The Euro-zone’s problems
We have focused primarily on France and Germany’s economic woes in our pieces over the last month, but it is now Italy that is the sick man of Europe, and one cause continues to be China. WSJ:
Italy now has the greatest woes in Europe. Its economy shrank by 0.5%, following a 0.4% contraction in the fourth quarter. Economists expect another drop in output in the second quarter. They don’t see any easy escape routes, because stiff competition from China is harming some of Italy’s biggest industries, and the country’s already sizable debt constrains government moves because of euro-zone fiscal rules.
“This is the first case where a big country in the euro area has gone into a big recession,” said Julian Callow, chief European economist at Barclays Capital in London. “Italy has suffered a major deterioration in its relative competitiveness.” Italian industrial production suffered steep declines in February and March, led by the country’s large textiles, clothing and footwear sectors, all suffering from cheap Chinese competition.
Worse still, Joaquin Almunia, European monetary affairs commissioner, explained that Italy may have a tough time using tradtional policy tools to lift itself out of recession because of Euro-zone budget disciplines (via FT):
Mr Almunia warned that Italy had “some important structural problems leading to low growth potential”, including the exposure of exporters to Asian competition. Mr Almunia will soon exacerbate Mr Berlusconi’s political problems by demanding that he take action to bring down the country’s rising budget deficit. The commissioner believes Italy broke the stability and growth pact’s deficit ceiling of 3 per cent of GDP in 2004 and will do so again in 2005, leaving him no alternative but to launch proceedings against Rome.
Some of Italy’s woes stem from the end of export quotas by Chinese textile manufacturers at the end of 2004, which those manufacturers were quick to exploit and the Chinese government did little to stop (WSJ):
Last month, the EU launched a 60-day investigation into surging Chinese textile imports, which have jumped by triple-digit percentages in some product categories….At the end of last year, China’s Ministry of Commerce announced it would impose duties on certain textile exports. The measures were part of a pre-emptive effort to prevent a flood of Chinese textile and clothing exports after the Jan. 1 expiration of a global quota system that had kept a lid on shipments.
Beijing faces a balancing act. China’s textile industry is a hodgepodge of lean factories situated on the country’s wealthy coast and struggling state-run enterprises employing thousands of workers in the poorer interior. Chinese leaders fear that a slowdown in textile exports could put jobs at risk, threatening social stability. Still, pressure to do something has mounted in the wake of a surge in China’s textile sales since the dismantling of a global quota system on Jan. 1. In the first quarter, Chinese textile exports rose 29%, according to China’s official Xinhua news agency.
We continue to be fearful of what happens when China’s low prices and aggressive business practices conflict with a Euro-zone at the limits of its monetary, fiscal and political constraints.