of the huge relative size of the Cypriot banking sector, the small island-nation was in no position to offer its banking sector any support. Cyprus is less an example of economic profligacy that got out of hand, than it is an example of how dangerous it can be for small counties to try to use themselves as rogue centers to harbor wild-cat banking activity.

Cyprus down, Italy...next? With Cyprus resolved attention should turn back to Italy which is in fact a more important and more significant threat to the European Community. Italy has recourse from austerity and it is not recourse that is as draconian as the recourse that Cyprus had to choose from and chose to reject. Italy does not need help from outside sources to resolve its conflict with the European Community. If Italy wishes to assert its independence from 'European Monetary Union-endorsed austerity' it has the domestic resources to do so and could choose to do that in a plan that would take it outside of the European Monetary Union.

Italian politics spells trouble for EMU - The Italian president, Giorgio Napolitano, has empowered the center-left Bersani faction to pursue the formation of a government in the wake of the still unresolved Italian elections. Silvio Berlusconi is demanding that his faction be included in the making of a government. Meanwhile, the Five Star Movement (FSM) faction under 'Bebe' Grillo is gaining more grassroots support and thereby becoming a potentially larger faction should these elections prove unable to produce a workable government and should new elections need to be set. The Grillo faction has said it would not be part of a government led by any conventional political party. Many of its members are separatists with respect to participation in the European Monetary Union. Grillo's FSM seeks a referendum on Italy's continued participation in EMU. The Italian President's circumstance is increasingly with limited options. The ability to steer this outcome seems to be increasingly tenuous. The maneuver in the previous election to install a technocrat government worked because the two major contending factions supported a technocrat government that would do the difficult things neither of them wanted to do but that the EU Commission demanded. A technocrat government is no longer supported. The people are up in arms over the changes made by the technocrats, imposed on them by outsiders.

The end of rule by the elite in EMU? In some sense Italy has ceased to be run by the elite that have dominated its politics over the years. While Italy has had many different governments because of the need to combine factions to make the government, there has been a lot more stability in Italian politics that it seems, in the sense that many of the same people had been in office through the years even as the government has changed. But now this government with the changing name and revolving chair membership among the same participants seems to have become a thing of the past. It seems that Italy will finally at some point have a new government and one that will be more responsive to what the people want rather than to be responsive to what some elite person knows that the people 'must do.' Such a prospect puts the entire modus operandi of the EMU at risk. For years the EMU has survived on its ability to make changes that were mis-categorized as 'not treaty changes' so that national leaders could make decisions for changes while a vote of the people was never required. The EU/EMU knows how poor is its popularity at the grass roots level in many member nations.

Italian consumer is angry... at risk... and... not at all fooled - The Italian consumer does not seem to be fooled by the prospects that stand in store. With confidence essentially at the weakest levels they have ever seen they are not optimistic about the outcome whatever it would be. The overall situation in March is assessed as the worst ever. With an average reading for this metric at -85, the reading in March is -150. The overall situation for the next 12 months is assessed at a level of -22 which makes it worse only about 15% of the time. In the next 12-months the unemployment prospect reading continues to rise and is worse than its March reading less than 3% of the time. The expected household budget reading has improved in March but has been worse than its current reading only about 3% of the time. These are the expectations for the coming 12 months

Households are pulling back - Households assess their financial situation over the last 12 months as having been worse historically only one half of one percentage point of the time. In the next 12 months expectation show that expectations have been worse only about 6% of the time. Currently households are saving money. Savings have been better than this only about 31% of the time. Looking to the future expectations for savings are that they will be in the bottom 8% of what has been experienced. That seems to suggest that households currently are saving and saving as much as they can because they are so very concerned about the future. In terms of buying conditions when consumers are asked if the current situation is a good one for major purchases responses are worse than the March level less than 6% of the time.

Italy: not alone facing austerity; but why continue? - With Italy facing difficult times along with Spain and along with Portugal the question they have to ask themselves is how does Europe help them? In looking at the European solution for other troubled countries such as Greece and Cyprus how has the European solution made life better for them? The answer may be that Europe saved Greece and Cyprus from going over the cliff. Each of them, however, continues to dangle off the edge of the cliff held on by a tenuous lifeline with great effort on their own part so that life can go on but under very difficult circumstances and under a very dark shadow.

The EU's push Vs local resistance and options; Sizing up the past and future - Arguably Greece did not have any other choice when the EU came calling and in fact played its political cards as well as could be expected. Cyprus had other options but in the end chose not to pursue them. Italy is a country that could make a life for itself outside of the union. A re-launch of the lira would restore its competitiveness and it would press its inflation rate higher temporarily, something that the Italian central bank would eventually control. Italy could choose what sort of inflation environment it wanted. It could use inflation to ease the pain of its debt. Or it could keep inflation at bay and use the weaker lira to stimulate its real sector by increasing its international competitiveness. Since Italy is a relatively wealthy country and since one of its main fiscal problems is in the collection of taxes, Italians can control their destiny. It may be one in which Italians actually have to pay their income tax. It may be one in which value-added taxes are no longer able to be evaded. And maybe one in which property taxes are more consistently applied and uniformly collected. Certainly there are things in the Italian culture that would have to change but could change according to decisions made by Italians rather than according to changes imposed upon Italians from the outside. Italy is unique in having this flexibility. At least it is unique among the countries in the European monetary union that are currently under the pressure of austerity. Spain and Portugal continue to have fewer options than Italy.

Cyprus a catalyst for what? The resolution of the situation in Cyprus I think will simply refocus attention on the problems in Italy. Italy is a much more difficult situation and the European Commission will have a harder time bowing Italy to the solution that it wants not only because Italy has economic and political flexibility but because the Italian people have made their will known. The penchant for Europe to kick the can down the road could very well end with Italy. It seems to me that Italy is a clear message to Europe that it day's of imposing its will on other countries may be drawing to a close. I say this even realizing that that's exactly what has been done with Cyprus. But Italy is not Cyprus nor is Spain, nor is Portugal. It is very hard for me to see how the EuroGroup is going to put the Italian toothpaste back in the tube.

close
large image