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Italian Europhobia

Three major Italian parties together representing more than half the voters are expressing themselves critical of the common euro currency: Berlusconi's PdL, Grillo's Five Star Movement and the regional Northern League. To many Italians, tired of their economic and political travails, leaving the Euro Zone and returning to the lira seems an option to be seriously considered.

Europhobia among parties

For different reasons, the three parties dislike the euro. The Northern League has split feelings: it wants to rule over Italy or at least its northern half and wants an autonomous currency under its direct control. However, sometimes it hates the South so much that it wants to separate the North from the South and engage in a close relationship with Switzerland and Central Europe, keeping the euro as a symbol of northernness.

Silvio Berlusconi always disliked any limit imposed on his administrations by European authorities in Brussels, Strasbourg or Frankfurt. Now he also seems to be seeking his personal revenge for the derogatory treatment he continues to receive from European media and politicians by spitting on all things European, including the euro.

Beppe Grillo is an old fashioned Italian nationalist who wants to oust the traditional parties whom he holds responsible for Italy's decline. As culprits for this decline he also sees the European institutions and their instruments, above all the euro. He wants to free Italy of the old system and its dependencies and return to a national currency.

This leger de main discussion in Italy starkly contrasts with the mood prevailing in Greece. Greeks abhor the idea of leaving the Euro Zone. Indeed, they are willing to accept terrible sacrifices in order to remain inside.

Have the Greeks discovered something the Italians ignore?

Greeks are painfully aware that their country is but a small appendix to Europe. The euro is the umbilical cord which keeps them attached. By severing this cord they would tumble and fall into an unfathomable abyss, perhaps ending up as an economic satellite of their big and prosperous neighbor, Turkey. Politicians and media alike took pains to explain the dire truth of grexit to the population. Apart from a few fascist hotheads, the Greeks understood.

In Italy, silence prevails. Politicians seem happy to keep italexit as an option in their toolbox. Why should they explain its consequences to their voters? The media don't seem to recognize italexit as a real option; consequently, there is no public discussion. The population does not seem to worry because of two assumptions:
— Italy is a big and strong country which will continue to exist with or without the common currency
— Europe cannot exist without Italy; it saved Greece and it would therefore rush to save Italy with even more zeal.

Italy kept afloat by the ECB

In a way, this relaxed mood is fortunate. It helps the Italian politicians to play their egoistic post-election games and discredit themselves even more thoroughly. Maverick Beppe Grillo reveals himself as another example of the classical italiota, the boisterous and narcissist Italian who trusts in no-one but himself. Meanwhile, the spread inches up, the measure of the interest rate Italy must pay for its public debts. However, the situation prevailing borders on the surreal.

Italy is currently kept afloat by the European Central Bank. The ECB, headed by Mario Draghi, keeps its interest rate at microscopic levels, allowing banks to borrow enormous amounts at Islamic conditions, i.e. nearly interest free. With these funds, the banks purchase government bonds at high rates and pocket enormous profits which help them to overcome their own problems. The Italian treasury is happy because it can successfully refinance debts which under normal interest levels would be considered far too risky. Without the near zero-interest policy of the ECB Italy, Greece (and some other countries) would already months ago have faced default.

While the ECB is buying time, Italy is resting. As usual in democracies, former prime minister Mario Monti has been punished for his efforts to salvage the sinking ship. His top opponent, Susanna Camusso of the main trade union CGIL, tries to coax the left party PD and Grillo's Five Stars into a coalition which reports to her. All pundits now call for growth instead of austerity but fail to explain how growth can be achieved without increasing public debt. As long as raising debt levels by more than the ordinary budget deficits remains an absolute no-no, growth is a mirage that Italy cannot attain.

A decade of boundless optimism

Like consumption in Greece, Italy's grew excessively after the country joined the euro. The suddenly low interest rates fueled a housing and automotive boom, accompanied by investments in the tertiary sector and rising imports to substitute local production. De-industrialization occurred as Italy, due to rising labor costs, gradually lost its position in the world markets. But, worst of all, the labor market changed. The new luxuries accompanying the growth of incomes caused a hype which induced young people to choose careers and study courses to serve this new prosperous sector. Management instead of book keeping; interior design instead of carpentry, astrophysics instead of engineering. The first years of the new century were a decade of boundless optimism despite a flashing red light: the Italian economy failed to grow. Government agencies on national, provincial and local levels continued to spend beyond their means which posed no problem as long as rates were low and markets eager to absorb Italian debts.

