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The beginning of a massive European collapse and the Italian case!


ARINDAM CHAUDHURI | New Delhi, November 17, 2011 18:01
Tags : eurozone crisis | greece | debt crisis | italy | unemployment | arindam chaudhuri |

The cracks are already visible all across Europe. It was first Greece, then Portugal and Italy, with Spain waiting in the queue. The current situation of Europe reminds me of the situation post World War II – wherein most European economies and societies were in complete anarchy! Since the last five years, European nations have been facing major economic setbacks, which have been triggered by political mismanagement and have impacted their entire social structure to a large extent. Today, fallouts of erstwhile strong economies are leading to a cascading effect and sending tremors across the continent!

Amongst all of them, Italy makes an interesting case because as a nation, it has been ranked among the top 25 most developed nations, has one of the best quality-of-life (features among the top ten in the quality-of-life index) and has a per capita GDP at par with other developed nations of the world. This fourth largest European economy is today struggling with a $2.2 trillion debt which is more than 120 per cent of its GDP. In spite of being one of the major manufacturing hubs of the region and boasting of big labels in the fashion and automobile industry, it has miserably failed to keep a balance between expenditure and income. UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) – two of Italy’s biggest banks – recently collapsed while five other large Italian banks have lost around 30 per cent of their share value since the beginning of 2011. Today, 20 per cent of their GDP is made up by the parallel economy and corruption ails the system. So much so that investors too are now shying away, which is evident from the fact that today Italy ranks lowest among OECD countries in the ‘Ease of Doing Business’ index; for that matter, Italy has seen a fall in all attributes since the last year’s ranking, with a drop of 10 points. The overpaid bureaucracy and corrupt political system have been instrumental in systematically destroying the nation, bit by bit!

The situation in Italy has been worsening with every passing day. More than 500,000 youths (aged less than 30 years) lost jobs between 2009 and 2010, in a nation that once had the lowest unemployment rate (around 8.5 per cent) in the entire Europe. Among this, the worst hit were pregnant women (around 800,000 pregnant women left the job as they were denied medical leaves) and low-cost skilled labourers. This not only led to a drop in family incomes, but also prevented hundreds of parents from sending their children to school. As a result, in the last year, the average school drop-out rate was around 20 per cent! And mind you, in Italy, the first six years of primary education are free.

Italy also fears that in the next few months to come, around one-fourth of the entire population may get trapped in the clutches of poverty. As per official figures released in July 2011, the poverty rate increased by 5 per cent and touched a figure of 29.9 per cent among households of 5 and more members. This is evident from the fact that in order to meet their daily consumption, the household savings rate in Italy has been experiencing a steep decline.

The savings rate that once oscillated between 25 to 34 per cent is now around 8-9 per cent! Needless to state that given the state of the socio-economic condition, societal crime too has increased in the nation. More and more unemployed youth attempted suicide in 2009 and 2011. On an average, 250 additional cases of suicides were reported in Italy every year starting 2009 – and 75 per cent of all cases were attributed to youth who were unemployed or lost their jobs. This is not all; kidnapping, assaults and sexual crime too saw a huge surge – around 25 per cent – since 2009. The cases of drugs abuse, teen pregnancy, drug addiction, alcohol abuse and depression have also seen an unprecedented rise in the last couple of years.

Add to this the problem of demographic replacement. According to a report published by the ISTAT (The Italian National Institute of Statistics) this January, the population growth is into a deep mess. Previously, due to migration, the population growth and the natural dynamic (the gap between birth and death rate) were positive. But then, after a huge protest against immigrants (due to the indigenous population losing jobs) the population growth started to decline. ISTAT reports that since the last four years, the natural dynamic is negative with the death rate surpassing the birth rate by 30,000 units; the average birth rate of women fell down to 1.40 by the end of last year. More and more parents are opting to not produce babies as they fear the high cost of medical and child-care. The government is also incapable of giving incentives for reproduction, as it did earlier, and had to discontinue their “fund for the newly born” scheme.

Now, more and more aging Italians are depending on the state pension for their living. The recent bill to increase the retirement age (in order to reduce government burden) saw a huge resistance and was therefore dismissed. Today, Italy has more people who derive pension from state than youths who contribute to the economy. Around 15 per cent of total GDP is used for fulfilling the targets of pensioners! Thus, a huge fraction of population that could have added to the economy is sitting idle at home at the cost of the entire nation. Not only this. The rich are also playing their cards well. Tax dodging has become a very common phenomenon among the upper strata of the society. The rich are transferring their money to tax havens and are stealing huge taxes. According to media reports, tax evasion to the tune of $140-150 billion is being practiced every year since the last 2-3 years. And all this under the aegis of the Italian premier – Silvio Berlusconi.

