With Italy's deficit problems, where to next?

I feel that Germany will stick to the Euro, but the Mediterranean countries may well abandon it. I was in Crete in 2006, and the Euro was universally unpopular then, about three years before the meltdown, so God knows what the feeling is now.

Greeks admit they will default at the end of the month as central bank turns on government.

Prime minister Alexis Tsipras says he is ready to assume responsibility for his government’s negotiating stance as “uncontrollable crisis” beckons


The Greek government has admitted it will become the first developed country in history to default on the International Monetary Fund (IMF) if its creditor powers fail to strike a deal with the Leftist government over its eurozone future in the coming days.

With just 13 days before the country’s bail-out programme officially expires, finance ministers will gather in Luxembourg on Thursday to discuss whether to finally give assent to release bail-out cash and stave off an unprecedented default.
Before the 11th hour attempt to secure a deal, Athens’ chief negotiator said his government had run out of cash to make a €1.6bn payment to the IMF, also on June 30.

."At the moment we haven’t got the money," said Oxford-educated minister Euclid Tsakalotos.
Greece has been without any aid from its creditors since August 2014.
The Syriza government has been locked in five month stalemate over the release of a remaining €7.2bn owed to the country under its current programme. Athens only avoided falling into arrears with the IMF earlier this month by taking recourse in an obscure “bundling” method which delayed debt payment until the end of June.
Mr Tsakalotos, who was drafted in by the Greek prime minister to head up negotiations, said the country had been “squeezing every last bit of drop of liquidity” to service its international obligations.
“There is no financing, we haven’t got access to the markets, we haven’t got money that hasn’t been paid since the summer of 2014 so obviously we won’t be able to have the money to pay that [the €1.6bn to the IMF],” he said.
Relations between the Leftist Syriza government and its paymasters has reached breaking point in recent days. Alexis Tsipras, the prime minister, has accused the IMF of bearing “criminal responsibility” for his country’s plight, while previous Greek ally Jean-Claude Juncker has declared he has lost faith in the government.
Mr Tsipras seemed to brace himself from the fall-out of his government’s negotiating stance, saying he was ready to "assume the responsibility to say ‘the big no’ to a continuation of the catastrophic policies for Greece".
He later held a brief phone conversation with Mr Juncker, where the pair agreed to talk again at a later date.
Hopes of a settlement at a meeting of eurozone finance chiefs has rapidly faded. Greek finance minister Yanis Varoufakis has said he will not present any new proposals to his colleagues, at what has been seen as a last-ditch attempt to rescue the country from the fate of a euro exit.
Thousands of anti-austerity protesters took to the streets of central Athens on Wednesday, in the first major demonstration against Greece's creditors since Syriza took office.
Panagiota Bleta, a 40-year old Athenian demonstrator said she supported a euro exit if it ended the country's "humiliation".
"It's time to create a Europe of equals," she said. "Greece is part of a third-speed Europe."


In more evidence that Syriza was running out of friends, the Bank of Greece, also turned on the government in a startling intervention which warned Greece was on the way to becoming “a poor country in the European South”.
A report from the Bank of Greece said a missed payment would trigger a "credit event" which would inexorably lead to an ejection from the euro, and ultimately the European Union.

This would result in a “deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area membership,” said the report.
"From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South."
European Parliament president Martin Schulz added that any abandonment of the euro would also result in a member state's ejection from the EU.

Syriza hit back at the apocalyptic prediction, accusing the Bank of breaching its constitutional role and attempting “to contribute to the creation of an asphyxiating framework in the moves and negotiating abilities of the Greek government.”
In its latest weekly decision on Greek bank funding, the European Central Bank decided to increase its drip feed of emergency cash on Wednesday. The ECB raised the ceiling on its liquidity assistance by €1.1bn, taking the total level of aid to €84.1bn.
• Nervous UK companies begin to assess impact of Greece exit
President Mario Draghi said earlier this week there was no fixed ceiling on the amount of liquidity available to Greece. But the ECB will soon be forced to take a judgement on the country’s stalled negotiation as the June 30 deadline approaches.
The solvency of the banking system has come under pressure as most ordinary Greeks have pulled their deposits out of the banks. Figures from the Bank of Greece showed more than €30bn has left the financial system from October to April.

http://www.telegraph.co.uk/finance/economics/11682277/Greeks-admit-they-will-default-at-the-end-of-the-month-as-central-bank-turns-on-government.html

http://able2know.org/topic/144149-1

This is getting exciting.

