There is a now a well-worn path beaten out by European nations as they approach the alter of the markets to plead that they “are different” from the previous cast that have just made the same trek. The speech given to market gods is always the same, “we are different”, “the market underestimates us”, “we aren’t [insert previous country who tried and failed]”. You can see my previous post on Portugal for as previous evidence from a casualty of the violent deity.
As I warned recently Italy has been on the verge of such a trek, with a growing level of denial being advertised by the Italian banking sector.
Some market players have said Italy will be the next to ask for a bailout but Federico Ghizzoni, chief executive of Italian bank Unicredit, told CNBC that the country is in a totally different situation than Greece.
That was 4 weeks ago, you can see the markets response to Mr Ghizzoni’s words over the last month from the Italian 2-Year bond chart.
Over the last week the pressure on Italy has grown to a point that last night Silvio Berlusconi has to throw himself in front of the alter.
Italian Prime Minister Silvio Berlusconi has said the country will not be drawn into the debt crisis engulfing Europe. Addressing parliament on Wednesday, he said Italy’s banks were “solid and solvent” and the economy was “solid”.
His comments come after heavy losses on the Milan stock market and a sharp rise in yields on Italian bonds. The eurozone’s third largest economy is about to introduce a 43bn-euro ($62bn; £38bn) austerity package.
Mr Berlusconi said Italy had “solid economic foundations” and called the recent fall in bond yields a “crisis of faith in the international markets”. Italy has so far managed to avoid sovereign debt problems, despite having one of the highest debt-to-GDP ratios in the eurozone at 120%.
But the economy is twice as big as Greece, Portugal and the Irish Republic’s combined, so a bailout would probably be unaffordable. Mr Berlusconi has been criticised for his silence on Italy’s economic problems, amid concerns about whether the government would introduce the full austerity package.
He told MPs that the government would need to approve “as soon as possible” fiscal reforms in order to have “a tax regime that is more favourable for families, workers and businesses”.
Mr Berlusconi also underlined the need for labour-market reforms and competition. He said the crisis “should be confronted with consistency and confidence, without bowing to the nervousness of the markets”.
I agree with Mr Berlusconi, there absolutely is a need to reform the labour markets and to address overall productivity. So why is it only being done now ? Why hasn’t this been addressed previously as part of prudent economic management? Why would you wait until the witching hour to announce that you are suddenly going to fix the fundamental issues with your economy that have been present all along?
As I mentioned in my previous post, Italy is actually about to embark on an austerity program which means cutting government spending and raising taxes. But Mr Berlusconi has it the wrong way round. You cannot increase the productivity of an indebted eurozone nation while implementing austerity. You need to address productivity first, attempting both at the same time will be counter-productive because austerity will lead to unemployment and therefore a fall in production.
Mr Berlusconi’s speech also highlighted the same major errors in logic that have dogged already fallen eurozone leaders:
Italian Prime Minister Silvio Berlusconi said yesterday the sharp jump in borrowing costs in the euro zone’s third largest economy reflects global troubles, particularly in the US and Japan and represents a “confidence” problem.
Italy’s sovereign debt is being “incorrectly” assessed by markets, he said in a speech to the parliament after a market session when Italian government bond yields hit their all-time high compared to German bunds.
“This crisis is not Italian but planetary,” he said.
So Italy is not a part of the planet?
Italy’s political system, banking system and economic fundamentals are all “solid”, Mr Berlusconi said, adding a recent decline in employment subsidies signals an improving labour market and an incipient hope of economic recovery.
Markets “haven’t recognised the power” of decisions taken by European Union leaders in their late July summit, in particular the decision to make the European Financial Stability Facility more flexible and allow it to buy bonds in secondary markets, Mr Berlusconi said.
While noting total debt levels in the Italian economy — including corporate and household debt — was only “just above” Germany, Mr Berlusconi emphasised his government had taken a long-term pension reform and was pursuing fiscal consolidation “faster than required”.
Germany is a net exporter, Italy is not. Pretending Italy is Germany in terms of macroeconomic stance is an embarrassing economic blunder.
Public debt, almost 120 per cent of gross domestic product and a “heavy legacy of the past”, will automatically begin to decline as a result of the recently-approved plan to balance the budget by 2014, Mr Berlusconi said.
Still, he said, economic and employment growth are “essential” and he said he hoped for fruitful results from the government’s talks with labour unions, business lobbies and the opposition. Those talks start today.
“Everyone has to roll up their sleeves,” he said, appealing for a “unity of intent”.
The Greek economy shows exactly what will happen to Italy as it attempts austerity. Unity of intent will quickly fall away as soon as unemployment starts to rise and politicians realise that their futures are on the line.