He was not only accused of corruption and tax stealing but has been more famous for his sex scandals. Now, with Prime Minister Silvio Berlusconi gone, it’s time for someone to take his place with the right intent and credentials. Italians are heavily banking upon the reputed economist and ex-EU Commissioner, Mario Monti. Severe austerity measures are needed and only Monti can deliver it – that’s what the entire Italian population is hoping for! He would be pushing for refinance of 200 billion euros of government bonds in April as an austerity measure and would try to regain market confidence by that time. Italy has to fix its problems on its own – as a bail-out is a difficult proposition for the country – because unlike Greece, Italy is a large economy. The silver lining however is that Monti has time till 2013! However, the political forces (including Berlusconi’s party) will be keeping a close eye on Monti’s performance and any slip-up from him on his promises can invite severe reproach from them! Therefore the chances of public gripe are high, and a small mistake can lead to huge political disturbance and mass public protest.

As I said earlier, not only Italy, even other nations like Spain are on the verge of a disaster! This is of serious consequence as it is unlikely that EU has the resources to pull up Spain as they did Greece. At the same time, Ireland’s ravenous resources are drying up, compelling them to take up the frantic measure of asking European Financial Stability Facility for a probable bailout. By 2014, Irish debt is expected to touch 180 per cent of it GDP – that will enable EFSF (European Financial Stability Facility) to ask for severe cuts in public spending, leading to a probable viscous cycle of recession. Similar is the situation for Greece and Portugal – and all three need to restructure their debt immediately to avoid a catastrophic default! However, this debt restructuring requires commitment from European leaders, especially from Sarkozy and Angela Merkel who still tend to treat this as a liquidity problem.

Another struggling European economy is Portugal with its current borrowing cost at a humungous 3,686 per cent as it plans to borrow as much as 1.25 billion euros repayable in 2014 and 2020! Portugal and Ireland are in such an economic quagmire that it may be very difficult to find solutions! However, the last probable recourse for these debt-trapped countries is IMF – as this organization has bailed out Greece with $145 billion, albeit putting conditions of austerity that the new government in Greece has promised to follow. Notwithstanding, if other countries follow suit and keep clamouring up to IMF for financial support, this trend could wreck IMF too, as they are already immersed in debt, which even the US dominated financial behemoth cannot handle! EU nations can’t even manipulate their currencies to boost their international trade – as they no longer have their own currency but follow the EU model.

It is a grave situation as the sinking ship of Europe can send ripples across the entire world! Therefore, it should evoke the concerns of not only Europeans but of the entire world! Europe’s crisis is the catalyst for sloppy stock markets across the globe, from New York to Shanghai. The European bond markets are reacting negatively too – the sagging economies of Greece, Italy, and Spain are issuing most of their bonds with a high chance of defaulting as they are rolling over huge existing debts! Without being cynical, it seems increasingly unlikely that Europe’s crisis is solvable in the near future; Europe will be a hotbed for social unrest and protest rallies that have already started and are going to be stronger with time. The ripple effects of the Occupy Wall Street campaign are a reflection of an angry outcry against unemployment, inequality, hopelessness and shattered dreams.

According to the San Francisco Federal Reserve Bank, more economic contraction is likely by early 2012 as a direct fallout of the European debt crisis. Few European countries enjoy investors’ confidence, forcing them to turn towards BRIC countries like China. The Bank of China has stopped forex trading with heavily indebted Societe Generale and BNP Paribas as an outcome of the downgraded credit rating by Moody’s. Clearly, the impact of the European crisis is spreading beyond their domestic borders. The worth of China’s exports is also suffering from veritable losses as EU is its largest trading partner and inflationary pressures are also swelling because of the debt crisis! When the crisis began, among a plethora of other countries, it impacted India’s trading too – as trade credit eroded substantially, forcing India’s Central Bank intervening with a fiscal stimulus to save the day.

Apart from economic turbulences, most of these European nations are suffering from a disturbing political environment that can do more harm. Particularly in the Nordic countries, there has been a rise of right-wing parties like The Progress Party in Norway (famous for mass murderer Anders Breivik), the Geert Wilders (famous for its anti-Islam propagandas) and similar other parties. Sex scandals, highly paid political staff and corrupt bureaucracies are allowing such parties to make their presence strong, which in the long run would destroy the very essence of the European society.

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Posted By: MJ Krishnamurthy | Bengaluru | November 23rd 2011 | 19:11
The article "The beginning ..." is very interesting. All the EU enjoyed a five star culture so far resulting in many evils such as: high cost of living, low productivity of labour, mismanagement of finances by some, pretensive and dubious politics etc. For so long they did not know that their ground is weakening. They thought of themselves as invulnerable unchallengeable. But, alas, time woke up gaints like China and India who also had a lot of Brain Brawn with them. The international hegemony of the stylish 'Big five' is less effective.The EU and the US are yet to realise about what has gone wrong with them and its remedy. And, of course no one knows. Wait for the time to tell evreything.

Issue Dated: Feb 5, 2017