From today's Telegraph.......



For everybody’s sake, it is time for the EU to set Greece’s economy free.

Allowing Greece to thumb its nose at those who try to live within their means would be far more risky than letting it leave the euro


How long must this Greek farce continue? The shenanigans of the past few days have been preposterous. Even if some sort of deal is cobbled together, as the financial markets are hoping, it would merely delay the next crisis. There is no sign of any real solution, for one simple reason: the European Union is philosophically incapable of acknowledging the gravity of the economic crisis on its hands, let alone able to respond to it appropriately.





The problem goes to the heart of the EU’s psychology. It is an imperialistic project, in the technical sense of that term: its raison d’etre is to grow and entrench its power, scale and scope. Its supporters argue that it is a force for peace and integration – but self-consciously benign technocracies tend to be naturally imperialistic in nature.
Whatever we choose to call them, most such political constructs readily engage in tactical retreats when necessary. Yet this is anathema to the EU, which has never allowed any of its member states to regain any of the powers previously relinquished to Brussels. Its worldview is heavily influenced by a form of historical materialism, an unfortunate way of looking at the evolution of societies.
This way of thinking is also prevalent in French politics. In Paris, the Socialist Party believes in the acquis social – that the state must snatch employment and social rights from the capitalists over time, and that these “gains” are the very definition of progress and can never be surrendered back. Similarly, the EU believes in the acquis communautaire: powers must be grabbed from nation states whenever possible, and never returned to them.



In practice, this makes it very difficult for the European establishment to accept that Greece could ever possibly leave the euro. This will almost certainly turn out to be the EU’s downfall.
The greatest danger to the euro is not that Greece leaves, but that its rejection of economic rationality encourages other, larger states to follow suit. If Greece is able to have its cake (a sound currency) and eat it (by refusing to reform its welfare state and by relying on handouts), radicals in Spain or Italy will eventually demand the same for themselves. Greece is containable; the Club Med giants wouldn’t be.
Forcing Greece out of the euro would be a gamble, of course, and the markets may panic, but there is a good chance that contagion could be prevented. Allowing Greece to thumb its nose at those who try to live within their means would be far more risky. In this case, if it had any sense, the EU would agree to a tactical retreat and allow Greece to walk away from its debts and from the euro.
This would also be good for the Greeks themselves, even though they would suffer in the short term. The latest proposals on VAT, pensions and the rest don’t change the fundamental problem. Greece must devalue its currency: that is the only way that its economy can possibly bounce back. A weaker currency – a new, freely floating drachma – would boost exports and attract far more tourists.
In general, while I’m against artificial currency areas such as the eurozone, devaluations are not my favourite solution. In an ideal world, economies would be able to cope with the strictures of a strong, sound currency. Their labour and product markets would be flexible, allowing them to adjust to shocks smoothly without having to debase their currency.



Fifteen years ago, some supporters of the euro believed that governments that joined the single currency would understand this, and push through the right reforms. The loss of one kind of flexibility (devaluations) would usher in another kind (wages). There appears to have been an increase in geographical mobility across Europe, but otherwise this experiment has failed disastrously. Too many countries have refused to reform, and economies such as Greece have paid the price.
A devaluation is thus the only realistic solution. Capital Economics has investigated how eight economies with large external debt burdens fared after their exchange rate fell precipitously following an economic crisis. The outcome was mixed, with winners as well as losers, but on balance the policy significantly improved their competitiveness. The episodes examined in the paper are Mexico (1994); Thailand, Indonesia, South Korea and Malaysia (1997); Russia (1998); Argentina (2002); and Iceland (2008). The great downside is that inflation soared in all eight cases following the devaluation, and especially during the two years that followed. Some countries, such as Malaysia and South Korea, were able to contain inflation to below 10pc a year, but it hit 82pc in Indonesia and 126pc in Russia, according to the Capital Economics research. Prices eventually came back under control, but the damage was done.
If you are a Greek citizen with lots of cash and non-indexed sources of income, you have a great deal to lose if Greece leaves the euro.
The good news, for the economy as a whole if not for those on fixed incomes, is that this surge in inflation tends not to be enough to wipe out the extra competitiveness from the collapse in the currency. Four years after the crises and subsequent devaluations took place, real exchange rates remained 20pc lower in the eight countries featured in the study.
In Russia, prices soared by more than 100pc in the year following the 1998 economic crisis, but the rouble fell by 75pc, which means that on balance exports became significantly more competitive.



