Could Italy cause the bubble to burst?
Make no mistake: there are some serious dislocations in the world economy today. China’s export-led economy has been growing by 9% a year for the past twenty years, and its growth is now colliding with much of the EU in or near recession. Something’s got to give. We have spent most of our time on France and Germany in discussions of the EU/China problem. Here is a chart from the WSJ, showing the pathetic growth and high unemployment in the broad EU:
However, the crisis is actually greatest in Italy. Here’s Italy’s situation via the 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. Italy also is experiencing faster wage inflation and slower corporate restructuring than euro-zone rivals including Germany, Mr. Callow said…..
Italy’s economy is dominated by small family businesses with little money to invest in upgrading technology or boosting productivity. The country lags behind much of Europe in spending on research and development and spending on information technology. The head of Italy’s employer’s association, Luca Cordero di Montezemolo, said Monday the economy was “on its knees” and “in the last place in Europe” for productivity, investment and the state of industry.
In the past, Italy could cut interest rates or devalue its currency to escape recession — options no longer available inside Europe’s monetary union. Italy already has the world’s third-biggest public debt after the U.S. and Japan — more than its entire annual GDP. As Mr. Berlusconi’s government faces lower tax revenue and political pressure to spend its way out of trouble by next year’s national elections, it is likely that Italy’s debt as a percentage of GDP will start to rise again…
Shipments of clothing and other textiles from China are up 54% this year versus last year, and the US, as well as the EU, have taken steps to re-impose limits on China. But doing so may not produce a silver lining, only another dark cloud, as John Bussey of the WSJ explains:
China needs the textile jobs as much as the U.S. and EU do. Politicians in the West fear losing elections if their constituents lose their jobs. In China, the Politburo fears losing its head. Unemployment can lead to social instability, and that’s the hottest of hot buttons for the Communist Party. In fact, China needs robust economic growth just to absorb the new workers flooding into the labor force each year. China is in some ways a bicycle economy, peddling fast to keep from falling over.
Your correspondent is one of the most bullish people on the planet regarding the prospects for long-term economic growth. However, the rising protectionist pressures against China are beginning to come into serious conflict with the need for China to cover its development dislocations and errors through continued high growth. This is a formula for a recessionary environment both in the EU and China — a terrible scenario for all of us.
We’re not betting on the Euro-zone’s long term success in its attempt to orchestrate a unified monetary and fiscal regime.