Euro Crisis Deepens
Italy Struggles to Break Out of Downward SpiralBy Hans-Jürgen Schlamp in Rome
A closed shop in downtown Milan: Italy is in the middle of a recession.
Claudio Pesaro actually had big plans for this year. The 35-year-old Italian, who still lives at home, wanted to buy his own place, marry his girlfriend and have children. But even though he has saved more than a third of the purchase price for a property, he can't find a bank that is willing to lend him the rest. His job is also at risk, as his company is making losses. As a result, he will have to put his plans on ice for now.
Marco Michelli wanted to go into business for himself, starting a microbrewery complete with pub. Beer is popular in Italy, especially among the young. But the municipal authorities hampered him with conditions and fees, and the bank withdrew its commitment to fund his business. That was the end of his project.
These are just two typical stories from Italy, which is currently in the fourth year of its crisis. The mood in the country is depressed. The number of people committing suicide for economic reasons is increasing. The enthusiasm with which Italy greeted the introduction of the euro has long vanished. Now, around 65 percent of the population are skeptical of the common currency.
Hence, Italians were relatively tranquil in their reactions to the latest "Black Monday" on the stock markets, when stocks fell sharply following the announcement that the Italian economy had contracted by 0.8 percent in the first quarter of 2012. They have come to expect such plunges. The focus of the euro crisis is, after Spain, shifting again to Italy. Italian share prices have plummeted, and yields on Italian government bonds jumped back over the dangerously high 6 percent mark. Stock markets insiders report that hedge funds are investing large sums of money in bets against the country, on the assumption that yields will continue to rise -- and are thereby fueling the downward spiral.
Italian Prime Minister Mario Monti has denied that his country will ask for an EU-led bailout. He told the German broadcaster Deutschlandradio Kultur on Wednesday that he realized Italy had a reputation as a "cheerful and undisciplined" country, but that it was "more disciplined" than many other European countries -- adding that it was "also not so cheerful."
On Wednesday, Italy saw yields on its 12-month bonds shoot up again in a 6.5 billion ($8.1 billion) auction. The interest rate rose to almost 4 percent, up from 2.34 percent last month. Demand, however, was strong.
The country also wants to raise 4.5 billion on Thursday and 9.5 billion on Friday. Together, that's a total of over 20 billion in new borrowing. If the interest rate on those bonds increases by just one percentage point, say from 5 to 6 percent, it will cost the state an additional 200 million. That happens to be the same amount of money that Corrado Passera, the Italian minister for economic development, is lacking to finance his growth program, which he announced some time ago. The program is currently paralyzed because of internal government wrangling over its financing.
Italy's battered economy desperately needs stimulus, but the downward trend is continuing unabated:
- Italy's industrial output is falling almost every month. Since early 2008, the country's total production has shrunk by about a quarter.
- The unemployment rate has increased from 8 to 10 percent over the last 12 months. Among the under-25s, it has risen from 28 to 36 percent. These figures may even be understating the problem: Many of the unemployed no longer bother to register, meaning they are not included in the statistics.
- Italy's gross domestic product (GDP) will decrease this year amid the deepening recession. The Italian central bank has said it will be satisfied if the decline does not exceed 1.5 percent.
- A raft of other indicators, including net national income, consumer demand and standard of living, are also falling.
- The only thing that is growing is Italy's mountain of debt, which is already at 120 percent of GDP and will probably exceed the 2 trillion mark this year. As long as the economy is shrinking, it is very difficult to break through the vicious circle of debt, which almost automatically produces more new debt.
Putting a Positive Spin on the Situation
Minister Passera has tried to play down the significance of the figures. The poor economic data had been expected, he said, arguing that exports are actually doing well, the banks are stable and government spending is proceeding as planned. Passera insists that the situation in Italy is much better than in other crisis-hit countries. Unfortunately the markets do not appear to recognize the subtle distinction.
Meanwhile, the enthusiasm that many Italians felt for Mario Monti's technocratic government in its early days has faded. Many Italians complain that Monti and his cabinet have talked a lot about economizing but have mainly increased taxes and other charges. They have done little so far in terms of cutting spending, for example to the wide range of unnecessary subsidies or the generously funded political and administrative system. And the promised reforms of Italy's ossified economy remain stuck in the early stages.
Passera's attempts to put a positive spin on the situation have earned him criticism, scorn and ridicule from his compatriots, including in forums on newspaper websites. "The day when we have serious politicians will be a great day," wrote one user on the website of the conservative-liberal newspaper Corriere della Sera. The comment is reminiscent of complaints from the Berlusconi era.
'Ms. Merkel, You Can't Go on Like This'
Italy's beleaguered politicians are trying to shift the blame for their plight. For example, the recent earthquake in the north of the country has been blamed, which did indeed cause great damage and considerable loss of production. But it is mainly the Germans who are increasingly being identified as the culprit, with the hard-hearted Chancellor Angela Merkel being a particular focus of resentment. In the view of some Italians, all the ideas that the highly indebted countries of the euro zone want or propose -- including euro-bonds, a banking union or investment and growth programs financed with jointly issued debt -- meet with a stubborn "Nein" from Berlin.
Things must change, wrote the Italian business newspaper Il Sole 24 Ore in a commentary published Tuesday, echoing the current political sentiment. "Ms. Merkel, you can't go on like this," writes the newspaper in the piece, titled, in German, "Schnell, Frau Merkel" ("Quick, Ms Merkel"). "You will not get very far if you continue to be indifferent to the Greeks' anger and distant from the Spaniards' wounded pride, the Italians' fears and the anxieties of the French." The commentator appeals directly to the chancellor to act, arguing that: "A strong and healthy Germany cannot possibly exist amid the ruins of European countries."
The reason why Merkel is not, however, acting quickly is addressed by the newspaper La Repubblica which quotes Monti as saying that Merkel is taking a hard line because of the upcoming 2013 national election in Germany. But Europe cannot wait that long, the newspaper quotes Monti as saying: "The time for hesitation" is over.