The crunch spells the truth

Since the crisis came in 2008 and 2009, Italy has gradually lost its illusions. The stagnant economy began to shrink. High occupation levels gave way to rising unemployment, especially among the young. The luxury sector contracted and, in some cases, collapsed. Banks ceased to finance companies and real estate transactions because profit could be attained much more easily by speculating in government bonds, raw materials and agricultural commodities. Companies, deprived of essential credit, went bust. The de-industrialization accelerated. Optimism gave way to pessimism; the best qualified and active young people migrated abroad.

It became obvious that the growth which had resulted from deficit spending during the boom years could no longer be maintained; that Italy's economy must shrink to pre-boom levels before it gets back on a solid footing. This process of shrinking is under way and should not be interrupted, no matter what Camusso and others say. It is a terribly painful process but a healthy one for the economy as long as the ECB-led credit crunch does not eliminate too many basically sound companies.

The sector most hurt by the economic adjustment is employment. The young are affected in two ways:
— Many must painfully recognize that they prepared themselves for a career which does not exist anymore because the luxury sectors have shrunk or vanished
— Others nurture excessive expectations: they pretend too high a salary or wage, too many fringe benefits or they simply don't want to move to where the job is.
Like in Greece, these problems must be tackled with pragmatism and initiative. Sitting in the cafe and complaining is no solution, nor is it to return to Hotel Mamma.

And now Europhobia

It is obvious that the current situation cannot last. Italy's public debt rises automatically as a percentage of GDP as the economy shrinks. The spiral of being downgraded by rating agencies continues and even the ECB will, in the medium term, not be able to tame and reassure the markets. More than ever, Italy needs vigorous reforms and efforts to reduce labor costs as they are under way in Greece. But the likes of Susanna Camusso are going to block every effort to make Italy's economy more competitive. In a way, Grillo is right in refusing to team up with the left party PD. Not because they were part architects of the Italian desaster, as he rightly says, but because they are dependent on Camusso and the other trade unions. A strong reform program would spell political suicide for any PD government.

Trying to weather the crisis without tough reforms will give the Europhobes among Italian politicians ample opportunity to reflect on the likely consequences of a return to the lira.

Assuming that one lira would replace one euro, the new currency would start with a massive devaluation. The markets' doubts about the country's stability, the lack of growth and the new exclusion from the Euro Zone's financial markets would result in a depreciation currently estimated by economists at about 40 percent.

Italians would wake up on a Sunday morning and have lost over night forty percent of their wealth and forty percent of their income, in international terms. If a euro was worth 1.30 US$, the new lira would trade at 1.82 $. On the following Monday morning, all Italian import firms would have adjusted their prices. From the gas station to the grocery store selling Chinese garlic, all would have jacked up prices. A Mercedes car or a vacation in Hawaii would be out of reach of even the better-to-do. Some foreign workers would pack up and leave for another country. One by one, all prices and rates would follow the example of the imported goods, without any compensation in terms of wages, incomes and rents.

But the most affected would be those with liabilities in euro, first of all government agencies. Their debt would have increased by 40 percent — calculated in lire — while their income would remain nominally unchanged. If Italy's total government debt stood at 125 percent in euro, it would have risen to 175 percent in lire. Unless the government undertakes drastic measures to recoup the 40 percent of revenue lost over night by changing the currency, the country would effectively default because economists agree that a debt level of 175% of GDP is unsustainable unless you are an economic powerhouse like Japan.

Not only the nasty 40 percent are a problem: worse is the loss of trust in Italy which translates into steeply higher rates to be paid for refinancing the public debt because the umbrella of the Euro Zone has been lost, as well as the support by the ECB. Servicing a debt as huge as Italy's at interest rates anywhere between 6 and 10 percent appears suicidal in the short term and impossible in the longer perspective.

Among the few positive aspects are the new chances opening for the export economy. With domestic labor costs massively cut, industries would again flourish. Tourism would be encouraged but many travelers would discover, to their surprise, that hotels have already jacked up their rates by up to 40 percent in order to cash in on the new windfall benefit.

When the turmoil is over and Italy's economy has settled in a new equilibrium, the belpaese would be — as in the pre-euro years — a relatively inexpensive country with an industrious population living a frugal life, having difficulty in making ends meet and parking many cars toward the end of the month, waiting until the new wage allows them to buy gas.

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—— Benedikt Brenner