Italy has only one serious economic problem. It is in the wrong currency.
The nation is richer than Germany in per capita terms, with some €9 trillion of private wealth. It has the biggest primary budget surplus in the G7 bloc. Its combined public and private debt is 265pc of GDP, lower than in France, Holland, the UK, the US or Japan.
It scores top of the International Monetary Fund’s index for “long-term debt sustainability” among key industrial nations, precisely because it reformed the pension structure long ago under Silvio Berlusconi.
“They have a vibrant export sector, and a primary surplus. If there is any country in EMU that would benefit from leaving the euro and restoring competitiveness, it is obviously Italy,” said Andrew Roberts from RBS.
“The numbers are staring them in the face. We think the story of 2013 is not about countries being forced to leave EMU but whether they choose to leave.”
A “game theory” study by Bank of America concluded that Italy would gain more than other EMU members from breaking free and restoring sovereign control over its policy levers.
Its International Investment Position is near balance, in stark contrast to Spain and Portugal (both in deficit by more than 90pc of GDP). Its primary surplus implies it can leave EMU at any moment it wishes without facing a funding crisis.
A high savings rate means that any interest rate shock after returning to the lira would mostly flow back into the economy through higher payments to Italian bondholders – and it is often forgotten that Italy’s “real” rates were much lower under the Banca d’Italia.
Rome holds a clutch of trump cards. The one great obstacle is premier Mario Monti, installed at the head of a technocrat team in the November Putsch of 2011 by German Chancellor Angela Merkel and the European Central Bank – to the applause of Europe’s media and political class.
Mr Monti may be one of Europe’s great gentlemen but he is also a high priest of the EU Project and a key author of Italy’s euro membership. The sooner he goes, the sooner Italy can halt the slide into chronic depression.
Markets are, of course, horrified that he will resign once the 2013 budget is passed, opening the door to political mayhem early next year. Yields on 10-year Italian debt spiked 30 basis points to 4.85pc on Monday. “The armistice lasted 13 months. Now the war continues. The world watches us with incredulity,” wrote Corriere della Sera.
The immediate risk for bond investors is a fractured parliament, with a “25pc” chance of victory by the eurosceptic forces of Mr Berlusconi, the Northern League and comedian Beppe Grillo, now running near 18pc in the polls. “We’re doomed if there is no clear majority in parliament,” said Prof Giuseppe Ragusa from Luis Guido Carli Unversity in Rome.
Any such outcome would leave the bond markets as nakedly exposed as they were in July during the last spasm of Europe’s debt crisis. Rome would be even less likely to request a rescue and sign a “Memorandum” giving up fiscal sovereignty – the preconditions for ECB action to cap Italian bond yields.
All those investors who rushed into Italian debt – or Spanish debt – after the ECB’s Mario Draghi pledged to do whatever it takes to hold EMU together would find that Mr Draghi cannot deliver. His hands are tied by politics. Bondholders should be worried. But the interests of Italian democracy and foreign creditors are no longer aligned. The 1930s deflation policies imposed by Berlin and Brussels have pushed the country into a Grecian vortex. The business lobby Confindustria said the nation is being reduced to “social rubble”.
The latest data confirm that Italy’s industrial output is in accelating freefall, down 6.2pc in October from a year earlier. “We have seen a complete capitulation of the private sector over the last 12 months,” said Dario Perkins, from Lombard Street Research. “Business confidence is back to levels in the depths of the financial crisis. Consumer confidence is the lowest ever. Berlusconi is right that austerity has been a complete disaster.”
Consumption has fallen 4.8pc over the past year as higher taxes bite. “There is no precedent for this in data. The risk for 2013 is that that fall will be even worse,” said consumer group Confcommercio.
The origins of this crisis go back to the mid 1990s when the D-Mark and the Lira were fixed in perpetuity. Italy had the Scala Mobile wage system and inflation habits. Old ways die hard.
It lost 30pc to 40pc in labour competitiveness against Germany by a slow ratchet effect. Its historic trade surplus with Germany has become a big structural deficit.
The damage is now done. You cannot set the clock back. Yet that is exactly what the EU policy elites are trying to do by means of drastic austerity and an “internal devaluation”.
Such a policy may work in a small open economy with a high trade-gearing like Ireland. In Italy it is replicating Britain’s experience after Winston Churchill put sterling back on Gold at an over-valued rate in 1925. As Keynes said acidly, wages are “sticky” going down. British pay scarcely moved for the next five years. The chief effect of such a policy is to drive unemployment sky high. Italy’s youth jobless rate is 36.5pc and rising.
Mr Monti has rammed through fiscal tightening of 3.2pc of GDP this year, three times the therapeutic dose. There is no economic reason to do this. Italy has had a budget near primary balance over the past six years. It has been, and was under Berlusconi, a rare model of rectitude.
The primary surplus will reach 3.6pc of GDP this year and 4.9pc next year. You could not be more virtuous. Yet the pain has been worse than useless. Fiscal tightening itself has pushed Italy’s public debt from a stable equilibrium into the danger zone. The IMF says the debt ratio is rising much faster than before, jumping from 120pc last year to 126pc this year and to 128pc in 2013.
The economy has been contracting for five quarters. Citigroup says this will grind on, with falls of 1.2pc in 2013 and 1.5pc in 2014, with near zero growth thereafter as far as 2017, and debt restructuring along the way.
It would be remarkable if Italian voters tolerate this debacle for long, even if Pier Luigi Bersani wins the election on a centre-Left, pro-reform, pro-euro ticket. Survey data from the PEW Trust show that just 30pc now think the euro has been a “good thing”.
The chorus in favour of EMU exit turned silent after Mr Draghi pledged salvation. Five months later it is clear that the deeper crisis is still festering. The voices are growing louder again. Mr Berlusconi plays mischievously with the theme, one day floating his “crazy idea” of telling the Banca d’Italia to print euros defiantly, the next saying “it’s not blasphemy to talk of leaving the euro”.
His language had a harder edge this week. “Italy is on the edge of the abyss. I can’t allow my country to plunge into an endless recessionary spiral.
“The situation today is far worse than a year ago when I left the government. We have an extra million unemployed, the debt is rising, firms are closing, property is collapsing, and the car market is destroyed. We can’t keep going on like this.”
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