Needless to say, currency crises are painful: besides excessive inflation, they tend to trigger severe banking collapses. Greece would be bound to suffer in the short term if it left or was expelled from the euro, but it would also bounce back sooner rather than later.
Economies shrank by an average of 6.5pc in the 12 months that followed the crises, with household consumption collapsing by 9pc, the Capital Economics study shows, but in seven out of eight cases they started to grow again the following year. The only exception was Iceland: its woes were so great that it took longer to start to recover. Economies that fared best, not surprisingly, were those with – like Greece’s – plenty of spare capacity.
Europe’s leaders need to accept that Greece cannot thrive unless its debts are written off, and that this wouldn’t be acceptable to other countries unless it also exited the euro. For everybody’s sake, it is time to set Greece free.

http://www.telegraph.co.uk/finance/economics/11692657/For-everybodys-sake-it-is-time-for-the-EU-to-set-Greeces-economy-free.html

"the gravity of the economic crisis" doesn't seem to have much impact.

Italy must choose between the euro and its own economic survival


Italy is running out of economic time. Seven years into an ageing global expansion, the country is still stuck in debt-deflation and still grappling with a banking crisis that it cannot combat within the paralyzing constraints of monetary union.

"We have lost nine percentage points of GDP since the peak of the crisis, and a quarter of our industrial production," says Ignazio Visco, the rueful governor of the Banca d'Italia.

Each year Rome hopefully pencils in a fall in the ratio of public debt to GDP, and each year the ratio rises. The reason is always the same. Deflationary conditions prevent nominal GDP rising fast enough to outgrow the debt.

The putative savings from drastic fiscal austerity - cuts in public investment - were overwhelmed by the crushing arithmetic of the 'denominator effect'. Debt was 121pc in 2011, 123pc in 2012, 129pc in 2013.

It came close to levelling out last year at 132.7pc, helped by the tailwinds of a cheap euro, cheap oil, and Mario Draghi's fairy dust of quantitative easing. This triple stimulus is already fading before the country escapes the stagnation trap. The International Monetary Fund expects growth of just 1pc this year.

The global window is closing in any case. US wage growth will probably force the Federal Reserve to raise interest rates and wild speculation will certainly force China to rein in its latest credit boom. Italy will enter the next downturn - perhaps early next year - with every macro-economic indicator in worse shape than in 2008, and half the country already near political revolt.


"Italy is enormously vulnerable. It has gone through a whole global recovery with no growth," said Simon Tilford from the Centre for European Reform. "Core inflation is at dangerously low levels. The government has almost no policy ammunition to fight recession."

Italy needs root-and-branch reform but that is by nature contractionary in the short-run. It is viable only with a blast of investment to cushion the shock, says Mr Tilford, but no such New Deal is on the horizon.

Legally, the EU Fiscal Compact obliges Italy to do the exact opposite: to run budget surpluses large enough to cut its debt ratio by 3.6pc of GDP every year for twenty years. Do you laugh or cry?

"There is a very real risk that Matteo Renzi will come to the conclusion that his only way to hold on to power is to go into the next election on an openly anti-euro platform. People are being very complacent about the political risks," said Mr Tilford.

Indeed. The latest Ipsos MORI survey shows that 48pc of Italians would vote to leave the EU as well as the euro if given a chance.

The rebel Five Star movement of comedian Beppe Grillo has not faded away, and Mr Grillo is still calling for debt default and a restoration of the Italian lira to break out of the German mercantilist grip (as he sees it). His party leads the national polls at 28pc, and looks poised to take Rome in municipal elections next month.

The rising star on the Italian Right, the Northern League's Matteo Salvini, told me at a forum in Pescara that the euro was "a crime against humanity" - no less - which gives you some idea of where this political debate is going.

The official unemployment rate is 11.4pc. That is deceptively low. The European Commission says a further 12pc have dropped out of the data, three times the average EU for discouraged workers.

The youth jobless rate is 65pc in Calabria, 56pc in Sicily, and 53pc in Campania, despite an exodus of 100,000 a year from the Mezzogiorno - often in the direction of London.





The research institute SVIMEZ says the birth rate in these former Bourbon territories is the lowest since 1862, when the Kingdom of the Two Sicilies in Naples began collecting data. Pauperisation is roughly comparable to that in Greece. Industrial output has dropped by 35pc since 2008, and investment by 59pc.

