Italian Consumer Hits the Deep Skids

It's a close to official as it can get. The Italian consumer is really fed up. While Italy is still one of the countries with one of the richer citizenries in Europe its technocrat government and the situation in Europe has driven the Italian consumers to the worst frame of mind since January of 1982 (at least) when the ISAE consumer confidence gauge was launched.

Bad all around in Italy - While Europe has been struggling for some time, Italians rate the overall situation over last 12-months as in the 66th percentile of its historic queue of values- a near top third historic ranking. But looking ahead they rate it for the next 12-months as in the bottom 3.8% of its historic queue - worse o nly 3.8% of the time. The outlook for the household budget is the worst ever. The expectation for unemployment at a raw reading to +32 is in the 99.2 percentile of this historic queue, higher than this less than 1% of the time. And so on, see the values in the table for other depressing dillies.

The euro-conundrum - The drop in confidence is the 16th largest drop over six months in the last 30 years. Conditions in Italy are spinning out of control. With Italy clearly in the less austerity camp and France with a new socialist government Germany is going to find a lot more united front with increasingly stiffer opposition to its austerity solutions. And this with Angela Merkel losing some of her power base at home is not going to make it any easier for her to compromise. Maybe we should rename the place the Euro-Conundrum?

The euro-dilemma - The next BIG PUSH in Europe, which Germany, the UK and Austria and some others oppose, is the desire for a euro-wide bond. And while that could help to buy time, buying time is no good unless reforms are made. Europe right now suffers from four distinct problems (1) an adverse business cycle that is undermining the ability of governments to hit fiscal targets even with good intentions, (2) not the best of intentions as many reforms needed to be enacted in Greece, Italy and elsewhere are not being aggressively pursued, (3) banking sector problems which differ across national boundaries and include problems for banks that are in non-troubled economies, (4) competitiveness problems that have crept in since the common unit was formed. Differential inflation rates have driven huge competiveness gaps between various member countries a problem that is very hard to solve if the currency union is kept and if there is not a development fund to try and address local problems. If you cannot solve the competiveness problem you will not solve any of the others. It is the lynchpin issue.

Eurobond as savior or red herring? By itself a Euro-bond would only be a way for Europe to get into even deeper trouble. Coupled with the right kinds of reform it might work. But there is little evidence that a country like Greece is willing to reform. Greece seems to want nothing but its old standard of living back. Countries need to have a commitment to change for a euro-bond to ‘do good' instead of making things worse. One big problem is that a lot of good will has already been used up and there are a lot of bridges to be rebuilt to get to the point where the financial backers of a euro-bond would feel that they would trust those who would use the proceeds. Greece's aggressive threat posture makes it an unlikely candidate to be included in a euro-bond scheme without a an awful lot of change and political reconfiguration.