Italy in recession: Fatal spiral

The economy is shrinking, debts are rising, rating agencies are threatening to downgrade to junk levels: Italy is slipping deeper and deeper into the crisis - and could trigger a domino effect in the EU.

Little time? At the end of the text there is a summary.

An estimated 200,000 people marched last Saturday in Rome from the Republic Square to Piazza San Giovanni, chanting slogans against the government: "Come down from your virtual to our world," they shouted, calling for a "change of course now."

The country's three largest unions, despite their very different political views, had called for a joint protest. That did not exist for many years.

What made the demo even more extraordinary: Among the party were officials from the industry association Confindustria. In line with trade unionists, industry representatives demand a different policy. The government was on the wrong track, a spokesman for the corporate lobby scolded. And some activities, such as the stop of gas drilling in the Adriatic, ordered by Rome, are "industrial suicide".

Slipped into recession

The latest economic data is indeed alarming. Italy's industrial output fell 5.5 percent from December 2017 to December 2018. It ran 2018 initially quite neat. But only, so the Italian statistics office Istat, thanks to a positive overhang from 2017. When it was consumed, it went downhill rapidly, especially in the last four months.

This is also noticeable in economic growth - because this has not happened for months. Both in the third and in the fourth quarter of 2018, the Italian economy has shrunk, according to common definition, the country is already in a recession.


Demonstration in Rome

In view of this situation, the EU Commission has also lowered the growth prospects for the current year from 1.2 to 0.2 percent. This is only one fifth of what Italy's state and debt budget for 2019 is based on - because the government has namely expected one percent growth. Economists and Finance Minister Giovanni Tria said that it was necessary to "update the budget law". Applicable would probably rather "drastically rewrite".

For according to a finding of the European Commission, the assumptions in the budget of the Roman government on the relationship between growth and debt have long been "unrealistic". The government's plan is to reduce the debt ratio by one percentage point to 130.7 percent of gross domestic product (GDP). That was even then, in late autumn, when the government in Rome made their plans for Brussels a blessing, more hope than faith.

Because, for example, one had booked in that one would get one percent of the GDP for the sale of state property. That would be sales revenue of roughly 18 billion euros - and probably no economist ever believed that. Such "privatization proceeds" have for years been decorating Italian budgets - but never, not even close to reality.

Now comes the dramatic current economic slump yet. It is clear that Italy's state deficit will rise again. The only question is how strong and with what consequences.


Nobel transactions in Milan: The economy is stagnating

In any case, the Commission in Brussels is very worried about the "tail end of Europe": "because of the risk of repercussions on the banking system, on the financial position of companies and families" and, given the size of the Italian economy, also because of possible consequences for " entire Euro network ".

It is likely that Italy's debt will rise to more than 132 percent of GDP, according to the EU forecast. This would probably also the negotiated between Rome and Brussels small austerity step for 2020 - debts down to 129.2 percent - lapsed.

Financial analysts of the British consulting firm "Capital Economics" dare a particularly explosive prognosis: Italy's debt ratio will continue to grow in the next ten years. Because the country will not create enough growth to overturn the trend. In the past ten years, you have had just 0.4 percent growth in the annual average. The share of the workforce has risen to the same extent, ie also by 0.4 per cent, and has served as an engine of modest growth, albeit modestly.

In the next ten years, however, the number of people able to work in Italy will decline. Therefore, say the analysts, the Italian debt mountain will continue to grow in time, to more than 145 percent of GDP. The consequences would be hard to imagine.

"Risk escape" threatens also in other countries

Even if the debt increases to a much lesser extent than the "Capital Economics" horror message suggests, the impact can be enormous. Thus, the International Monetary Fund (IMF) has also warned of a "global and significant" danger that could emanate from Italy.

For example, if the major rating agencies devalue the Italian promissory notes even more, because the risk is growing. Then Italian debt papers are in jargon as junk bonds, freely translated: rubbish bonds - so uncertain investments.

Such a devaluation would have dramatic consequences: many institutions in many countries are not only prohibited by law from buying such bonds. They must not keep the old credit notes of the Italians in their balance sheet, but must sell them immediately. Thus, according to the IMF, a "risk flight" could possibly also be triggered in other countries. Other countries with high debt and low repayment capacity could slip into disaster.

The first warning signs are already there. The famous "spread," the spread that a high-risk debtor has to pay for investors to buy their bonds, rose again to 280 points last week. Italy's finance minister must therefore again pay 2.8 percent-percentage points higher interest rates on loans than his German colleague. That goes into the money and also promotes even more mistrust.

Blocked economic projects

That is why treasurer Giovanni Tria is almost as opposed to opposition to government policy as the demonstrators in Rome. "We need to regain the trust of citizens and Italian and foreign investors," he said in a weekend interview. One could expect "no investment if a government considers it legitimate to retroactively change signed treaties". Every Italian understood what and who he means.


Economics and Finance Minister Giovanni Tria (archive)

Right now, the Italian government is blocking a number of major economic projects, including the high-speed railway line (TAV) from Turin to Lyon. The better to connect the Italian north (where the industry sits) with France's second largest trading partner. A fully funded € 15 billion project, which is currently creating a lot of work and should strengthen the business location in the medium term - but the government has sided with those who have been protesting against the major project for years - and stopped the project. Useless, is the rapid-transit railway, said Vice-Premier Luigi Di Maio of the 5-star movement.

The demolition of the project could cost more than completion, experts warn. The long-used EU funds would have to be repaid, damages paid to companies and decommissioning financed.

But Di Maio is not interested in all that. He sticks to his announcement: "NO-TAV or the government tips over".

When Tria pointed out the problem again in the Cabinet meeting last week, Di Maio, the daily La Repubblica quoted "government sources," snapped at the finance minister: "TAV is a political issue and is none of your business."

In summary: Italy's economy has slipped into recession and will hardly grow in the current year. This has a fatal impact on the financial situation: the debt targets that the government has reported to the EU Commission in Brussels are hardly achievable. Instead, the country is threatened with further downgrading by the major rating agencies - and this could set in motion a downward spiral in the financial markets. The government does not seem to mind that.