Wednesday, March 22, 2017

Italexit? Odds are saying Yes!

Poll after poll in Italy are showing the five star movement (not a radical right wing group) ahead in the poll.  In fact, just 6 points shy of a majority in the Italian Parliament (majority is at 40%).  Taking all the anti-Europe political parties together and you get a 56% coalition.

Italy is the weak link in core Europe, with 12% of the zone's GDP (a grouping of 27 countries) an economy in tatters, with 12% unemployment, and 37% unemployment among those below 25.  A banking system reeling from accumulated bad debts:  One bank alone absorbed 110% of the Italian government "authorized" rescue fund for its entire banking network.  The sickest bank, Banca Monte dei Paschi de Siena had non performing loans in the range of 30% -- at the peak of the S&L crisis in the 1980s the American banking non-performing loans were less than 5%.  Other Italian banks are in the low double digits -- still not healthy, but better.

The Italian economy is uncompetitive and has no tools (aside from mass reduction on salaries and benefits) to reduce its costs.  The political system is at a standstill with 4 prime ministers in 6 years. The entire system is corrupt and probably beyond redemption.

However there are five ways for Italy to remain in Europe/Eurozone:

  1. Italy and Germany could converge. To do this, Italy would need to undertake economic reforms to clean up the justice system and the public administration, cut taxes and invest in productivity-increasing technologies. Germany would need to run a higher fiscal deficit. Germany will never agree to run a fiscal deficit.  
  2. The northern European states accept large fiscal transfers to the south. Requires full federation of Europe into one political entity -- difficult to imagine Germany (or France, or Italy) giving up their sovereign parliament
  3. The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners (see above)
  4. The ECB finds a way to bankroll Italian public and private debt indefinitely (they're about to give up on Greece which is a much smaller problem [3% of Europe's GDP]).
  5. Italy‚Äôs government will forever continue to support euro membership.  How much pain is the electoral system ready to absorb, the popularity of S5M says that Italians patience with Europe is running thin (Not saying the pain/cost of exiting has been fully discussed)

Now, maybe Europe can figure out a fudge a delay something in between, but the FT's February analysis of the Italian dilemma seems to indicate that there are no easy solutions.  These are the five known options.

Anyway, things are getting interesting


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