SVIMEZ warns that the downward spiral is turning a cyclical crisis into a "permanent state of underdevelopment". In short, southern Italy is close to social collapse, and there is precious little that premier Renzi can do about it without reclaiming Italian economic sovereignty.

The story of Italy's disastrous ordeal with the euro is long and complex. The country had a large trade surplus with Germany in the mid-1990s, before the exchange rates were fixed in perpetuity. Those were the days when it could still devalue its way back to viability, much to the irritation of the German chambers of commerce.

Suffice to say that Italy lost 30pc in unit labour cost competitiveness against Germany over the next fifteen years, in part because Germany was screwing down wages to steal a march on others, but also because globalization hit the two countries in different ways. Italy tipped into a 'bad equilibrium'. Its productivity has dropped by 5.9pc since 2000, a breath-taking collapse.

Blame is pointless. The anthropological critique of EMU was always that it would be unworkable to corral Europe's prickly, heterogeneous nation cultures into a tight monetary union, and so it has proved.

You can fault successive Italian governments, but the relevant issue today is that Italy cannot now break out of the trap. Efforts to claw back competitiveness by means of an internal devaluation merely poison debt dynamics and perpetuate depression. The result before our eyes is industrial implosion.

Into this combustible mix we can now add a banking crisis that exposes the dysfunctional character of EMU, and it is getting worse by the day. The share price of Italy's biggest bank Unicredit fell 4.5pc today. It has lost half its value over the last six months, emblem of an untouchable sector with €360bn of non-performing loans (NPLs) - 19pc of the Italian banking balance sheets.


This is the highest in the G20, though some say the real figure in China is close. The banks have yet to write down €83.6bn of the worst debts (sofferenze). They have not done so for a reason. Their capital ratios are too low, hence the gnawing fears of forced recapitalization and a creditor haircut under the EU's new 'bail-in" laws.

This is politically explosive. Tens of thousands of Italian depositors at small regional banks have already faced the axe, learning to their horror that they had signed away their savings unknowingly. The Banca d'Italia said the EU bail-in law has become “a source of serious liquidity risk and financial instability” and should be revised before it sets off a run on the banking system.

The government wanted to follow the Anglo-Saxon model and create a publicly-funded 'bad bank' to run off the NPLs but this breached eurozone rules. "They basically tried all possible routes," said Lorenzo Codogno, former chief economist at the Italian treasury and now at the London School of Economics.

The ECB's surveillance police has made matters worse. "They keep asking the banks to put more money. It is normal to have high NPLs after a long deep and recession, so the ECB should not be doing this. It is effectively increasing instability," he said.

In the end the government launched its hybrid €4.25bn 'Atlante' fund, twisting the arms of Italian banks and insurers to take part. The aim is to soak up bad debts, to prevent a fire-sale of assets to foreign vulture funds at levels that would wipe out capital, and to save Unicredit from having to raise fresh money in a hostile market.

Atlante is fraught with hazard. Silvia Merler from the Bruegel think-tank says it draws healthier banks into the quagmire, increasing systemic risk. Nor has it succeeded in buying time in any case.

Italy is now in the worst of all worlds. It cannot take normal sovereign action to stabilize the banking system because of EU rules and meddling, yet there is no EMU banking union worth the name and no pan-EMU deposit insurance to share the burden. "We're going to be in big trouble if there is another recession," said Mr Codogno.

"The whole way the banking union is operating is symptomatic of EU practice. Countries have to abide by a slew of rules and regulations but when a crisis hits there is no solidarity: none of the benefits are forthcoming," said Mr Tilford.

Mr Renzi may ultimately face an ugly choice. Either he tells the EU authorities to go to Hell, or he stands by helpless as the Italian banking sytem implodes and the country spins into sovereign insolvency.

Italy is not Greece. It cannot be crushed into submission. Besides, the 'poteri forti' of Italian industry whisper in your ear these days that ejection from the euro might not be so awful after all.

In fact it might be the only way to avert a catastrophic deindustrialization of their country before it is too late.




http://www.telegraph.co.uk/business/2016/05/11/italy-must-chose-between-the-euro-and-its-own-economic-survival/

Italy is getting what they deserve. And they need to stay on the Euro until they pay Amanda Knox the many millions of Euros that they owe her.

If they can't afford it, they can close some children's hospitals.